New FHA Repair Reporting Requirements

Your real estate appraiser has just returned from the property inspection and has presented you with a list of VC (Valuation Condition) repair items. Suddenly, everyone involved with the transaction is upset and wants answers as to what has to be fixed and who's going to pay for it. Right? Brian J. Davis, RAA of Brian J. Davis & Associates says: "Those FHA repairs may NOT be necessary any longer." In September 2005, the Federal Housing Administration (FHA) issued Mortgagee Letter 2005-34 , which announced the adoption of four of Fannie Mae's revised appraisal reporting forms as well as the release of the 139 page Revised Appendix D of Handbook 4150.2, CHG-1.

"FHA has shifted from its historical emphasis on the repair of minor property deficiencies and now only requires repairs for those property conditions that rise above the level of cosmetic defects, minor defects or normal wear and tear."

Brian Davis said, "That's an IMPORTANT change for both lenders and appraisers to be aware of. It's easy for us to keep doing business-as-usual which may ultimately result in confusion and delay the processing of the loan." With the elimination of the HUD VC-Sheet, FHA Roster Appraisers are to report all readily observable property deficiencies, as well as any adverse conditions discovered performing the research involved in completing the appraisal, within the appraisal reporting form. Lenders should use professional judgment and rely upon prudent underwriting practices in determining when a property condition poses a threat to the SAFETY of an occupant and/or jeopardizes the SOUNDNESS and STRUCTURAL integrity of the property, such that additional inspections and/or repairs are necessary. As stated in the Revised Appendix D, "FHA now permits an "as-is" appraisal for existing properties that serve as security for FHA-insured mortgages when minor property deficiencies, which generally result from deferred maintenance and normal wear and tear, do not affect the safety of the occupants or the security and soundness of the property. " FHA no longer requires repairs for these types of minor cosmetic deficiencies to bring a property into compliance with FHA Minimum Property Requirements. FHA Inspection Examples of minor property conditions that no longer require AUTOMATIC REPAIR for existing properties include:

• Missing handrails
• Cracked or damaged exit doors that are otherwise operable
• Cracked window glass
• Defective paint surfaces in homes constructed post 1978 Minor plumbing leaks (such as leaky faucets)
• Defective floor finish or covering
• Evidence of previous (non-active) Wood Destroying Insect/ Organism damage where there is no evidence of unrepaired structural damage
• Rotten or worn out counter tops
• Damaged plaster, sheetrock or other wall and ceiling materials in homes constructed post-1978
• Poor workmanship
• Trip hazards (cracked or partially heaving sidewalks, poorly installed carpeting)
• Crawl space with debris and trash
• Lack of an all weather driveway surface

Lenders must review the appraisal to determine whether the appraiser has reported any property conditions that will affect the health and safety of the occupants or the security and the soundness of the property and must require immediate repair where the property condition poses a threat to these criteria. If the appraiser reports a potential property deficiency that may pose a threat to the safety of the occupants or the security and soundness of the property, the lender should require an inspection of the condition to determine whether repairs are necessary to mitigate or resolve the problem.Additional Reading Resouces FHA New Appraisal Reporting Requirements 1-06.pdf FHA Repair and Inspection Requirements 12-05.pdf FHA 4150.2 (Full) Appendix D.pdf