An appraisal conducted by a licensed and approved FHA appraiser is needed for underwriting a 203k loan. All residential home loan programs including VA, FHA and conventional (Fannie Mae, Freddie Mac) require the performance of comprehensive appraisal report. The type of appraisal required for the financing of rehab property is specified under the 203(K) appraisal requirements and guidelines.
The primary objective of an appraisal report is to establish the value of a subject property based on its existing condition and local market conditions. A lender evaluates other factors only after the suitable property value has been determined. The loan amount allowed by the 203(K) rehab loan program is determined based on the market value established by the FHA approved appraiser.
Differences between a 203K Appraisal and a Conventional Mortgage Appraisal
For most common purposes involving residential financing, the lender appraisal guidelines only require the “As Is” value. In such reports, the appraiser estimates the home value based on its prevailing condition. The 203K appraisal is different as it involves the calculation of the “After Repair” value.
In addition to the purchase price, the cost of the rehab and repair work can also be financed with a 203k loan. The proposed repair work, in most cases, increases the property’s market value. A 203k lender seeks the after-repair value from an appraisal report submitted to them by an approved FHA appraiser. The ARV helps the lender determine the maximum loan amount a property can support based on its value.
The specific FHA appraisal guidelines on 203(K) loans differ based on the type of transaction involved. For purchase transactions, the lender may choose to establish the sales contract price as the “As is Value”. Value is determined based on the contract amount only in cases where the lender estimated value is also similar to the agreed amount.
If purchase price based on the contract is higher than the “AS IS” value determined by the appraisal, the lender may require the buyer renegotiate the contact price to match this amount. Otherwise, the borrower may have to secure these funds from other sources.
For a refinance transaction under 203K guidelines, the FHA appraisal requirements are slightly different. As there is no contract involved, the present value of such properties is determined using either the outstanding loan amount or the “as is” appraisal value. When both values are available, the lesser one is chose for setting the 203k loan appraisal value. In situations where the outstanding amount exceeds the allowable LTV amount, the difference can be made up through cash at the closing.
The 203k appraisal requirements are accommodative of many rehab loan scenarios that fall between the Streamline and Standard programs. Both the “as is” and “after repair” values can be indicated in a single appraisal report. The proposed improvements and renovation work is considered when arriving at the “after improvement” value. The final call regarding a single or double appraisal is taken by a 203(K) lender underwriting the loan.
Appraisal for HUD 203(K) Eligible Properties
203K rehab loan program is one of the most preferred options utilized by buyers of 203(K) eligible HUD owned homes. Every hud-listing has an entry indicating the eligibility of the subject property according to 203k provisions.
A HUD property can be purchased and renovated using a 203k loan. An appraisal report is generally not required by the lender to determine the “as is” value. When an appraisal is needed, it can be requested from the nearest field office. This usually saves about $300 for buyers of HUD homes with a FHA 203k loan.
Unlike traditional and conventional appraisal reports, a 203k appraisal involves contractor bids, work write-ups, proposed plans, specifications and other related matters. All the supporting documents must be presented in the lender prescribed format as a part of the final appraisal package.
In addition to single-family and multi-family residential properties, 203k financing can be used to renovate and rehabilitate mixed-use properties and condos. A mixed-use property appraisal involves the separate assessment of both the residential and commercial portions. Due to this, the appraisers might charge a bit higher.
The lending guidelines allow a loan amount 10% greater than the 203k appraisal value determined through the “after repair” method.