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UNDERWRITING
MANUAL
co

M6 AS
C ,

WITH REVISIONS TO FEBRUARY 1938

FEDERAL HOUSING ADMINISTRATION
WASHINGTON ,DC.

UNDERWRITING
MANUAL
UNDERWRITING AND VALUATION PROCEDURE
UNDER TITLE II
OF THE

NATIONAL HOUSING ACT

FEDERAL
HOUSING ADMINISTRATION

WASHINGTON , D. C.

FHA Form No. 2049
Revised Feb. 1938

U.S. GOVERNMENT PRINTING OFFICE 1938

‫یار میر‬

9970
A5

1958
c.2 .
For sale by the Superintendent of Documents , Washington , D. C.
Price 75 cents

3/८

UNDERWRITING MANUAL

TABLE OF CONTENTS
PART L - ORGANIZATION AND PROCEDURE :
Section 1. Underwriting Organization ...

Paragraphs
101-199

Section 4. Compliance Inspections ....

201-299
301-399
401-499

Section 5. Minimum Eligibility Requirements ...

501-599

Section 2. Underwriting Procedures .--Section 3. Preliminary Examination .....

PART II - MORTGAGE RISK RATING :

Section
Section
Section
Section
Section
Section
Section

6.
7.
8.
9.
10.
11.
12.

Methods of Mortgage Risk Rating ...
Rating of Mortgage Pattern ..
Rating of Property....
Rating of Location ....
Rating of Borrower ...
Rating of Commercial Borrower.
Rating of Earning Expectancy ...

601-699
701-799
801-899
901-999

1001-1099
1101-1199
1201-1299

PART III - VALUATION :

Section 13. Methods of Dwelling Valuation ....

1301-1399

Section 14. Valuation of Amenity Income Dwellings ...

1401-1499

Section 15. Valuation of Rental Income Dwellings ..

1501-1599

PART IV - COST ESTIMATION :
Section 16. Methods of Dwelling Cost Estimation....
Section 17. Application of Cost Estimation Methods...

1601-1699
1701–1799

PART V - COMPILATION OF DATA :

Section 18. Compilation and Recordation of Data ...
Section 19. Construction Cost Data ......

1801-1899
1901-1999

UNDERWRITING MANUAL
PREFACE

1. The Underwriting Manual is issued by the Federal

Housing Administration. It contains instructions and regulations
governing the procedure and policies to be followed by Underwriting
Staffs of the Federal Housing Administration .
2. The Manual describes the techniques used by the
Federal Housing Administration to determine whether or not mort
gages are eligible for insurance under Title II of the National Hous

ing Act. Eligibility is determined by risk rating. This process con
sists of an examination of mortgage risk and embraces valuation .
3. The salaried underwriting personnel and duly ap
pointed fee consultants are furnished with loose- leaf Underwriting
Manuals. Each of these manuals is numbered and remains the prop

erty of the Federal Housing Administration . Copies assigned to
staff members or fee consultants are listed in the name of the in

dividual to whom assigned. They shall not be destroyed or trans
ferred and must be surrendered upon demand of the Federal Hous
ing Administration .

4. Revisions of the Manual are issued by supplying new
or substitute sections for the loose - leaf edition.

Such sections indi

cate the dates upon which their contents become effective. They are
to be inserted in their proper places as indicated by the section
numbers.

5. In order to promote a broad understanding of the
underwriting and valuation principles and procedure adopted and
advocated by the Federal Housing Administration, the Underwrit
ing Manual is made available to individuals and institutions. Such
manuals are bound and contain an imprint on the cover indicating
the date to which revisions have been made.

6. This edition of the Manual, dated February, 1938,

covers policies and procedures to be used in connection with non
farm mortgages to be insured under the provisions of Section 203,
Title II of the National Housing Act, as amended February 3, 1938.
For mortgages to be insured under Sections 207 and 210, those in

volving larger projects, and farm properties under Section 203,
policies are basically the same, but procedures and forms are dis
tinctly different. In order to make the Manual available to the
Underwriting Staffs and to the public, this edition has been ordered
to be printed immediately upon enactment of the legislative amend
ments .

PART I

SECTION 1

ORGANIZATION

CONTENTS

Objectives.--General Organization --Washington Headquarters Organization.
Underwriting Organization
Organization for Underwriting Activities --Underwriting Division, Washington Headquarters_-.

Paragraph
101-103
104-116
116

117–166
117-119
120-134

Underwriting Organization in Insuring and Underwriting Offices--- 135–137
138

Chief UnderwriterArchitectural Section

139–143
144-148
149–151
_152-157
158

Valuation Section-

Mortgage Risk Section_
Review Section ------

Reassignment of Personnel .
Deputizing Staff Members

159-160
161-162

Modification of Reports-----

Relationship of Underwriting Division to Underwriting Organiza
tion in Field Offices.-

163–166
167–193
169-179
180–192
193

Underwriting Personnel .

