MLO Mentor: Section 35 Part II Loans

MLO Mentor is an ongoing series covering compliance best practices for Mortgage Loan Originators (MLOs). This article discusses the special valuation rules applied to Section 35 loans. to find MLO Mentor Part I: Section 35 Loans here.

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


The following types of loans are exempt from the Section 35 appraisal requirements:

  • qualified mortgages [12 CFR §1026.35(c)(2)(i); 12 CFR §1026.43(e)];
  • loans under $27,200 in 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)];
  • operations used to finance the initial construction of a dwelling [12 CFR §1026.35(c)(2)(iv)];
  • bridge loans with a term of 12 months or less, if they are used in connection with the acquisition of a consumer’s main residence [12 CFR §1026.35(c)(2)(v)];
  • reverse mortgages [12 CFR §1026.35(c)(2)(vi)];
  • certain simplified refinances by the existing lender [12 CFR §1026.35(c)(2)(vii)]; and
  • transactions secured by a prefabricated house. [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 the others higher priced mortgage (HPML) assessment 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 the borrower with:

  • an invoice for the cost of the unit, established by the manufacturer;
  • a cost estimate of the value of the prefabricated house, prepared by an independent cost service provider; Where
  • an appraisal by a person with no financial interest in the property, who has undergone training in manufactured home appraisal. [12 CFR §1026.35(c)(2)(viii)(B)]

Valuations for Reverse Properties

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

  • the seller acquired the property 90 days or less before 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)]; Where
  • the seller acquired the property 91-180 days before 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 must be performed by a different appraiser than the one who performed the initial appraisal. [12 CFR §1026.35(c)(4)(ii)]

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

Finally, the costs due for the second expertise cannot be charged to the borrower. [12 CFR §1026.35(c)(4)(v)]

Note that the second appraisal is not required for loans that fund a consumer acquisition property:

  • a local, state or federal government agency;
  • a person who has acquired title to the property through the exercise of the right to collect an overdue mortgage, resulting in foreclosure, deed in lieu of foreclosure or other judicial or non-judicial proceeding;
  • a not-for-profit entity that acquired the property by foreclosure or deed in lieu of foreclosure;
  • from a person who inherited the property due to death;
  • from a person who received the property following a divorce;
  • an employer or a relocation agency in connection with a relocation;
  • a service member who was deployed or received a permanent station change order after purchasing the property;
  • located in a federal disaster area; Where
  • located in a rural town. [12 CFR §1026.35(c)(4)(vii)]

Provide assessment reports

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

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

The assessment can be provided in printed or electronic form.

Assessment Disclosure

The lender must deliver or mail a written disclosure regarding the Section 35 appraisal requirements within three business days of:

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

This disclosure must indicate:

“We can order an appraisal to determine the value of the property and charge you for that appraisal. We will provide you with a copy of any appraisal, even if your loan is not closed. You may pay for additional appraisal for your own use at your own expense. [12 CFR §1026.35(c)(5)(i)]

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

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