What if the Buyer or Seller Disagrees on the Appraisal?

July 7, 2015

Here is a common variation on a frequently asked question about FHA appraisals: “I am selling my home. There was an appraisal done and it came in low. We negotiated with the buyers on that appraisal. Is a second appraisal possible or legal?”

Appraisals--which should never be confused with a much more in-depth home inspection--are used to make sure the home to be purchased with an FHA mortgage loan meets minimum standards. The appraisal also determines the fair market value of the property for the purpose of setting the FHA home loan amount (which is the lesser of the asking price or appraised value, plus any permitted add-ons to the loan).

HUD 4155.2 Chapter Four covers the appraisal rules (“property valuation”) for FHA single-family home loans. According to Chapter Four:

“The purpose of the property valuation process is to
–determine eligibility for mortgage insurance based on the condition and location of a property, and
–estimate the value of the property for mortgage insurance purposes.”

In essence, Chapter Four says the appraisal is the lender’s “tool for making this determination.”
When it comes to enforcing the rules listed in this chapter, including a prohibition on ordering a second appraisal simply to get a better valuation of the property, we learn:

“Lenders, including sponsoring lenders, are equally responsible, along with appraisers, for the quality, integrity, accuracy and thoroughness of appraisals. The lender will be held accountable if it knew, or should have known, that there were problems with the integrity, accuracy and thoroughness of an appraisal submitted to FHA for mortgage insurance purposes. Lenders that submit appraisals to HUD that do not meet FHA requirements are subject to the imposition of sanctions by the HUD Mortgagee Review Board (MRB).”

Lenders are forbidden from a variety of practices that could influence the outcome of the appraisal including:

• conditioning the ordering of an appraisal report or the payment of an appraisal fee, salary or bonus on the opinion, conclusion or valuation to be reached, or on a preliminary value estimate requested from an appraiser
• requesting that an appraiser provide an estimated, predetermined or desired valuation in an appraisal report prior to the completion of that report
• requesting that an appraiser provide estimated values or comparable sales at any time prior to the appraiser’s completion of an appraisal report.
• providing to the appraiser an anticipated, estimated, encouraged or desired value for a subject property or a proposed or target amount to be loaned to the borrower, except that a copy of the sales contract for purchase must be provided.

Chapter Four also contains language that prevents the lender or financial institution issuing the FHA loan from “ordering, obtaining, using, or paying for a second or subsequent appraisal or automated valuation model (AVM) in connection with a mortgage financing transaction”. There are exceptions--a lender can order another appraisal when:

• there is a reasonable basis to believe that the initial appraisal was flawed or tainted and such appraisal is clearly and appropriately noted in the loan file
• such appraisal or automated valuation model is done pursuant to written, pre-established bona fide pre- or post-funding appraisal review or quality control process or underwriting guidelines, and
• the lender adheres to a policy of selecting the most reliable appraisal, rather than the appraisal that states the highest value, or
• any other act or practice that impairs or attempts to impair an appraiser’s independence, objectivity or impartiality, or violates law or regulation, including, but not limited to the Truth in Lending Act (TILA) and Regulation Z and USPAP.

Borrowers or sellers who feel these rules have been broken in some way are encouraged to contact the FHA directly for assistance and advice.