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Frustrations Fly Over FHA Loan Hangups

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At the Real Property Valuation Forum during the 2016 REALTORS® Legislative Meetings & Trade Expo Tuesday afternoon, real estate professionals, appraisers, and underwriters all aired grievances about the difficulty and confusing language of the FHA loan process, in particular the new FHA single family handbook and its effect on appraisals.

Read more: More Buyers Take Advantage of FHA Loans

John Anderson ABR, CRB, and broker-owner of Twin Oaks Realty Inc. in Minneapolis, Minn. says he’s seen a huge reluctance on the part of sellers to accept offers that will be financed by loans insured by FHA. “Sellers are looking the other way and saying ‘I don’t really want to deal with FHA,’” he said. Still, he said that some 25-30 percent of his deals are FHA-insured and noted that sometimes it’s more of a word-of-mouth reluctance than actual experience of collapsed deals. “Often it’s because of misconceptions… sellers are saying ‘I hear there’s problems with FHA appraisers.’”

As a housing programs policy specialist with FHA, Gary Eisenbraun did his best to explain the limits of the FHA’s power to change the process, noting that appraisers don’t decide where the home should be valued. “The appraiser has a responsibility to tell the story. It’s the underwriter that clears the property,” he said. Anderson and Eisenbraun were a part of a panel of experts who took questions from the audience over a range of issues affecting appraisals and home sales. 

While some noted that recent changes to the FHA’s handbook on appraisals seemed to imply that appraisers’ work is more akin to that of the home inspection community, Eisenbraun disputed that, noting that appraisers and lenders can always order a more experienced or capable inspector to do follow-up work that will help the lender determine proper value. “HUD would never expect anyone to put themselves in a dangerous situation,” he said. “We don’t expect the appraiser to be a chemist.”

Another point of contention was the practice of appraisers asking to see outside home inspection reports. “The home inspection should never be given to the appraiser,” Eisenbraun said. “That’s giving someone something they really don’t need in order to determine value and acceptability of the property to HUD.”

Perhaps the greatest number of individual questions from the audience centered around the working order of appliances. The way Eisenbraun laid it out, FHA doesn’t technically require any appliances to be present or in working order; just that occupants have areas in which they can sleep, eat, prepare food, and bathe. “We are not saying you have to have kitchen appliances unless they are conveyed in the context of real estate,” he said. “But if it’s customary in your local market then it may be considered real estate.”

Several questions from the audience were about issues that arose in connection with appliances that aren’t in tip-top shape. Eisenbraun said the basic functionality of an appliance should be the litmus test. If the fridge can keep the milk cold, it’s working. If the ice maker doesn’t appear to be making ice, “maybe that has a defect on the overall contributory value” but it’s not really a deal-breaker for the appraisal.

There were calls from the audience and panel participants to increase training, but Eisenbraun said there was only so much the federal government could do at the local level, and appealed to real estate professionals and lenders to stay involved in the appraisal process and to demand a high level of performance from appraisers. 

Anderson added that sales associates and brokers have a responsibility to consider future appraisals when they work with sellers to determine the price of a home. “We have to build our cases when we list our properties, just like appraisers have to, [otherwise] we’re not doing our fiduciary duty,” he said, telling attendees to consider the work of the appraiser throughout the listing process. “Sometimes we think, ‘We just sell them and you make it fit,’ but it doesn’t really work that way.”

The discussion over these issues and others will continue Wednesday morning at the Real Property Valuation Committee

—Meg White, REALTOR® Magazine

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