Which Appraisal Threshold for Two 1-4 Family Properties?
In this Compliance Clip (video), Adam answers a question related to which appraisal threshold applies for a consumer-purpose loan secured by two 1-4 family properties (for a bank). As the answer to this might not be what you expect it to be, Adam points out a few of the challenges of the new appraisal thresholds. This video provides a great overview of when the different appraisal thresholds apply to bank loans.
For a deep dive into the new appraisal threshold changes, be sure to check out our 3Q 2019 Quarterly Compliance Update where we cover the threshold changes in detail.
Video Transcript
The following is a transcript of this video.
This Compliance Clip is going to talk about the new appraisal thresholds for two 1-4 family properties. Specifically, we've received several questions on the new appraisal threshold rules, and one of the questions received is this. The question is, “What is the appraisal threshold for a consumer-purpose loan that is secured by a borrower's primary residence and their second home?” So we have a loan that's secured by two properties, and it is consumer-purpose. What appraisal threshold applies?
The answer to this, of course, is going to come from the interagency rules for appraisal thresholds. To refresh your memory, there are two main rules that have come out in the last couple of years that we need to talk about. The first came out in April of 2018, and this related to commercial real estate transactions, and what the interagency guidance did is it said the threshold requiring an appraisal up from $250,000 to $500,000. That is the requirement for commercial real estate transactions. Now, the second rule we need to look at came in October of 2019, and this rule relates to residential real estate transactions. What this rule did is it increased the threshold from $250,000 up to $400,000. So, for years, we had this threshold that required appraisals at $250,000 and recently we had a rule change where the threshold was increased up to $500,000 for commercial real estate transactions. And then in October of 2019, we had an increase where residential real estate transactions only require appraisal if the amount is over $400,000. That's the rule in a nutshell. There's some exclusions to that, some exceptions, but I'm not gonna get into that in this short video.
To answer our question - we have two residential real estate properties, so two 1-4 family homes, maybe a primary residence and a second home like a lake home that are both being taken as collateral on a single loan - does the $400,000 threshold apply since its consumer purpose, or does the $500,000 threshold apply as a commercial real estate transaction? Well, the answer to this, believe it or not, we can find in the April 2018 rule for the definition of a commercial real estate transaction because when we look at the definition of a commercial real estate transaction, what we see is this: the final rule says that the agencies have included the term “single” in the definition to clarify that only transactions secured by one, or a single, 1-4 family residential property are excluded from the definition of commercial real estate transaction, whether financing, construction or for other purposes. So what this means in a nutshell is this, you have this final line in the sand. You have a single 1-4 family property that falls under the definition that meets the $400,000 threshold, and multiple structures as collateral regardless of whether or not their consumer-purpose or commercial-purpose fall under the $500,000 threshold.
So just to be clear, what we're talking about here are the definitions under these appraisal thresholds. The definition of a commercial real estate transaction includes multiple properties. That's automatically included whether or not it's for consumer or business purpose. So our Reg Z definitions do not align with this definition. If we have multiple structures, it's $500,000, if we have a single structure that's a 1-4 family residential property, then that can qualify for the lower threshold of $400,000 and meet the definition of residential real estate transaction. That's what it comes down to. A hard line in the sand, one property that's a 1-4 family property for a hundred thousand, multiple properties automatically meet the definition of commercial real estate transactions and fall under that $500,000 threshold.
It's confusing, isn't it? It absolutely is. And if you're not confused enough, there's a lot of nuances to this final rule. Things like, is it $400,000 and below or $400,000 above? How does that threshold work? For example, does the $400,000 threshold apply to the appraised amount of the property or multiple properties, or is it the loan amount or what threshold applies? So there's a lot of nuances to these rules.
That's all I have for you today in this compliance clip.