Salaried Staff Underwriting Personnel..
Fee Consultants -Training of Underwriting Personnel.

Effective February 1938.

Federal Housing Administration .

PART I

SECTION 1
ORGANIZATION

OBJECTIVES

101. Title II of the National Housing Act established a
system of mutual insurance of mortgages secured by residential
property. The general objectives of Title II are the creation and
maintenance of a sound structure for mortgage loans of this type and
the improvement of housing standards. The Act provides that no
mortgage shall be accepted for insurance unless it is economically
sound. It anticipates that eventually any liability in connection

with mortgages insured under the provisions of Section 203 of the
Act will be that of the Mutual Mortgage Insurance Fund ; and re
quires that such mortgages accepted for insurance be classified into
groups of similar risk characteristics so that the mortgagor may have

the opportunity of receiving any benefits arising from the mutual
feature. These and other requirements of the Act presuppose the
insurance of sound mortgages only.
102. Specifically, the major objectives of the Federal
Housing Administration include the following:
a . To increase the security of home ownership by making
funds available at reasonable rates and on terms within

the borrower's capacity to pay. This anticipates a single

mortgage amortizing completely in a definite period of
time, as compared with more hazardous methods of mort
gage financing
6. To induce lending institutions to lend on mortgage secu
rity in the residential field by offering to them the ben
efits of the single mortgage system .
C. To establish standards of quality with respect to neighbor
hoods, construction, architecture, and factors contribut
ing to more satisfactory housing in order to encourage
improvement in housing standards and conditions. Im
provement in housing standards and conditions will result
in better mortgage security as well as benefits to owners .

d. To stimulate home construction in localities where housing
is needed . Such a program provides employment for wage
earners in building trades and allied industries.

UNDERWRITING MANUAL

102-112

e. To conduct statistical surveys and economic studies for the
purpose of determining suitable fields for mortgage in
vestment, guiding the development of housing, and assist
ing mortgage investors and home owners or buyers in the
formulation of sound judgments and policies.

f. To maintain a nation -wide system of dwelling financing
based on economically sound and readily salable mortgages.
103. One of the means of achieving these objectives is to

require those who process and analyze mortgages submitted for in
surance to adhere to sound underwriting practices. The purpose
of this manual is to prescribe uniform and sound underwriting
techniques.
GENERAL ORGANIZATION

104. The authority vested in the Administrator in con
nection with Section 203, Title II of the National Housing Act is

delegated to a Deputy Administrator with headquarters in Wash
ington, D. C.

105. The organization to operate Section 203, Title II
includes Washington Headquarters, Insuring Offices, and Under
writing Offices.
106. The Washington Head quarters includes the ad

ministrative and technical personnel located in or traveling out of
Washington on supervisory or special missions.
107. Insuring Offices are in the charge of Directors or

Managers who report on administrative performance and problems
to the Assistant Deputy Administrator in charge of the Zone in
which their Offices lie. Insuring Offices handle locally all phases of
insuring activity through and including the endorsement of insur
ance of mortgages qualifying under Section 203 of the Act. There
are five territorial zones with an Assistant Deputy Administrator in

charge of each zone.
108. Underwriting offices contain complete Underwrit
ing Staffs, but differ from Insuring Offices in other respects.

109. Each Underwriting and Insuring Office has juris
diction over a definitely outlined area .
110. The Insuring Office or Underwriting Office shall
not process any application involving property outside of its estab
lished jurisdiction.
111. The Underwriting Staffs of all Offices are entirely
independent of each other.

112. The accompanying map shows the locations of In
suring and Underwriting Offices. The counties assigned to each of
the Offices are indicated in special instructions issued by the Deputy
Administrator for Title II.

SEATTLE

DANGOR
PORTLANO

.NELEM

Dudung
Tout

BISMARCK

UNDERWRITING ORGANIZATION

ANCORD

ALDANY

D•OISE

AutFALD

Sioux
FALLS
MILVAUKEE

DETROIT

DAN
VÄITES

CLEVELANO
NETVAR
.PITTSBURGH

CHICAGO
CHEYENNE

ORENO

CADASTON

MINNEAPOLIS

CITY
LAKE
SALT

MOINES
DES
OMAMA

COLUMBUS

ALTY
KANSAS

DENVER

SAAT
IMORE

INDIA
LIKUNAPOL
WATYIS

SAN
FRANC
de

MOTORD
CITY
YW ORK
JAMAICA
PHILADELPHIA

BMGTON
RICHMOND

TOPEKA

CHARLESTON

ST L.obis
LOUISVILLE

GREENSBORO
ANGELES
Los

FE
SANTA

CITY
OKLAHOMA

MEMPHIS

ROCK
UTTLE

COLUMBIA

PHOENIX

DIRMINGNAM ATLANTA

DIEGO
SAN

JACKSON
DALLAS
•

FORT O
WORTH

S
OFFICE
INSURING
S
OFFICE
UNDERWRITING
ON
STRATI
ADMINI
G
HOUSINAL
FEDER

HOUSTON

ORLEANS
KEW

JACKSONVILLE

ANTONIO
SAN

AT
OFFICES
ALSO
ARE
THERE
JUNEAU

ALASKA

HAWAII

MIAMI

112

HONOLULU

UNDERWRITING MANUAL

113-115

113. Insuring Offices and Underwriting Offices are indi
cated by the names of the cities in which they are located and the

