FHA 203(k) – Understanding Its Real Value – Part 2

FHA 203(k) – Understanding Its Real Value – Part 2: "How Is the Appraisal Completed?
The appraiser is given a detailed report from either a licensed contractor [for the “Streamline” 203(k)]; or from an FHA 203(k) Consultant [For the “Standard” 203(k)]. This Bid/Report details the scope of work that will be financed into the loan. The appraiser visits the home and uses the scope of work report as his “rose colored glasses” and appraises the home under a “hypothetical assumption that the work has been completed”. Thus the home is appraised “As-Repaired” even though the work has not been completed nor is it required to be completed until after the transaction closes and will be completed by the buyer thru his contractor.
Financing at 110% of the “Repaired Value”
Yes, it’s true. Let’s use yesterday’s example; if the home is sold for $200,000 and the buyer’s acquisition cost is $258,000 including the renovation account. If the home is appraised “As Repaired” at $235,000, this transaction will close because 110% of $235,000 is $258,500 and the acquisition cost is $258,000 which is less than 110%. FHA will insure this loan and the transaction will close (some lenders have underwriting overlays and will only fund loans at 100% of the “repaired value”). The FHA 203(k) can keep transactions together and eliminate the seller from having to make price reductions at the eleventh hour to keep the buyer from walking because the value did not come in."