The last few FHA High Balance (aka FHA Jumbo) purchases that I’ve closed, the buyers and agents thought a second appraisal was automatically required. FHA did adopt conforming appraisal guidelines for declining markets at the beginning of this month, but that does not guarantee a second appraisal.
What triggers a second appraisal for FHA?
- base loan amount over $417,000; and
- loan to value equals or exceeds 95%; and
- the appraisal indicates it’s a declining market; and/or
- if the wholesale lender/bank decides the area is in a declining market.
Per Mortgagee Letter 2009-09, FHA defines a declining market as:
“…any neighborhood, market area or region that demonstrates a decline in prices or deterioration in other market conditions as evidenced by an oversupply of existing inventory or extended marketing times.”
Appraisers are having to determine overall trends for market areas including analyzing the current supply and demand, days on market, absorption rate and the prevalence seller concessions. For FHA and conventional loans, this is documented on Fannie Mae Form 1004MC which FHA adopted effective April 1, 2009.
Please note that conventional, FHA and VA appraisals require this new form. FHA does have additional requirements:
- At least two of the three recent sales (comparables aka comps) must be within the last 90 days of the effective date of the appraisal. Plus,
- A minimum of two active listings or pending sales. The appraiser must insure the active listings and pending sales have “reasonable market exposure to avoid use of overpriced properties as comparables”.
If a home buyer is using a FHA mortgage with a base loan amount over $417,000, they may want to consider saving up for that extra 1.51% down so that they are at a 94.99% loan to value and therefore (currently) avoid the potential second appraisal issue and make sure that the lender you’re working with does not have underwriting “overlays” that will impact you. FHA’s second mortgage requirements can be found on Mortgagee Letter 2009-09.
Regardless of what type of financing you’re doing, know that the underwriter is going over the appraisal with a fine tooth comb. It’s quite possible that if they don’t require a second appraisal, they may request additional information or comps from the appraiser which could take more time for your transaction to close. Since this post is based on FHA transactions–we won’t even venture into HVCC here…that’s a whole other can of worms.