types of offices; for example, Chicago Insuring Office, Phoenix
Underwriting Office.
114. The following cities contain either Insuring or

Underwriting Offices :
Albany, N. Y.
Atlanta , Ga.

Juneau, Alaska
Kansas City, Mo.
Little Rock , Ark .

Baltimore, Md.

Bangor, Me.
Birmingham , Ala .
Bismarck , N. Dak .

Los Angeles, Calif.

Boise, Idaho
Boston, Mass.
Buffalo, N. Y.

Milwaukee, Wis .

Burlington, Vt.
Charleston, W. Va .

Newark , N. J.
New Orleans, La.

Columbia , S. C.

New York , N. Y.
Oklahoma City, Okla .

Louisville, Ky.

Memphis, Tenn .
Miami, Fla.
Minneapolis, Minn.

Cheyenne, Wyo.
Chicago, Ill.
Cincinnati, Ohio
Cleveland, Ohio
Columbus, Ohio
Concord, N. H.
Dallas, Tex .
Denver, Colo.
Des Moines, Iowa
Detroit, Mich.

Fort Worth, Tex.
Greensboro , N. C.
Hartford , Conn .
Helena, Mont.
Honolulu, T. H.
Houston, Tex .

Indianapolis, Ind.
Jackson, Miss.
Jacksonville, Fla.
Jamaica, N. Y.

Omaha, Nebr.

Philadelphia, Pa.
Phoenix, Ariz .
Pittsburgh, Pa.
Portland , Ore.
Reno, Nev.

Richmond, Va .
St. Louis, Mo.

Salt Lake City, Utah

San Antonio, Tex.
San Diego, Calif.
San Francisco, Calif.
Santa Fe, N. Mex .
Seattle, Wash .
Sioux Falls, S. Dak .
Topeka, Kans.

Washington, D. C.
White Plains, N. Y.

115. When the volume of business justifies, additional

Underwriting Offices or Insuring Offices may be opened and existing
jurisdictions divided in an appropriate manner. In certain cases

Service Offices are established to expedite the handling of business.
When Service Offices are manned with underwriting personnel, such
personnel reports directly to the Underwriting Staff in the Insuring
Office having jurisdiction.

UNDERWRITING ORGANIZATION

116-118

116. Washington Headquarters Organization .

The

Headquarters organization to operate Title II, except Sections 207
and 210 thereof, comprises several divisions, as follows:
a . Operating Division , which supervises relations between In
suring and Underwriting Offices and Headquarters, rela

tions with mortgagees, and general administrative policy
matters

6. Underwriting Division, which directs all matters pertaining
to underwriting activities as defined in paragraph 117, and
is charged with the responsibility of securing compliance
with standards and eligibility requirements
c. Technical Division, which establishes eligibility requirements

as to property standards, subdivision standards, minimum
construction requirements, and new methods of dwelling
construction

d . Legal Division, which establishes policy with respect to in

terpretations of the National Housing Act and regulations
concerning legal matters

e. Division of Economics and Statistics, which engages in re

search activities, compiles information as a basis for policy
making and guidance of underwriting activities, and pro
duces operating statistics
f. Division of Education, which directs educational activities
in connection with the housing program outlined in the
National Housing Act

g. Division of Public Relations, which compiles and supplies all

public information bearing on the program
h. Comptroller's Division , which handles revenue, expenditures,
and management of funds, including the mutual mortgage
insurance fund of the Federal Housing Administration
UNDERWRITING ORGANIZATION

117. Organization for Underwriting Activities. The
underwriting activities are comprised of all operations which con

cern analyses of proposed mortgage transactions, including inspec
tions, valuations, and risk ratings. They include all underwriting
procedure after the recordation of the application until a rating is
given to the proposed mortgage and a final recommendation is made
by the Underwriting Staff.

118. The organization for underwriting activities and
the underwriting personnel is composed of :
a . The Director of the Underwriting Division, Washington
Headquarters, and his staff. This staff includes Under

UNDERWRITING MANUAL

118-124

writing Supervisors who perform executive duties and who
travel out of Washington Headquarters on supervisory

missions, and Underwriting Examiners who review proc
essed cases both in Washington and in the field.

