How does the appraisal work on an FHA 203(k) renovation loan?

The appraiser values the house that doesn't exist yet

A 203(k) loan rolls the purchase (or refinance) and the renovation into one FHA mortgage. That means the appraiser has to answer a strange question: what will this house be worth after the work you haven't started?

That number is the after improved value. It's the value of the home as if every item in the approved work plan is done.

To get there, the appraiser needs to know exactly what's being done. One wholesale lender's Limited 203(k) guidelines (July 2024) spell out how this works in practice:

• The appraiser receives the work plan and contractor bids at the time of the assignment.
• The report describes the scope of work.
• All 203(k) appraisals are completed "subject to" the work.
• Funds are released after the appraiser's final inspection confirms the work.

That same guide notes HUD does not require a separate "as-is" value on a purchase, because HUD treats the purchase price as the as-is value. Lenders can add their own rules on top, so ask.

In short, I'm appraising a house that exists mostly on paper and in a contractor's optimistic handwriting.

The 110% rule and what it means for your budget

HUD's Mortgagee Letter 2024-13 says the base loan amount may not exceed 110% of the after improved value, or 100% for condominiums. Energy efficiency, weatherization and solar costs are left out when figuring that limit.

Here's a simple hypothetical. Say the after improved value comes in at $500,000. On a house (not a condo), the base loan amount can't go over $550,000 under that rule. Other FHA limits also apply, like the area loan limit and the normal down payment math, so the 110% figure is a ceiling, not a target.

The catch: if the after improved value comes in lower than you hoped, every number in the deal shrinks. The loan amount, the renovation budget, maybe the whole plan.

That is why the scope of work should match the neighborhood. A $90,000 kitchen with a pizza oven in a neighborhood of starter homes is a lovely kitchen. It may not be a lovely appraisal. Buyers in that market have to actually pay for what you're building, and the appraiser has to find sales that prove it.

Limited 203(k) versus standard 203(k)

ML 2024-13 made several changes for FHA case numbers assigned on or after November 4, 2024:

On a Limited 203(k), work that keeps the borrower out of the house for more than 30 days total counts as major, which pushes the loan to the standard program. Repairs that come out of the appraisal can also make a job "major" if they need a consultant's work write-up or plans.

HUD also said the $75,000 cap will be reviewed each year with FHA's loan limits. Check the current number before you build a budget around it.

Consultant fees under the current schedule

A 203(k) consultant inspects the home, writes up the work, and checks progress before money is released. ML 2024-13 set this fee schedule:

• Feasibility study: up to $375 more, if the borrower or lender asks for one.
• Work write-up: up to $1,000 for repairs up to $50,000; up to $1,200 for $50,001 to $85,000; up to $1,400 for $85,001 to $140,000; and over $140,000, up to 1% of repair costs or $2,000, whichever is lower. Add $25 per extra unit.
• Draw inspections: a reasonable local fee, capped at $375 per draw.
• Change orders: $120 each. Re-inspections requested by the borrower or lender: $225.
• Mileage: the IRS rate when the consultant's office is more than 15 miles away.

One helpful change: since ML 2024-13, the consultant fee on a Limited 203(k) can be financed, within the fee schedule limits.

The appraiser is a separate person with a separate job. The consultant asks "what needs to be done and what will it cost?" I ask "what will buyers pay for it when it's done?" Those are two very different questions, and only one of them involves a tile catalog.

How to set up a 203(k) appraisal that holds up

1. Get detailed bids. Line items, materials, finishes. "Redo kitchen, $60k" tells the appraiser nothing.
2. Flag permits. The work plan should say which items need permits.
3. Match the neighborhood. Look at what renovated homes nearby actually sold for. That's roughly where the after improved value can land.
4. Give the appraiser the whole package at assignment: work plan, bids, plans and any upgrades already done.
5. Be realistic about time. Know the 9-month or 12-month rehab window before you hire anyone.
6. Plan for the final inspection. Money isn't fully released until the work is confirmed.

In the markets I work, buyers react to condition more than age, so a well-planned renovation can move value a lot. The key word is well planned. Facts over feelings. Especially when the feeling is a Pinterest board with 400 pins.