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The FHA Financing Issue: Appraisal or Home Inspection

Posted by Staff Reporter on Apr 19, 2016 10:26 AM EDT
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Caption:WASHINGTON, DC - FEBRUARY 09: (AFP OUT) U.S. President Barack Obama (2R), joined by (L-R) Illinois Attorney General Lisa Madigan, U.S. Attorney General Eric Holder and Housing and Urban Development Secretary Shaun Donovan, speaks about the details of a $26 billion housing settlement between federal and state officials and mortgage lenders, in the Eisenhower Executive Office Building on February 9, 2012 in Washington, DC. The $26 billion agreement settles potential charges of improper foreclosures and mortgage fraud. (Photo : Kevin Dietsch-Pool/Getty Images)

For real estate professionals, there is a world of difference between a home inspection and an appraisal. For laymen, this is not so apparent. An appraisal, according to a recent report from RealtyTimes, "results in a number representing the value of the house." On the other hand, a home inspection determines the issues and not the value of a specific home.

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This similarity and confusion is very important when it comes to Federal Housing Administration financing or FHA financing. When applying for the said loan, an FHA appraiser conducts a visit to make observations as well as judgments on the state and condition of the home.

This results in a problem, as many FHA buyers essentially waive the use of an FHA appraiser when it comes to purchases because many are lead to the believe that the FHA appraiser's work has been done by their very own appraiser.

This was one of the issues contained in a letter sent by National Association of Realtors President Tom Salomone to Housing and Urban Development Assistant Secretary of Housing Edward Golding. In the said letter, Salomone said, "Unfortunately many appraisers have become wary of participating in FHA-insured home loan transactions given the confusion with the Handbook (Single Family Housing Policy Handbook) requirements. Concerns over liability are leading many appraisers to require the current homeowner to take time away from work to physically test washer/dryers, stoves etc so that the appraiser cannot be blamed for any related damage."

In related news, the FHA is also being criticized for its use of single-family mortgage insurance programs as subsidy for the Homeowners Equity Conversion Mortgage.  According to a report from the National Mortgage News, the FHA had a total of $4.3 billion in net transfers from 2010 to the said conversion mortgage account. This fund was used to reverse mortgage risks to below 2 percent the minimum statutory capital requirement under current law.  This proves a misleading conclusion that the capital ratio of the reverse mortgage program was below what was mandated in the law.

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