Now seller concessions, gifts, other creative financing must be reported in FHA appraisals

Get ready for some extra work on FHA assignments.

Months ago we reported on the trend of seller concessions and seller-assisted downpayments artificially inflating property values by being recorded as part of the “sale price” of homes.  We told you that the State of Colorado warned its appraisers to take seller concessions into account to stanch this overvaluation phenomenon, as did the Appraisal Institute.  Now, the Federal Housing Administration (FHA) will require such an analysis.

The Department of Housing and Urban Development (HUD) announced January 4 that their appraisers will have to:

• Report the total dollar amount of the loan charges and/or concessions to be paid by any party on behalf of the borrower and describe which party provided the concession in the Subject Section of the appraisal report, using an addendum if necessary;
• Verify all sales transactions for seller concessions and report those findings in the appraisal;
• If the sale cannot be verified with someone who has first-hand knowledge of the transaction (i.e., buyer, seller or one of their representatives), you must clearly state how the sale was verified and explain to what extent;
• In the Sales Comparison Analysis, Sales or Concession Section, report the type and the amount of sales or financing concessions for each comparable sale listed.  If no concessions exist, you must note “none”;
• Make market-based adjustments to the comparable sales for any sales or financing concessions that may have affected the sales price.  The adjustment for each comparable sale must reflect the difference between the sales price with the sales concessions and what the property would have sold for without the concessions.  In the Sales Comparison Analysis, Sales or Financing Concessions Section, the appraiser must report the adjustment applicable to each comparable sale listed;
• Provide an analysis of the current agreement of sale, contract, option or listing for the subject property and an analysis of all prior transfers of the subject property that occurred within three (3) years prior to the effective date of the appraisal.  If the contract of sale for the subject property is not provided to the appraiser, the appraiser must report the steps or efforts taken to obtain the current agreement of sale; and
• In the Sales Comparison Analysis, Sales or Financing Concessions Section, the appraiser must provide analysis of all prior transfers of the comparable sales that occurred within one (1) year prior to the effective date of the appraisal.  If the data is unavailable, the appraiser must note what steps were taken during the normal course of business to obtain and report the information.

What you should do first: You should let your FHA clients know that they are required to provide you with a complete copy of the ratified sales contract, including all addenda, for the subject property that is to be appraised, all financing data and sales concessions for the subject property granted by anyone associated with the transaction, including gifts and/or down payment assistance, which may or may not be included in the contract of sale.  If your client requests a reconsideration of value, you must be provided with any amendments to the contract that occurred after the effective date of the appraisal.

HUD announced its new policy in its Mortgagee Letter 2005-02. click here and choose “2005 Letters” for a list of all mortgagee letters so far this year, and choose “05-2” from the list. (No direct link possible.)