6. The personnel of the Underwriting Staffs in Insuring, Un

derwriting, and Service Offices. These are permanently
stationed in the field, and include salaried employees, per
diem employees, and approved fee consultants engaged in
analysis of cases to determine both eligibility and ratings
of proposed mortgages.

119. Members of the organization for underwriting ac

tivities are selected and duly accredited by the Underwriting Division,
Washington, D. C. No persons are permitted to engage in under
writing activities before they are so accredited.
120. Underwriting Division, Washington Headquar
ters. The Underwriting Division is organized into Sections.
121. The Control Center maintains a record of the per

formance of Underwriting Staffs in Field Offices. It handles
routine correspondence with the Underwriting Staffs in field offices
and assigns correspondence to the respective sections. It also handles

the distribution of loose -leaf Manuals to the personnel of the
Administration .
122. The Allocation Section determines for the Under

writing Division the qualifications of members of Underwriting Staffs
and fee consultants and makes an allocation of underwriting personnel
to positions according to the qualifications and requirements. This
section handles, for the Underwriting Division, appointments, trans
fers, changes in status, promotions, demotions, resignations, and

terminations. It also makes physical arrangements for whatever
training schools may take place in Washington . It handles corre

spondence pertaining to underwriting personnel and prepares studies
of field office performance and expense.

123. The Wholesale Operations Section develops pro
cedures for the wholesale examination of portfolios of residential

mortgages, real estate owned , or both . It initiates and supervises
preliminary surveys of these portfolios. When necessary , it estab
lishes special offices and selects and trains the required personnel
for the handling of wholesale operations. Procedures for whole

sale underwriting operations are designed and supervision is given
these activities.

124. The Project Section is responsible for the determi

nation of eligibility of large projects insofar as the Underwriting
Division is concerned with such projects. The section handles cor

UNDERWRITING ORGANIZATION
124-130

respondence and reviews Insuring Office decisions concerning such
large projects and undeveloped subdivisions, and supplies supervision
for the conduct of this work in the field .

125. The Supervision Section is charged with the duty
of discovering and solving underwriting problems in field offices
and the determination of the quality of the work performed and
the decisions made by Underwriting Staffs. It is also charged with
all general training of Staffs and recommendations for instruction
by other sections. This section recommends action for the solution of
problems when such action extends beyond its regular function. It
takes care of the routine provisions for travel for the Division. To
perform these duties the Supervision Section maintains personal con

tact with the field underwriting organization , reviews Case Binders,
and verifies by inspections underwriting decisions on cases received

by the field offices. It engages in general training activities and sup

plies personnel for temporary emergency assignments in the field and
for the conduct of wholesale operations.

126. The Sections whose activities are listed above report

to a Chief of Underwriting Operations who coordinates the activities
of these Sections and reports to the Director of the Underwriting
Division .

127. The Administrative Section supplies interpreta

tions of underwriting policies and handles inter -Divisional relations.
It coordinates the work of the Underwriting Division , including the

preparation of the Underwriting Manual and various forms used
in underwriting activity. It reviews Underwriting Division reports

and is charged with the office management of the Underwriting Divi
sion including expense, personnel, supplies, and the assignment of
stenographic service to all sections.

128. The remaining sections of the Underwriting Divi
sion are known as the specialized sections.
129. The Valuation Section develops techniques re
garding valuation and training of underwriting personnel, and

handles all correspondence regarding valuation problems.

It pre

pares illustrative case material relating to valuation activities and
makes supervisory inspections of the Valuation Sections of field
offices. It handles development and revision of the underwriting
forms concerning valuation activities. It reviews and makes recom

mendations concerning disagreements between Chief Underwriters
and Directors. Appraisals for other Governmental Departments are
handled upon request by the Valuation Section. It also handles spe
cial technical assignments.

130. The Location Rating Section develops techniques
for the rating of Adjustment for Non -Conformity, Locations, and

UNDERWRITING MANUAL

130–134

Economic Background Areas. It handles the development of under
writing forms, all correspondence with Underwriting Staffs in field
offices, and the preparation of illustrative case material for these
phases of underwriting activity. It performs supervisory inspec

tions of the Valuation Sections of field offices, completes special tech
nical assignments, and supervises the revision of Economic Back
ground ratings.

131. The Borrower Rating Section develops techniques
for the rating of individual and commercial borrowers and the credit

analysis of subdivision sponsors and operative builders. It prepares
illustrative case material and correspondence concerning these activi
ties. It performs supervisory inspections of the Mortgage Risk Sec
tions of field offices. It supervises the relations with credit agencies
and performs special technical assignments. The Borrower Rating
Section reviews and establishes ratings of corporate borrowers and
determines the credit allotments in connection with borrowers apply
ing for large lines of credit.

