HUD and FHA Guidelines for Valuation Analysis for Single Family and One to Four Unit Dwellings - Part 4

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.



The FHA guidelines for property analysis include specific requirements to which appraisers must adhere for the appraisal to reflect an accurate valuation that win:

  • Denote any deficiencies in the subject property
  • Protect HUD's interest in that property

The property analysis includes General Acceptability Criteria for conducting the appraisal to address FHA minimum property requirements.


  • The appraiser must make a complete visual inspection of the subject property - interior and exterior - and complete the VC form.
  • The appraiser must take photographs that show the sides, front and rear of the subject property and all improvements on the subject property with any contributory value. A photograph of the street frontage is also required.
  • The appraiser is required to submit a single photograph of each comparable sale transaction in the addenda to the appraisal report.
  • The map of proposed construction must clearly show proposed roadways.
  • The appraiser must provide a copy of a local street map that shows the location of the property and each comparable sale.
  • If the subject property is proposed construction and the improvement has not started, the appraiser should take a photograph that shows the grade of the vacant lot.


For both proposed and existing construction, the appraiser must determine the present highest and best use for the site, disregarding improvements that may exist or are proposed for the site. This conclusion serves as the basis of comparison for estimating the market price of the land and discloses the extent to which the existing or proposed building improvements are appropriate or inappropriate for the site. This also forms the basis for selecting comparable land sales. The appraiser must analyze the site to:

  • Establish the basis for comparing the market estimates of sites in the estimate of replacement cost of the property
  • Determine suitability for the existing or proposed use

Carefully consider the topography, suitability of soil, off-site improvements, easements, restrictions or encroachments.


Proper topography and site grading can be important elements in preventing wet basements, damp crawl spaces, erosion of soils, and overflowing sewage disposal systems. To ensure proper protection, the appraiser must analyze the relationship of street grades, floor elevations, and lot grades. If the foundation or its bearing soils may be affected by seepage or frost, the dwelling is unacceptable unless the surface and subsurface water is diverted from the structures to ensure positive drainage away from the foundation.


Consider the readily observable soil and subsoil conditions of the site including the type and permeability of the soil, the location of the water table, surface drainage conditions, compaction, rock formations and other physical features that affect the value of the site or its suitability for development. Also observe the effects of the adverse features of the adjoining land.


Consider the off-site improvements adjoining the subject property, including street surface, curbs, sidewalks, curb cuts, driveways, aprons, etc., that are not contained within the legal boundaries of the site but enhance the market acceptance and the use and livability of the property. Also consider these situations:

  • Compare the subject property with the immediate neighborhood to determine the dominant off-site improvements required by the market. Note any necessary off-site improvements that are not in existence or are proposed for the subject property and adjust for them in the market value.
  • Any proposals for installing off-site improvements and levying assessments by the local governing body in the near future may affect value. These proposals will necessitate a commitment condition that requires the installation of improvements and the payment of the assessment before or immediately after insurance endorsement.


Consider all easements, restrictions or encroachments and their impact on the market value of the subject property and list them on the appraisal. These factors are often discovered during the survey and title report once the appraisal has begun. Perform limited due diligence to verify the existence of these types of significant limiting factors. Also record these items in the URAR which were considered in the value estimate.


As a general rule, an encroachment will cause a property to be ineligible for FHA mortgage insurance. However, there are exceptions to this rule and further information can be found by calling the lender. The appraiser should identify any of these conditions:

  • Encroachment of a dwelling, garage, another physical structure or other improvement onto an adjacent property, right-of-way or utility easement
  • Encroachment of a dwelling, garage, another physical structure or improvements on the subject property
  • Encroachment of a dwelling, garage or another physical structure into the setback requirement

An encroachment may be acceptable if the adjoining landowner or the local governing authority provides a perpetual encroachment easement that is filed in the County Clerk and Recorder's Office. The Direct Endorsement under-writer will handle this issue under the General Waiver guidelines.


Analysis of the physical improvements results in conclusions as to the desirability, utility and appropriateness of the physical improvements as factors in determining mortgage risk and the ultimate estimate of value.


Gross Living Area is the total area of finished, above-grade residential space. It is calculated by measuring the outside perimeter of the structure and includes only finished, habitable, above-grade living space. Finished basements and unfinished attic areas are not included in total gross living area. The appraiser must match the measurement techniques used for the subject to the comparable sales. It is important to apply this measurement technique and report the building dimensions consistently because failure to do so can impair the quality of the appraisal report.


As a rule basement space does not count as habitable space. If the bedroom does not have proper light and ventilation, the room can not be included in the gross living area. The following requirements apply to the valuation of below-grade rooms:

  • The windowsill may not be higher than 44 inches from the floor.
  • The windowsill must have a net clear opening (width x height) of at least 24 inches by 36 inches.
  • The window should be at ground level; however, compensating factors may allow less.

In all cases, use reasonable care and judgment. If these standards are not substantially met, the basement area cannot be counted as habitable space.


Design is the cohesive element that blends the structural, functional and decorative elements of a property into a whole. With good design, the property's parts will be in harmony (each part with all the other parts). The whole property, in turn, will be in harmony with its immediate site and environment. Because good design is recognized and desired, the economic life of properties and neighborhoods will be extended and prices will typically exceed those for properties offering the same number of rooms and area but lacking good design. This competitive advantage usually continues through the entire economic life of the property. The appraiser must recognize this demonstrable price differential and reflect it in the comparative adjustments of market data and the final finding of value.


A residential property with good physical characteristics may not necessarily be good security for a mortgage loan, even if it is situated in a good location. The property may be entirely appropriate at another location, but not in its actual location. The property may be displeasing when viewed in relation to its surroundings, and it may not conform in other respects to the most marketable use in the particular neighborhood. When determining the effect of property-neighborhood relationships to marketability, consider elements other than similarity of physical characteristics.

Analysis of the Elements of Conformity. Analysis of Conformity requires consideration of Suitability of Use-Type, Appropriateness of Functional Characteristics, Harmony of Design and Relation of Expense of Ownership to Family Income Levels.

  • Suitability of Use-Type. The term Use-Type refers to the use for which a dwelling is designed - single-family, two-family, etc. In most neighborhoods only one use-type is suitable. In some neighborhoods, however, because of their heterogeneous development, several use-types may be found suitable.
  • Appropriateness of Functional Characteristics. Functional Characteristics refer to the living facilities provided in a residential property. They relate to site use and to arrangement, number and size of rooms. Usually well-defined neighborhood market preferences are observable.

Nonconformity may exist because of the placement of the house on the site. Carefully consider any deviation from the accustomed or accepted placement to determine whether it adversely affects desirability. If a site is substantially smaller than the size typical in the neighborhood, marketability may be limited. The shape or topography of a particular lot may make it less desirable than those typical of the area. The number, arrangement and size of rooms frequently conform to definite preferences in given neighborhoods. In some localities where one-story dwellings dominate, a two-story dwelling may meet considerable market resistance.

  • Harmony of Design. Conformity of the exterior design of a structure with other structures in the immediate neighborhood is not important unless it contrasts inharmoniously with them. There may be considerable variety in the exterior design of dwellings in a neighborhood and yet each may present a pleasing appearance when viewed in relation to its surroundings. On the other hand, a dwelling may be without any architectural faults and yet clash so violently with the design of neighboring properties that marketability may be seriously limited.
  • Relation of Ownership Expense to Family Incomes. Families usually select homes in neighborhoods where typical occupants have financial means similar to their own. A home that is too costly for these families to purchase or maintain will have limited marketability.
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