Must the Mortgagee order an appraisal for a HUD REO purchase transaction?

The Mortgagee (Lender) must order a new appraisal for all transactions involving the purchase of a HUD Real Estate Owned (REO) Property with a new FHA-insured Mortgage.
Mortgagees must order appraisals in accordance with the requirements of the Ordering Appraisals section of Handbook 4000.1 (II.A.1.a.iii.(B)(6)). 
For 203(k) transactions, the Mortgagee must also adhere to the requirements in the Appraisals for Standard 203(k) and Limited 203(k) section of the Handbook 4000.1 (II.A.8.a.viii and II.D.12.c).
The Mortgagee must review the appraisal and property conditions in accordance with the requirements in the Underwriting the Property section of Handbook 4000.1 (II.A.3).
The appraisal ordered by the Mortgagee to support the transaction must be used to assist the Mortgagee with determining the extent of the repair needed to meet HUD’s Minimum Property Requirements (MPR) and the cost of the repairs.
Under the 203(b) program, when the HUD REO Property does not meet HUD’S MPR in its as–is condition, but repairs of no more than $10,000 are needed to meet HUD’s MPR, an escrow account to complete the repairs after closing is required.  If the costs of repairs are greater than $10,000, the property is only eligible for FHA 203(k) financing.
The maximum escrow amount must be based on the sum of the repairs required to meet the intent of HUD’s MPR, plus a 10 percent contingency.  The total escrow amount, including the 10 percent contingency, must not exceed $11,000.
The Mortgagee must comply with the Repair Completion Escrow Requirement section of Handbook 4000.1 (II.A.6.a.viii(B)).
For policy information see Handbook 4000.1 II.A.8.o.iv.; II.A.1.a.iii(B)(6); II.A.3; II.A.6.a.viii(B); II.A.8.a.viii; II.D.3 and II.D.12.c available at:

All policy information contained in this knowledge base article is based upon the referenced HUD policy document. Any lending or insuring decisions should adhere to the specific information contained in that underlying policy document.

Topic Number: KA-03836