A federally related transaction involves a refinance of a single-family home with a loan amount of $180,000. The property has an estimated value of $240,000. What level of valuation is required under federal regulations?
Correct Answer
A) No appraisal required
For refinance transactions, the threshold is $250,000 or more, and this transaction is below that amount at $180,000. Therefore, no appraisal by a state licensed or certified appraiser is required under federal regulations.
Why This Is the Correct Answer
Option A is correct because federal regulations specify that refinance transactions require an appraisal by a state licensed or certified appraiser only when the loan amount is $250,000 or more. Since this refinance involves a loan amount of $180,000, it falls below the federal threshold and therefore no formal appraisal is required under federal regulations. The property value of $240,000 is irrelevant to this determination - only the loan amount matters for the threshold calculation. While the lender may still choose to require an appraisal for their own risk management purposes, federal regulations do not mandate one at this loan level.
Why the Other Options Are Wrong
Option B: Evaluation by a state licensed or certified appraiser
An evaluation by a state licensed or certified appraiser is not required because the loan amount of $180,000 falls below the $250,000 federal threshold for refinance transactions. Federal regulations only mandate formal appraisals above this threshold, so this option incorrectly suggests a requirement that doesn't exist at this loan level.
Option C: Appraisal by a state licensed or certified appraiser
A full appraisal by a state licensed or certified appraiser is not federally required because the $180,000 loan amount is below the $250,000 threshold established for refinance transactions. This option incorrectly applies the federal appraisal requirement to a transaction that falls below the mandatory threshold.
Option D: Broker price opinion is sufficient
While a broker price opinion might be sufficient from a federal regulatory standpoint since no formal appraisal is required, this option is incorrect because it suggests BPO is the specific requirement, when in fact federal regulations simply don't mandate any particular valuation method below the threshold. The lender has discretion in what valuation method to use, if any.
Quarter Million Refinance Rule
Remember 'Quarter Million for Refinance' - refinance transactions need appraisals when they hit a quarter million dollars ($250,000) or more. Think 'R for Refinance, Q for Quarter million.'
How to use: When you see a refinance question, immediately check if the loan amount reaches the 'Quarter Million' threshold. If it's below $250,000, no federal appraisal requirement exists.
Exam Tip
Always identify the transaction type first (purchase vs. refinance) and focus on the loan amount, not the property value, when determining federal appraisal requirements.
Common Mistakes to Avoid
- -Confusing the refinance threshold ($250,000) with the purchase threshold ($400,000)
- -Using property value instead of loan amount to determine the threshold
- -Assuming that because no federal appraisal is required, no valuation of any kind will be performed
Concept Deep Dive
Analysis
This question tests knowledge of federal appraisal requirements under the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) and related regulations. Federal regulations establish minimum thresholds for when formal appraisals are required in federally related transactions, with different thresholds for purchase transactions versus refinance transactions. The key distinction is that refinance transactions have a higher threshold ($250,000) compared to purchase transactions ($400,000 for residential), reflecting the lower risk profile since the lender already has familiarity with the property. Understanding these thresholds is crucial for determining when a full appraisal by a licensed or certified appraiser is mandated versus when alternative valuation methods may be acceptable.
Background Knowledge
Federal appraisal requirements are established under FIRREA and implemented through regulations that set minimum thresholds for when formal appraisals are required in federally related transactions. These thresholds vary by transaction type, with refinance transactions requiring appraisals at $250,000 or more, while purchase transactions have a $400,000 threshold for residential properties.
Real-World Application
In practice, even when federal regulations don't require an appraisal, many lenders still order them for risk management purposes, especially for larger loan amounts or when significant time has passed since the original appraisal. Appraisers should understand that 'not federally required' doesn't mean 'never ordered.'
More Report Writing Questions
Under FIRREA, which federal agency has the authority to set minimum standards for real estate appraisals in federally related transactions?
What is the minimum transaction threshold for requiring a state licensed or certified appraiser under Title XI for most federally related transactions?
The Dodd-Frank Act established which requirement specifically related to appraisal independence?
Which of the following is NOT a responsibility of the Appraisal Subcommittee (ASC)?
State appraiser regulatory agencies are primarily responsible for which of the following functions?
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