132. The Property Rating Section develops techniques

for the rating of physical security and compliance inspections, co
operates with the Technical Division in the preparation and estab
lishment of Property Standards and Minimum Construction Require
ments, prepares illustrative case material, and handles correspondence
concerning these activities. It enforces Property Standards, Mini
mum Construction Requirements, and regulations concerning new
methods of construction. It performs supervisory inspections of the
Architectural Sections of field offices, trains Valuation Sections in
related subjects, and completes special technical assignments. The
Cost Data Unit is a part of the Property Rating Section . This Unit,

in cooperation with the Technical Division, develops techniques for
cost estimation . It is responsible for the compilation of cost data in

field offices. The compilation of this data is made by Cost Analysts
permanently stationed in the field.
133. The four Sections described above, the Valuation ,

Location Rating, Borrower Rating, and Property Rating Sections, as
well as the Administrative Section, report to the Director of the

Underwriting Division .
134. The personnel comprising the Underwriting Divi
sion is divided into the following groups by titles:
a . Director

b. Underwriting Supervisors
1. Senior Underwriting Supervisors

2. Underwriting Supervisors
3. Junior Underwriting Supervisors

UNDERWRITING ORGANIZATION
134_138

c. Underwriting Examiners, who perform case binder review
and field verification duties

d. Cost Analysts, who are responsible for construction cost
data and who are permanently stationed in the field
135. Underwriting Organization in Insuring and Un

derwriting Offices. All underwriting activity in each Insuring and
Underwriting Office is under the jurisdiction of a Chief Underwriter.
He reports to the Director or Manager in charge of the office to which

he is attached on all matters pertaining to discipline, organization,
personnel, and routine, and to the Underwriting Division , Washington,

D. C., on all matters pertaining to procedure, qualifications of under
writing personnel, technical standards, valuation, cost estimation, com
pliance inspections, research, and rating of mortgage loans. All
correspondence of the Underwriting Staff directed outside the Insur

ing Office shall be signed by the Chief Underwriter, Manager, or
Director. Section Chiefs are prohibited from signing outside corre
spondence.
136. The following paragraphs set forth prescribed
duties and responsibilities of Underwriting Staffs. However, when
conditions permit, the Director or Manager may arrange with the
Chief Underwriter for the assignment of underwriting personnel to
other duties such as educational activities.

137. Accompanying charts illustrate the underwriting
organization for large, medium , and small volume offices. It is to
be noted that in small offices one individual may perform the func
tions which are divided between several individuals in the larger
offices. Thus, the Chief Underwriter in a small office may perform
the duties of Preliminary Examiner, Chief Mortgage Risk Exam
iner , and Chief Valuator, in addition to his regular duties as Chief
Underwriter. The actual functions assigned to an individual will be
dictated by the volume of business handled by the office, with the

viewpoint and motive of accomplishing the necessary underwriting
activity in the most economical and expeditious manner possible.
138. Chief Underwriter.

The Chief Underwriter shall

organize the Underwriting Staff into four sections : the Architectural

Section, Valuation Section, Mortgage Risk Section, and Review

Section. The duties and responsibilities of the Chief Underwriter
include the following :
A. The interpretation and application of standards, procedures,
and techniques established by Washington Headquarters
6. The quality of work, soundness and reasonableness of the
decisions produced by the Underwriting Staff, and its

UNDERWRITING MANUAL
138

efficiency of operation ; and the completion of the Report
of Chief Underwriter

c . Supervision of the training and instruction of staff, per diem ,
and fee personnel of the Underwriting Staff

d . The completion, upon specific request by Washington Head
quarters, of special investigations and examinations of any
property in which the Federal Housing Administration has
an interest

e. Executive and administrative control of all activity of the
Underwriting Staff to assure efficiency and economical
operation
ORGANIZATION OF UNDERWRITING STAFF IN TYPICAL LARGE OFFICE
CHIEF

UNDERWRITER

VALUATION
SECTION

ARCHITECTURAL

CHIEF
ARCHITECTURAL
SUPERVISOR

SENIOR
ARCHITECTURAL
INSPECTORS

ARCHITECTURAL
INSPECTORS

ARCHITECTURAL
AIDES

HHH

SECTION

CHIEF
VALUATOR

SENIOR
VALUATORS

MORTGAGE RISK

REVIEW

SECTION

SECTION

CHIEF
MORTGAGE RISK
EXAMINER

ASSISTANT
TO CHIEF
UNDERWRITER

SENIOR
MORTGAGE RISK
EXAMINERS

MORTGAGE RISK

VALUATORS

VALUATION
AIDES

EXAMINERS

REVIEWERS

PRELIMINARY
EXAMINER

ASSISTANT
PRELIMINARY
EXAMINERS

f. Coordination of the work of all sections in order that con
sistent, efficient, and economical handling of cases may
result

g. Maintenance of an adequate production of work per section,
expeditious processing of cases by the Underwriting Staff
and efficient and economical organization of personnel
h . Making recommendations to the Director or Administrative
Officer for the purpose of securing and maintaining an
adequate and trained personnel in each Section in order
that replacements or additions may be effected when and
where warranted , and that unusual volume may be handled

