Wednesday
July 23, 2014

HUD's Alternative to Mandatory Home Inspections

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HUD's Alternative to Mandatory Home Inspections

REALTORS® move to protect homebuyers

You’ve heard the news. Now it’s time to learn the rules. Six months into the U.S. Department of Housing and Urban Development’s FHA Homebuyer Protection Plan, practitioners are seeking answers as they try to do the right thing for buyers using FHA insurance.

What exactly is this new plan, and what can you do to stay informed as you try to protect FHA buyers from costly surprises?

Staying informed hasn’t been easy. REALTORS® around the country say they’re confused about what’s required of them and what’s required of appraisers. And there have been news reports alleging that practitioners are giving incorrect information to FHA buyers.

“When you come down to it, the plan makes only minor changes to existing practices,” says Cathy Whatley, NAR’s first vice president nominee and point person on the FHA inspection issue. Whatley is a broker at Buck & Buck Inc., Jacksonville, Fla. “The plan is also a much simpler alternative than the mandated home inspections that Congress considered imposing last year.”

Congress accepted HUD’s plan as a sound alternative to mandatory inspections because it protects buyers without imposing an inappropriate burden on practitioners, she says.

Under the plan, buyers are required to sign a form disclosing why a home inspection is helpful and how a home inspection differs from an appraisal. The requirement isn’t new. Buyers have been directed to sign a similar disclosure form since 1996, but the new form goes into more detail. It also has teeth. A buyer who doesn’t sign the form before execution of the sales contract could void the contract, requiring all the parties to draw up a new one.

Another difference is the proactive role of the real estate profession. NAR has pledged in a memorandum of understanding (MOU) with HUD and lenders that REALTORS® will take a lead in educating buyers on the inspection and disclosure issues.

“REALTORS® aren’t mandated to do this, but the MOU puts it out front that REALTORS® will be leaders on this,” Whatley says.

The revised disclosure form took effect Aug. 10.

Appraisers’ role grows

To provide minimal protection to buyers, whether or not they opt for a home inspection, HUD also beefed up the property condition report that appraisers provide to lenders.

The revised report gives lenders a thorough tool for determining whether a house has a physical deficiency that could trip up a homebuyer, HUD says.

HUD also created a form for appraisers to give to buyers informing them of their findings, and it added a training curriculum for appraisers to get FHA certification.

The report to lenders, what’s known as the valuation condition (VC) sheet, requires appraisers to note an extensive list of property condition details, but it doesn’t require appraisers to expand their reviews, HUD says.

“The form incorporates existing requirements and clarifies items listed on the previous VC checklist,” HUD says. “The appraiser completes the revised VC sheet by simply observing the condition of the property and its key components and systems. FHA isn’t requiring the appraiser to make a judgment about observed conditions that the appraiser doesn’t feel qualified to make.”

The new buyer disclosure form also doesn’t require appraisers to go outside their area of expertise, HUD says.

Appraisers have raised concerns that the buyer disclosure would expose them to liability risk. The concern is that the notice will give buyers the impression that the appraisal is a substitute for an inspection. “We sign our name to this notice,” says Frank Gregoire, principal of Gregoire & Gregoire Inc., St. Petersburg, Fla.. “As appraisers, we have a contractual relationship with the lender. Why are we furnishing this notice to the buyers? If my signature’s on it, the buyers think they can rely on that.”

HUD says it’s listening to appraisers’ concerns, but it defends the new notice: “It’s important that this form be a separate document so that the homebuyer is fully aware, in plain English, of the conclusions of the VC sheet.”

The appraisal forms took effect Sept. 10.

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