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Second Appraisal Requirements/Limits on Cash-Out Refinances

To help stabilize the mortgage market, FHA is not at this time establishing higher downpayment requirements or borrower credit bureau score thresholds for properties located in declining areas. However, for mortgage amounts that will exceed the January 1, 2008 conforming limit of $417,000, FHA is establishing a second appraisal requirement for loans on properties in declining areas, and limiting the loan-to-value for cash-out refinances. The purpose of this is to mitigate the new risks to the FHA insurance fund and FHA borrowers.

A second appraisal will be required when:

  • The loan amount, excluding the upfront mortgage insurance premium, will exceed $417,000;
  • The loan to value (LTV), excluding upfront mortgage insurance premium (MIP), equals or exceeds 95%; and
  • The property is determined as being in a declining market.
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What is LTV?

Loan-to-Value is defined as the mortgage amount, excluding any financed upfront mortgage insurance premium, divided by the lower of the adjusted sales price or the appraiser's estimate of the property's value.

How is a declining market determined?

  • By the appraiser: The appraisal report requires the appraiser to indicate if the property is located in a declining area in both the neighborhood section of the appropriate appraisal form as well as in the housing trend section, and/or determine if there is an “over-supply” of properties. The certifications contained in the appraisal reporting forms are supplemental standards to the Uniform Standards of Professional Appraisal Practice (USPAP) and Certification # 14 specifically requires an appraiser to consider and report on all conditions that impact value. Appraisers must provide specific support for any conclusions noted in the Housing Trend section of the appraisal report and research local price trends, relying upon such services as local Multiple Listing Services or others as described below.
  • By the lender: The lender may determine through services such the S&P/Case-Schiller Index, Office of Federal Housing Enterprise Oversight (OFHEO) Index or National Association of Realtors (NAR) statistics, or through an automated underwriting system (e.g., Fannie Mae's Desktop Underwriter or Freddie Mac's Loan Prospector) that the property is located in a declining market area.

Who can perform the second appraisal?

The second independent appraisal must be completed by a FHA roster appraiser selected by the Direct Endorsement lender that is underwriting the mortgage. The lender independently engages the appraiser and is not to request a second case number through FHA Connection. The fee for the appraisal may be passed onto the borrower as any other closing cost.

What does the lender do with the second appraisal?

The second appraisal, when required, is to be included in the FHA insurance binder. If the second appraisal is used to recalculate the maximum mortgage amount, the mortgagee must enter the appropriate information in the appraisal logging screen in the FHA Connection or functional equivalent.

Loan-to-Value Limits for Cash-Out Refinances

a homeowner is pursuing a cash-out refinance and the loan balance exclusive of FHA's upfront mortgage insurance premium will exceed $417,000, the loan-to-value may not exceed 85 percent of the appraiser's estimate of value.

Source: Mortgage Letter 2008-09


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