UNDERWRITING ORGANIZATION

138-139

without over-taxing the capacity of the Sections, lowering
efficiency, or adversely affecting the quality of work
i. The completion of the Report of Architectural Inspector,
Report of Valuator, Report of Mortgage Risk Examiner,

as well as Compliance Inspection Report, when such work
is found advisable

j. Periodic field verification of cases processed and recordation
of inspections on Case Review Summary Sheets, in order
to obtain uniform underwriting decisions
139. Architectural Section. The Chief Architectural
Supervisor is in charge of the Architectural Section and is responsible
ORGANIZATION OF UNDERWRITING STAFF IN TYPICAL OFFICE
CHIEF
UNDERWRITER

ARCHITECTURAL
SECTION

CHIEF
ARCHITECTURAL
SUPERVISOR

VALUATION
SECTION

MORTGAGE RISK

CHIEF
VALUATOR

CHIEF
MORTGAGE RISK

SECTION

EXAMINER

SENIOR

ARCHITECTURAL

SENIOR
VALUATOR

INSPECTOR

ARCHITECTURAL
INSPECTORS

VALUATORS

MORTGAGE RISK
EXAMINER

to the Chief Underwriter for the quality of work and the efficient
operation of this Section. His duties and responsibilities include
the following :
a. Interpretation and application of architectural standards,
procedures, and techniques established by Washington
Headquarters

6. The quality and efficiency of work produced by the section
as a whole and by individual members of the section
c. The completion of Reports of Architectural Inspector and
Compliance Inspection Reports, the verification of the
eligibility of physical security and its compliance with
established standards, ratings of physical security, esti
mates of replacement cost of improvements, estimates of

UNDERWRITING MANUAL

144-146

lished Ratings of Locations ; maintenance of location

cards and neighborhood maps ; compilation, recordation
and application of valuation data ; and analysis of unde
veloped subdivisions
d . Training of all staff, per diem, and fee personnel of the
Valuation Section by instruction conferences, guidance,
demonstration , and field supervision

e. Executive and administrative control of all activity within
the section, planning of work, and coordination of effort
necessary for the efficient and economical operation of the
section

f. Coordination of the work of the section with all other sec
tions of the office in order that consistent, efficient, and
economical handling of cases may result

g. Maintenance of adequate production of work per man ,
expeditious processing of cases through the section and
economical utilization of personnel, especially recognizing
the capacity and qualifications of the individual Valuators

in making case assignments
h. Personal preparation of Reports of Valuator, and Com
pliance Inspection Reports on request, when other duties
permit

i. Periodic field verification of cases processed and recordation
of inspections on Case Review Summary Sheets, in order
to obtain uniform valuations and ratings
145. Assistant Chief Valuator. The Assistant Chief
Valuator prepares Reports of Valuator ; secures and correlates data
for Economic Background Ratings ; completes Established Ratings
of Locations; makes analyses of undeveloped subdivisions and com
pletes Chief Underwriter's Subdivision Reports ; reviews reports pre
pared by other members of the Valuation Section , making recom

mendations to the Chief Valuator for approval of reports which
appear satisfactory, changes in reports which appear questionable
or unsatisfactory, and recommendations for revaluation and re

analysis when such action is considered desirable ; compiles and
records valuation data in accordance with instructions contained in

Section 18, Compilation and Recordation of Data ; renders assistance
to the Preliminary Examiner ; and renders Compliance Inspection

Reports when requested . This title is used only in the largest
offices.

146. Senior Valuator. The Senior Valuator completes
Reports of Valuator ; secures and correlates data for Economic

Background Ratings ; makes analyses of undeveloped subdivisions

UNDERWRITING ORGANIZATION

146-149

and prepares Chief Underwriter's Subdivision Reports ; renders
Compliance Inspection Reports when requested ; compiles and
records Valuation data in accordance with instructions contained in

Section 18, Compilation and Recordation of Data ; renders assistance
to the Preliminary Examiner ; and completes such other assignments
as may be required by the Chief Valuator. While he handles routine
cases, those applications involving special problems are referred to
him . In the medium volume office, the Senior Valuator may perform ,
when necessary , the duties of the Assistant Chief Valuator set forth
above.

147. Valuator. Staff, per diem , and fee Valuators com
plete Reports of Valuator ; secure and correlate data for Economic

Background ratings; complete Established Ratings of Locations;
make analyses of undeveloped subdivisions and prepare Chief Under
writer's Subdivision Reports ; compile and record valuation data in
accordance with instructions contained in Section 18, Compilation
and Recordation of Data ; render assistance to the Preliminary Ex
aminer ; render Compliance Inspection Reports when requested ; and
complete such other assignments as may be required by the Section
Chief.

