HUD and FHA Guidelines for Valuation Analysis for Single Family and One to Four Unit Dwellings - Part 3

Purpose of this Section: The following section contains appraisal guidelines for HUD and FHA appraisals. I've included this section to be used as a reference for you. These guidelines can help further clarify the appraisal topics discussed in this book. The text is written in a very formal and technical style of writing since it is used by HUD and FHA for their appraisal procedures. You don't need to try and memorize everything right away since it will seem overwhelming if you try to do that. Just take your time so you can learn at your own pace and refer back to this book as needed, like a reference manual.



This Chapter addresses the site requirements for FHA-insured mortgages. Before the valuation process can begin, subject properties must meet specific site requirements. The appraisal process is the lender's tool for determining if a property meets the minimum requirements and eligibility standards for a FHA-insured mortgage. 'In addition, these standards provide a context for the appraiser in performing the physical inspection of the property.


The purpose of site analysis is to identify the various site characteristics that affect the marketability and the value of the subject property. Site analysis requires the following:

  • Determining the desirability and utility of the site
  • Determining the degree and extent to which the site, because of external influences, shares in the market for comparable and competitive sites in the community
  • Forecasting the likely changes at the site because of justifiable future trends
  • Appraising the current situation and knowledge of the various trends that could affect the valuation of the real property

The principal of change is fundamental to appraising real estate and to properly analyzing a site. Value is created and modified by economic, social and governmental changes that occur outside the property. Evaluate the direction of these trends and determine their effect, if any, on the current value of the subject property.


The appraiser must clearly define the boundaries - north, south, east and west - of the subject neighborhood. By defining the neighborhood, the appraiser can extract pertinent information on which to base valuation conclusions.


Sites are competitive when they are improved with, or appropriate for, residential properties that are similar in accommodations and sales price or rental range for similar residents or prospective occupants. Compare features of the subject site with the same features of competitive sites within the community. An acceptable site must be related to the needs of the prospective occupants and to the alternatives available to them in other competitive locations.


Proposed - No concrete or permanent material has been placed. Digging of footing and placement of re-bar is not considered permanent.

Under Construction - From the first placement of concrete (permanent material) to 100% completion. Finalized and ready to occupy.

Existing - 100% complete and has occupancy permit.

Existing less than one year - Appraisal performed less than one year since receipt of final occupancy permit issued. For model homes, age begins with issuing of permit to use as a model.

For any home less than 2 years old, list month and year completed in the age box on the URAR.


The appraiser must give consideration to, and include in the value analysis, the economic trends of a neighborhood and the general area, including:

  • Price and wage levels (the purchasing power of community occupants)
  • Employment characteristics
  • The current supply and demand for residential dwellings, including projects under construction
  • Taxation levels
  • Building costs
  • Population changes
  • Activity of real estate sales market and mortgage interest rates


Site analysis determines the effects of actual and potential neighborhood land use on the subject site. The following factors form patterns for present and future land uses:

1. Zoning

The appraiser should consider the effect on the value of appropriate and well-drawn zoning ordinances. Land-use controls that receive public approval and are strictly enforced protect residential sites from adverse influences that diminish the desirability of sites. This must be noted on the URAR, and its effect must be quantified in the valuation analysis.

2. Protective Easement/Covenants

Properly drawn protective covenants have proven more effective than zoning regulations in providing protection from adverse environmental influences. When combined with proper zoning ordinances, these covenants provide the maximum legal protection to ensure that a developed residential area will maintain desirable characteristics or that a proposed or partially built-up neighborhood will develop in a desirable manner. Protective easements and covenants should be superior to any mortgage and should be binding to all parties and all persons claiming under them. These must be noted on the URAR and its effect must be quantified in the Valuation Analysis.

3. Inharmonious Land Uses

The appraiser must identify all inharmonious land uses in a neighborhood that affect value. Clearly define the current and long-term effect that inharmonious uses will have on the market value and the economic life of the subject property. If inharmonious land use represents a serious detriment to either the health or safety of the occupants or to the economic security of the property, clearly note safety of the occupants or to the economic security of the property, clearly note this on the VC and URAR. Recommend that the property be rejected by the Lender.

4. Natural Physical Features

The appraiser must consider favorable and underlying topography and site features, including pleasing views, wood lots, broad vistas and climatic advantages. Streets that are laid out with proper regard to drainage, land contours and traffic flow show good design and increase the desirability of the neighborhood. This must be noted on the URAR and its effect must be quantified in the valuation analysis.

5. Attractiveness of Neighborhood Buildings

The overall appeal of a neighborhood is strengthened if the buildings in a neighborhood harmonize with each other and their physical surroundings. A pleasing variety that results in harmoniously blended properties is desirable but not mandatory. The age of the structure is not in itself an important consideration; however, the maintenance of the structure over time has an important impact. Consider the amount of rehabilitation that has taken place or is taking place in a neighborhood. This must be noted on the URAR and its effect must be quantified in the valuation analysis.

6. Neighborhood Character

Mobility and economic growth can alter neighborhood patterns. Shopping, recreation, places of worship, schools and places of employment should be easily accessible. This must be noted on the URAR and its effect must be quantified in the valuation analysis.

7. Character of Neighborhood Structures

The appraiser must carefully analyze the age, quality, obsolescence and appropriateness of typical properties in a neighborhood. Take into account the attitude of the user group as well as the alternative choices available to the specific market under consideration. This must be noted on the URAR and its effect must be quantified in the valuation analysis.



Community services include commercial, civic and social centers. For a neighborhood to remain stable and retain a high degree of desirability, it should be adequately served by elementary and secondary schools, neighborhood shopping centers, churches, playgrounds, parks, community halls, libraries, hospitals and theaters. A lack of services in the community should be noted and quantified in the valuation analysis. The appraiser must note a change in these services and quantify the effect on value.


Ready access to places of employment, shopping, civic centers, social centers and adjacent neighborhoods is a requisite of neighborhood stability. The appraiser must take into consideration the transportation requirements of the typical family and quantify the effect on value.


The appraiser must consider these utilities and neighborhood services: police and fire protection, telephone services, electricity, natural gas, garbage disposal, street lighting, water supply, sewage disposal, drainage, street improvements and maintenance. Public services and utilities can affect value and must be quantified. A lack of these services should be noted and quantified in the valuation analysis.


As time passes, desirability changes residential areas in any location. Therefore, give special consideration to the following:

  • Infiltration of commercial, industrial or nonconforming use
  • Positive and negative effect on value of gentrification
  • Changes in the mobility of people (employment shifts)
  • Weakly enforced zoning regulation or covenants


The demand for home ownership in a neighborhood is directly related to the marketability of the homes in the neighborhood or in competitive neighborhoods. Home ownership rates, vacancies and the marketing time of dwellings in a neighborhood help the appraiser determine the strength of market demand and the extent of supply.


A small town may have its own set of standards in architectural design, livability, style of mechanical equipment, lot size, placement of structures, nature of street improvements and in all features of the physical property and environment. Judge each in light of local standards and preferences.

Log in to comment