The FHA 203k Appraisal: How is it Different?
Like all home mortgage loans such as FHA, VA, and Conventional a required appraisal is needed when financing a property. An appraisal is a written analysis of the estimated value of a property and is one of the required items needed for your lender to do your loan. Standard FHA, VA, and Conventional appraisals will have detailed information regarding the property with a conclusion of what it is currently worth. The difference with 203k appraisals is that it will give an “after improved value” which is the expected market value of the property upon completion of the proposed rehabilitation and/or improvements.
That right there is the biggest difference when it comes to renovation loans that give additional funds for improvements because both you and your lender want to make sure the anticipated improvements will support the value once completed. Now along with knowing what your future property value will be, your lender will want to know the current property value also. With that said the 203k appraisal’s primary focus is the “After Improved Value” but the “As Is Value” is expected as well from an appraisal when doing a 203k loan.
FHA 203K Purchase Appraisals:
For 203k purchase appraisals, the “As is Value” can be the contract sale price agreed to by both buyer and seller, or higher with no issues. If the “As is Value” is less than the contract sale price then your choices will be to either renegotiate the contract or make up the difference in cash at closing. Typically that is not the case but it’s good to know you have options. Just like Conventional (Fannie & Freddie), VA ,as well as the more popular FHA 203b appraisals, the same type of negotiations would apply when the property does not appraise at the agreed sale price.
FHA 203K Refinance Appraisals:
For a 203k refinance there is no contract sale price so the current total loan balance (s) on the property or the “As is Value” from the appraisal, whichever is less, would be used. If the outstanding loans are more than the minimum equity needed or the “As is Value” then once again the difference can be made up in cash at closing.
For the most part, one appraisal whether it’s for a 203k purchase or 203k refinance will be sufficient. It will indicate both the opinion of the estimated “As is” value as well as the “after improved value” with the emphasis and scope of work targeted towards the “after improved value”. Although the 203k appraisal is more concentrated on future value it will still be your 203k lender’s call on whether or not they will want a full “As-Is” appraisal of the property if they believe more details are needed for the “As-Is” value. One exception to that though would be if you are purchasing a HUD owned property which then NO “As-is” appraisal would be required.
On 203k appraisals unlike standard FHA, VA and Conventional appraisal the supporting documentation of what is to be done to the property such as copies of contractor bids, the plans, specifications, work write-up and other conditions upon which the value was based on should be part of the appraisal package. For mixed use properties the commercial space is to be appraised as if it were residential and lastly your final loan amount which will include your funds for improvements can exceed the final improved value by 10% over.
For any additional 203k appraisal questions talk to your 203k Loan Specialist. Or for property values on a particular property a real estate professional for your area should be able to assist.