148. Valuation Aide. It is the duty of a Valuation
Aide to secure data for Economic Background Ratings, Established
Ratings of Locations, and subdivision analyses; to assemble, brief,
digest, and maintain the collected valuation data in usable form ; to
assist in the preparation of Report of Valuator under the close super
vision of a Valuator or Chief Valuator ; and to complete such other

assignments as may be required by the Section Chief. However, the
Valuation Aide shall not complete Report of Valuator.
149. Mortgage Risk Section .

The Chief Mortgage

Risk Examiner is in charge of the Mortgage Risk Section and is
responsible to the Chief Underwriter for the quality of work and the
efficient operation of this section . His duties and responsibilities
include the following:
a . Interpretation and application of borrower rating stand

ards, procedures, and techniques established by Washing
ton Headquarters
6. The quality and efficiency of work produced by the section
as a whole, and individually by members of the section
C. The completion of Reports of Mortgage Risk Examiner ;
maintenance of the Mortgage Insurance Allotment Record ;
verification of ratings of borrowers; and compilation of
borrower rating data which include credit control files for
multiple risk, corporate, and operative builder borrowers

UNDERWRITING MANUAL

149–154

d . Training of personnel of the Mortgage Risk Section by in
struction conferences, guidance, demonstration, and super
vision

e. Executive and administrative control of all activity within
the section, planning of work, and coordination of effort
necessary for the efficient and economical operation of the
section

f. Coordination of the work of the section with all other sec

tions of the Office in order that consistent, efficient, and
economical handling of cases may result

150. Senior Mortgage Risk Examiner.

The Senior

Mortgage Risk Examiner completes Reports of Mortgage Risk Ex
aminer ; maintains the Mortgage Insurance Allotment Record ; com

piles adequate borrower rating data which include credit control files
for multiple risk, corporate, and operative builder borrowers; and

completes such other assignments as may be required by the Section
Chief. While he handles routine cases, those applications involving
special problems are referred to him .
151. Mortgage Risk Examiner. Mortgage Risk Exam
iners complete Reports of Mortgage Risk Examiner; maintain the
Mortgage Insurance Allotment Record ; compile adequate borrower
rating data which include credit control files for multiple risk, cor

porate, and operative builder borrowers ; and complete such other
assignments as may be required by the Section Chief.
152. Review Section . The Assistant to the Chief Un

derwriter is in charge of the Review Section and is responsible for
the quality and efficiency of preliminary examination ; the completion
of work assigned by the Chief Underwriter, such as review of cases

and the preparation of the Report of Chief Underwriter; and, under
the direction of the Chief Underwriter, the coordination of the work
of all sections of the Underwriting Staff in order that applications for

insurance may be speedily and efficiently processed. He further serves
as member of and secretary to the Review Committee.
153. Reviewer. It is the duty and responsibility of a
Reviewer under the supervision of the Chief Underwriter or Assist
ant to Chief Underwriter to review cases, to prepare Report of Chief
Underwriter, and to complete such assignments as may be required
by the Chief Underwriter or the Assistant to the Chief Underwriter.

154. Preliminary Examiner. The Preliminary Exami
ner makes the initial survey of each application for insurance for the

purpose of determining eligibility for further consideration by the
Underwriting Staff, and selecting the procedure to be followed .

UNDERWRITING ORGANIZATION

155-159

155. Assistant Preliminary Examiner. The Assistant

Preliminary Examiner performs the duties of Preliminary Examiner
as set forth above, under the direction and guidance of the Prelimi.
nary Examiner.

156. Junior Preliminary Examiner. The Junior Pre

liminary Examiner performs the duties of Preliminary Examiner as
set forth above, under the direction and strict supervision of the

Preliminary Examiner. This title is used only in the large offices.
157. Review Committee.

The Review Committee re

views the reports made by the Architectural, Valuation, and Mort
gage Risk Sections in those cases where unusual problems are pres
ent. The Review Committee is appointed by the Chief Underwriter
who may also serve as a member. In large offices it usually consists
of the Assistant to the Chief Underwriter, who acts as secretary, the
Chief Valuator, the Chief Architectural Supervisor, and the Chief
Mortgage Risk Examiner. In small Offices the Chief Underwriter
appoints the committee from qualified Staff members who are available
for such work .

