MLO Mentor is an ongoing series covering compliance best practices for mortgage loan originators (MLOs). This article discusses the special appraisal rules applied to Section 35 loans find Part I of MLO Mentor: Section 35 loans here.

Strict appraisal rules apply to Section 35 higher-priced mortgage loans. A lender making a Section 35 higher-priced mortgage loan must obtain a written appraisal of the property prepared by a licensed appraiser based on a physical interior inspection of the property. [12 CFR §1026.35(c)(3)(i)]


The following loan types are exempt from Section 35 appraisal requirements:

  • qualified mortgages [12 CFR §1026.35(c)(2)(i); 12 CFR §1026.43(e)];
  • loans of less than $27,200 during 2021, to be adjusted for inflation each year [12 CFR §1026.35(c)(2)(ii); Official Interpretation of 12 CFR §1026.35(c)(2)(ii)-1];
  • transactions secured by a mobile home, boat or trailer [12 CFR §1026.35(c)(2)(iii)];
  • transactions used to finance the initial construction of a dwelling [12 CFR §1026.35(c)(2)(iv)];
  • bridge loans with maturities of 12 months or less, if used in connection with the acquisition of a consumer’s principal dwelling [12 CFR §1026.35(c)(2)(v)];
  • reverse mortgages [12 CFR §1026.35(c)(2)(vi)];
  • certain streamline refinances by the existing lender [12 CFR §1026.35(c)(2)(vii)]; and
  • transactions secured by a manufactured home. [12 CFR §1026.35(c)(2)(viii)]

A physical inspection of the interior of the property is not required when the loan will be secured by a new manufactured home and land. All other higher priced mortgage loan (HPML) appraisal requirements remain in place. [12 CFR §1026.35(c)(2)(viii)]

However, if the HPML is secured by the manufactured home alone, the interior physical inspection is not required if the lender provides to the borrower:

  • an invoice of the cost of the unit, prepared by the manufacturer;
  • a cost estimate of the value of the manufactured home, prepared by an independent cost service provider; or
  • aa valuation from a person with no financial interest in the property, who has training in valuing manufactured homes. [12 CFR §1026.35(c)(2)(viii)(B)]

Appraisals for flipped properties

Two appraisals are required if the Section 35 higher-priced mortgage loan funds the purchase of property on a flip of the property by the seller and:

  • the seller acquired the property 90 or fewer days prior to entering into a purchase agreement with a buyer, and the purchase price exceeds the original purchase price by more than 10% [12 CFR §1026.35(c)(4)(i)(A)]; or
  • the seller acquired the property 91 to 180 days prior to entering into a purchase agreement with a buyer, and the purchase price exceeds the original purchase price by more than 20%. [12 CFR §1026.35(c)(4)(i)(B)]

The second appraisal is to be completed by a different appraiser than the appraiser who completed the original appraisal. [12 CFR §1026.35(c)(4)(ii)]

In addition, the second appraisal must include analysis of the difference in sale prices, changes in market conditions and improvements to the property between the date the seller acquired it and the current sales date. [12 CFR §1026.35(c)(4)(iv)]

Lastly, the fee due for the second appraisal cannot be charged to the borrower. [12 CFR §1026.35(c)(4)(v)]

Note that the second appraisal is not required on loans that finance a consumer acquisition of property:

  • from a local, state or federal government agency;
  • from a person who acquired title to the property through the exercise of the right to collect on a defaulted mortgage, resulting in foreclosure, deed-in-lieu of foreclosure, or other judicial or nonjudicial procedure;
  • from a non-profit entity which acquired the property through foreclosure or deed-in-lieu of foreclosure;
  • from a person who inherited the property due to a death;
  • from a person who received the property as the result of a divorce;
  • from an employer or relocation agency in connection with a relocation;
  • from a service member who was deployed or received a permanent change of station order after purchasing the property;
  • located in a federal disaster area; or
  • located in a rural county. [12 CFR §1026.35(c)(4)(vii)]

Providing appraisal reports

A lender must provide a free copy of each appraisal report involving a Section 35 higher-priced mortgage loan to the borrower:

  • at least three days before consummation of the loan; or
  • if the loan is not consummated, no later than 30 days after the lender determines the loan will not be consummated. [12 CFR §1026.35(c)(6)(i)-(ii); 12 CFR §1026.35(c)(6)(iv)]

The appraisal can be provided in print or electronically.

Appraisal disclosure

The lender is to deliver or place in the mail a written disclosure about the Section 35 appraisal requirements within three business days of:

  • receiving an application for a Section 35 higher-priced mortgage loan; or
  • determining the loan associated with an existing application is a Section 35 higher-priced mortgage loan. [12 CFR §1026.35(c)(5)(ii)]

This disclosure is to state:

“We may order an appraisal to determine the property’s value and charge you for this appraisal. We will give you a copy of any appraisal, even if your loan does not close. You can pay for an additional appraisal for your own use at your own cost.” [12 CFR §1026.35(c)(5)(i)]

A lender who willfully violates this appraisal rule will be liable to the applicant or borrower for $2,000. [15 USC §1639h(e)]