Requirements for FHA Desktop and Exterior-Only Appraisals During COVID-19

By Brandon Cornett | © 2023 FHAhadbook.com. All rights reserved.

In March 2020, the Department of Housing and Urban Development issued guidelines for desktop-only and exterior-only home appraisals for properties being purchased with an FHA loan. These temporary measures and procedures have been put in place to reduce, or even eliminate, face-to-face contact during the coronavirus (COVID-19) pandemic.

The requirements for desktop-only and exterior-only FHA home appraisals are laid out in HUD Mortgagee Letter (ML) 2020-05, which was issued on March 27. A second ML was issued on June 29, extending the effective date for the desktop-only and exterior-only FHA appraisal procedures.

Related: Home buying in the age of COVID

Guidelines for Desktop and Exterior-Only FHA Appraisals (ML 2020-05)

The ML sent out back in March is the one with the guidelines and requirements for exterior-only and desktop appraisals for FHA-backed home purchases. So that’s where you’ll want to start, when trying to get a handle on all of this.

Here’s an overview of what that Mortgagee Letter says about FHA appraisals during the coronavirus / COVID-19 health crisis.

Affected Loan Programs

HUD issued ML 2020-05 to help limit the spread of COVID-19. This ML modifies the FHA appraisal process by “allowing exceptions for Exterior-Only and Desktop Appraisal inspections in certain transactions.”

Here are the key guidelines outlined in the ML:

  • Most FHA single-family purchase loans and Home Equity Conversion Mortgages (HECM) for purchases can use the optional desktop-only or exterior-only appraisal, in lieu of a traditional onsite appraisal.
  • Traditional HECM, HECM-to-HECM refinances, Rate and Term Refinances and Simple Refinances of properties may utilize an optional Exterior-Only inspection scope of work.
  • All home appraisals conducted in association with the servicing of FHA’s forward or reverse mortgage portfolios may use either the desktop or exterior-only appraisal inspection scope of work.
  • These changes do not apply to Streamline Refinances, since those transactions do not require appraisals. Likewise, these COVID-related modifications do not affect the appraisal requirements for FHA’s Cash- Out refinance program, 203(k) loans, and certain purchase transactions.

Amending the Scope of Work

ML 2020-05 also provides information on amending the scope of work when conducting FHA appraisals during the 2020 COVID crisis.

  • When applicable, the home appraiser can amend the scope of work to perform a desktop-only appraisal or exterior-only (i.e., viewing the property from the street).
  • Appraisers can rely on “supplemental information from other reliable sources” when preparing an appraisal report for FHA-insured transactions. Reliable sources include the Tax Assessor’s property record, as well as the Multiple Listing Service (MLS).
  • FHA-approved appraisers can also rely on property-related information provided by an “interested party to the transaction.” This could be the borrower, a real estate agent, a property contact, etc. The appraiser should include an appraisal report disclosure “when additional verification [of third-party information] is not feasible.”
  • The appraisal report must include enough information to allow the intended users (including the mortgage lender) to “understand the extent of the inspection that was performed.”
  • Desktop and exterior-only appraisal options must continue to be reported on the current FHA-approved forms “with amended certifications and scope of work disclosures.”

Additional Guidance: Exterior-Only Option

ML 2020-05 also outlined the required exhibits and protocols to be used with the exterior-only appraisal option for FHA loans:

  • The home appraiser will observe the property (and any improvements made to it) from the street.
  • The home appraisal will be completed “as-is,” unless Minimum Property Requirements (MPR) related deficiencies are observed from the street or are otherwise known.
  • The property appraiser can use “extraordinary assumptions” when needed to complete the appraisal process.
  • Interior photos, sketches, or rear exterior photographs are not required in this scenario.

Additional Guidance: Desktop Option

Here’s what ML 2020-05 says about the desktop-only appraisal option for FHA loans during the COVID-19 crisis.

  • The home appraiser will not physically observe the Property and Improvements.
  • The home appraisal will be completed “AS IS” unless MPR-related deficiencies are known.
  • The Appraiser may utilize extraordinary assumptions when necessary.
  • Here again, interior photo, exterior photographs and sketches are not required.
  • HUD does not require comparable (comp) viewing or photos for desktop-only appraisals.

Types of Transactions That Are Affected

As mentioned earlier, the guidelines and allowances for desktop and exterior-only appraisals apply to some (but not all) FHA transactions. According to ML 2020-05, here are the types of transactions that may utilize these modified procedures:

  • FHA purchase transactions: The Federal Housing Administration will accept appraisals for both forward and HECM for Purchase transactions with an optional Exterior-Only or Desktop-Only scope of work by the assigned Appraiser. However, these procedures and “flexibilities” are not permitted on Building on Own Lands, New Construction, Construction to Permanent, or 203(k) purchases.
  • FHA refinance and traditional HECM: The Federal Housing Administration will accept appraisals for Traditional HECM, HECM-to-HECM Refinance, Rate and Term Refinance, and Simple Refinance with an optional Exterior-Only scope of work by the Appraiser. However, these flexibilities are not allowed with cash-out or 203(k) refinances.

Important note: All of the information above was adapted from Mortgage Letter 2020-05. Appraisers who have questions about these guidelines and requirements can refer to the ML, contact the FHA help line (1-800-225-5342), and/or ask the lender that is requesting the appraisal.

Extending the Effective Date (ML 2020-20)

The modified guidelines and requirements for desktop-only and exterior-only FHA appraisals (above) were originally issued back in March, with the publication of ML 2020-05. The original effective date extended through May 17, 2020.

These procedures were later extended, with the publication of HUD Mortgagee Letter 2020-20. That second ML pushed the effective date out to August 31, 2020, in response to the ongoing COVID-19 crisis.

Here are the two most important parts of ML 2020-20, taken verbatim from the letter itself:

  • “The re-extension of Appraisal guidance in Mortgagee Letter 2020-05 is effective immediately for appraisal inspections completed on or before August 31, 2020.”
  • “Due to the continuing national emergency caused by the COVID-19 pandemic, HUD is issuing this ML to extend the modifications issued in ML 2020-05.”

It’s possible that these guidelines will be extended again, given the rise in COVID cases that began in early summer 2020. We will update this page if and when HUD decides to extend these modified procedures and allowances for FHA appraisals.