Appraisals and Seller Concessions ... FHA Takes Note
In the summer edition of the Federal Housing Administration (FHA) Appraiser Newsletter, the FHA re-emphasizes the importance of appraisers correctly documenting any seller concessions on a property sale. The Mortgagee Letter referenced in this issue is ML 2005-02, which gives guidance on seller concessions and verification of sales. The FHA requires lenders to give appraisers the financing data and sales concessions information for properties with FHA loans. In all FHA appraisals, appraisers are required to identify and document sales concessions and adjust the comparable sales accordingly. Sales concessions influence the price paid for real estate and may be in the form of discount points, origination fees, buy downs, closing cost assistance, downpayment assistance, etc., given by the seller or any other party involved in the transaction. The following is an excerpt from Mortgagee Letter 2005-02 which outlines the lender and appraiser requirements for loans where the borrowers receive a concession for closing costs and/or pre-paids: Lender requirements 1. On any purchase transaction, the lender must provide the appraiser with a complete copy of the signed purchase agreement, including all addendums, for the subject property. 2. The lender must provide the appraiser with all financing data and any sales concessions given by any party to the transaction, and must include gifts and/or downpayment assistance, which may or may not be included in the contract of sale. 3. If the lender requests a reconsideration of value, the appraiser must be provided with any amendments to the contract that occurred after the date of the appraisal. 4. Contributions from sellers or other interested third parties that exceed six percent of the sales price are to be treated as inducements to purchase, thereby reducing the amount of the mortgage. Each dollar exceeding the six percent limit must be subtracted from the property’s sale price before applying the appropriate loan-to-value (LTV) ratio. 5. The dollar-for-dollar reduction to the sales price also applies when gift funds do not meet FHA requirements. Appraiser/appraisal requirements 1. The appraiser must report the total dollar amount of the closing costs and/or concessions to be paid by any interested party on behalf of the borrower and describe which party provided the concession in the Subject Section of the appraisal report. Use of an addendum with the heading “Loan Charges/Sales Concessions” may be required due to limited space provided in the appraisal reporting form. 2. The appraiser must also verify all sales transactions for seller concessions and report those findings in the appraisal. If the sale cannot be verified with someone who has firsthand knowledge of the transaction (i.e., buyer, seller or one of their agents), the appraiser must clearly state how the sale was verified and explain to what extent. 3. In the Sales Comparison Analysis, Sales or Concession Section, the appraiser must report the type and the amount of sales or financing concessions for each comparable sale listed. If no concessions exist, the appraiser must note “none.” 4. The appraiser is required to 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. 5. The appraiser must 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 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. 6. 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 year prior to the date of the appraisal. If the data is unavailable, the appraiser must note what steps were taken to obtain and report the information. Since we are on the topic of appraisals, it is a good time to recall FHA’s position on Lender Accountability for Appraisals, which is as follows: “The lender is held responsible, equally with the appraiser, for the integrity, accuracy and thoroughness of an appraisal submitted to FHA for mortgage insurance purposes. FHA may pursue appropriate enforcement actions against both or either party for violations.” For further reference regarding appraisals see Mortgagee Letters: 09-09,05-06,94-54. FHA has gone to great lengths to assure there is a high level of accountability for the loans that lenders send in for FHA insurance … especially with respect to the appraisals. It took a while for the industry to adjust to the appraisal management company (AMC) model, but the good news is that it appears to be of real benefit in many ways, to both the industry and to the consumer—if for no other reason than the fact that mortgage loan originators (MLOs) no longer find themselves in direct contact with appraisers, tempting the possibility of an appraiser being placed under undue pressure to “bring in value.” As an MLO, it is a good idea to understand how to read an appraisal so you can better serve your clients. For example, I am working on a transaction right now where the appraisal came in about $3,000 under the sales price. I looked at the comparable sales that were good in style, size, distance from subject property, and all the adjustments were good, but the appraiser made a $6,000 adjustment for cosmetic repairs which were the interior painting of three rooms, carpet cleaning in three rooms and the replacement of a pantry door. Does that sound like $6,000 worth of work to you? Me neither! I contested it and the underwriter agreed with me. So when an underwriter or appraiser does something that doesn’t make sense, do your homework and know what the FHA guide is on the subject. There are a lot of conventional underwriters reviewing FHA loans right now to handle the industry’s FHA volume, and many of them are not experts in the FHA guides so you need to be that FHA expert. Go FHA! Jeff Mifsud is founder of Michigan-based Mortgage Seminars LLC, a former FHA underwriter with 15-plus years of experience originating FHA loans, an FHA expert for LoanToolbox.com and creator of The FHA Originator, a monthly FHA newsletter. Jeff may be reached by phone at (248) 403-8181.