HUD home appraisals work a little backward from a normal sale. HUD orders an FHA appraisal before the house ever hits HUD Home Store. The list price comes from that appraisal, or from a cut off it after the home sits. For an FHA buyer, that same appraisal usually travels with the house to their lender. Here's how I explain it to agents, and how to keep a buyer from getting surprised at closing.
The short answer
FHA buyers usually use the appraisal HUD already has. The lender asks for the FHA case number to be transferred and receives HUD's report. If the buyer bids at or under list, value is rarely a problem, because the list price is the value. VA and conventional buyers order their own appraisal, which can come in higher or lower. If any buyer bids over the appraised value, the extra comes out of their pocket in cash. And HUD won't lower the price because of a low appraisal.
Step by step
- Know the loan before you bid. FHA, VA, conventional, 203(k) or cash. Each one treats the appraisal differently.
- For FHA, tell the lender on day one. Ask them to request the case number transfer right away. Late transfers are a top reason HUD closings run long.
- Check if the appraisal is still good. FHA appraisals expire after a set period. If HUD's has expired, the lender orders a new one. Check current validity rules in HUD Handbook 4000.1.
- Plan the utility turn-on when needed. VA and conventional appraisers need working systems. So does a new FHA appraisal, or one marked "subject to" testing. See HUD inspections and utilities.
- Do the over-list math before the bid. An FHA loan is capped at appraised value. Every dollar above it is cash at closing, on top of the down payment.
- Read the repair line. On an IE home, HUD already set a repair escrow for FHA items. On an IN home there shouldn't be one. See HUD codes IN, IE and UI.
- If value comes in low, get it in writing. The buyer can bring the difference in cash. If they can't, the lender should issue a written denial based on value. That paper matters for the earnest money.
A worked example (illustration only)
An FHA owner-occupant bids over list on a busy HUD home. HUD's appraisal matches the list price.
| Amount | |
|---|---|
| List price and HUD appraisal | $350,000 |
| Buyer's bid | $360,000 |
| Over appraised value, paid in cash | $10,000 |
| Minimum FHA down payment (3.5% of $350,000) | $12,250 |
| Cash for price above loan, before closing costs | $22,250 |
The buyer who thought they needed "about $12,000" now needs more than $22,000, plus closing costs. Show this before the bid, not after.
Illustration only. A lender sets the real terms. This example shows down payment and over-value cash only. FHA loans carry upfront and annual mortgage insurance premiums, plus taxes, homeowners insurance and closing costs. The annual percentage rate (APR) would differ from any note rate. This is not an offer of credit. Program rules change. Check current FHA rules in HUD Handbook 4000.1.
How to explain it to your client
"HUD already had this house appraised before it listed it. If you use FHA, your lender will most likely use that same appraisal. So if we bid at or under list, the value is already there. If we bid over list, the loan doesn't grow with the price. Every dollar over comes from you in cash, on top of your down payment. And if an appraisal ever comes in low, HUD won't lower the price. You'd either bring the difference or we'd get a letter from your lender, which protects your earnest money in most owner-occupant cases."
Watch-outs
- Bidding over list without the cash. This is the number one HUD appraisal mistake. Run the math with the buyer and the lender first.
- Expired appraisals. On a home that has sat, HUD's report may have expired. That means a new appraisal, a utility turn-on and more time.
- VA and conventional buyers. Their appraiser may call out new items. HUD still fixes nothing. The lender may allow a fix before closing only with HUD's written permission, or set up an escrow.
- No renegotiation. A low appraisal doesn't reopen the price. If HUD later cuts the price, your buyer can bid again at the new number.
- Get denials in writing. An owner-occupant with a documented financing denial is in a much better spot on earnest money. See HUD earnest money and closing timeline.
- Don't quote numbers yourself. Let the lender show the buyer the real cash-to-close.
Further reading
This is training for real estate agents. It isn't legal, tax or lending advice. A licensed loan officer sets loan terms. Check with your managing broker.
Questions
Does an FHA buyer need a new appraisal on a HUD home?
Usually not. The lender uses HUD's FHA appraisal through a case number transfer, unless it has expired.
Do VA buyers use HUD's appraisal?
No. VA and conventional buyers order their own. Plan for a utility turn-on and extra days.
Will HUD lower the price if the appraisal is low?
No. The contract price stands. The buyer brings cash or gets a written lender denial.
What happens if my buyer bids over list with FHA?
The loan is capped at appraised value. The extra is paid in cash at closing.
Who fixes items the appraiser calls out?
Not HUD. On IE homes, a repair escrow covers FHA items after closing. Other fixes need HUD's written OK or a lender escrow.
Brian Lee Burke is the founder of PadLeaders, a Colorado real estate broker licensed since 2003, team leader of The Kenna Group at Keller Williams DTC (formerly Kenna Real Estate Group) and the author of Mastering Real Estate and The Real Estate Playbook. More about Brian.