158. Reassignment of Personnel. The following rules

govern the reassignment of Underwriting Staff employees to duties :
a . No Architectural Inspector, Mortgage Risk Examiner, or
Preliminary Examiner may complete and sign Report of
Valuator, unless specifically authorized to do so by the
Underwriting Division, Washington, D. C.
6. No Valuator, Mortgage Risk Examiner, or Preliminary Ex
aminer may complete and sign Report of Architectural
Inspector, unless specifically authorized to do so by the
Underwriting Division, Washington, D. C.
C. Any member of the Underwriting Staff may complete and

sign Compliance Inspection Reports, provided he is in
structed to perform these duties by the Chief Underwriter
and, in the opinion of the Chief Architectural Supervisor,
is qualified to perform such duties. No specific authoriza

tion is necessary from the Underwriting Division, Wash
ington, D. C.
The Chief Underwriter is held responsible for the enforcement of
the above rules. However, the Underwriting Division is willing to
consider requests for specific authorization where the individual em
ployee possesses the necessary qualifications and experience.
159. Deputizing Staff Members. The Chief Under

writer may deputize the Chief Valuator, the Chief Architectural
Supervisor, the Chief Mortgage Risk Examiner, or the Assistant to
the Chief Underwriter to act in his stead during a temporary absence

UNDERWRITING MANUAL
159_162

on his part from the office, or in the event he is ineligible to act
on a given case, as for example, because of some personal interest
he has had in the property involved. A Section Chief, with the
approval of the Chief Underwriter, may deputize a Staff member
to act in his stead during a temporary absence on his part from the
office, or in the event he is ineligible to act on a given case . A deputy
shall sign documents as follows :
HENRY JONES, Chief Valuator
By JOSEPH DOE, Deputy.
160. In certain cases it will be advisable for the Chief

Underwriter to request the Underwriting Division, Washington,
D. C., to designate a deputy to assume the Chief Underwriter's
duties and responsibilities. This delegation of authority may apply
to the processing of a single case, to a group of cases, or to all cases
to be handled during a period of time.

161. Modification of Reports. The Chief Underwriter
or his authorized deputy has the power to modify any and all Sec
tion reports, including individual feature ratings of the various
categories, except that his power to raise valuations is limited in the

manner outlined in paragraph 162 and the waiving of violations of
Property Standards shall have the approval of the Chief Archi
tectural Supervisor and the Chief Valuator. Each Section Chief
or his authorized deputy has the power to modify reports prepared

by personnel attached to his section, including ratings ascribed
various features of the various categories. However, in accordance
with the provisions of paragraph 162, the Chief Valuator is lim
ited in altering valuations. The Chief Architectural Supervisor
may not waive requirements of Property Standards except with the
approval of the Chief Underwriter and Chief Valuator. In all in
stances where reports are modified in any manner by the Chief Un
derwriter or his deputy, or the Section Chiefs or their deputies, such
modifications shall be made in accordance with the prescribed proce
dures set forth in Section 2, Underwriting Procedures.

162. The prescribed rules covering the authority to es
tablish the Federal Housing Administration Valuation are as fol
lows :

a . The Valuator makes an estimate of value in the Report
of Valuator and submits it to the Chief Valuator.

6. The Chief Valuator shall submit an approved valuation.

In determining his approved valuation he has four alter
natives :

1. He may accept the estimate of value made by a Val
uator and establish it as his approved valuation ,

UNDERWRITING ORGANIZATION
162

2. He may establish his approved valuation at an amount
lower than the estimate of value made by a Valuator.
3. He may order another Valuator to render a new Re
port of Valuator and he may then establish, on the
basis of either report, his approved valuation in ac
cordance with the foregoing two alternatives.
4. He may, himself, complete a Report of Valuator based
upon his own personal inspection and examination of
the property .

c. The Chief Underwriter shall fix the Federal Housing Ad
ministration Valuation. The Federal Housing Adminis
tration Valuation is distinguished from the Chief Valua

tor's approved valuation in that it is final. In fixing the
Federal Housing Administration Valuation the Chief Un
derwriter has four alternatives :

1. He may fix the Federal Housing Administration Valua
tion at an amount equal to, or less than the approved
valuation submitted by the Chief Valuator. He may

not fix the Federal Housing Administration Valua
tion at an amount in excess of the Chief Valuator's

approved valuation, except as provided in (3) below.
2. In any case the Chief Underwriter may return the Re
port of Valuator to the Chief Valuator for recon
sideration and may require him to cause a revaluation
of the property to be made. In instances where re

valuations are required , regular field investigations of
the property shall be made. Such revaluations shall
be reviewed in the established manner by the Chief
Valuator.

3. The Chief Underwriter has the authority to fix the
Federal Housing Administration Valuation at an
amount in excess of the Chief Valuator's approved
valuation , provided the increase does not exceed 5%
of the Chief Valuator's approved valuation . In no
case , however, may the increase exceed $ 500 in the
aggregate. He shall not exercise this authority more
than once in connection with any one property. It is
recognized that valuations are based on judgment and
cannot be regarded as precise measurements. Rela
tive accuracy is obtained when the estimate of value

falls between limits which are reasonable. The right
of the Chief Underwriter to raise a valuation in an

amount not to exceed 5% of the approved valuation , is
based upon the assumption that any one of several esti

UNDERWRITING MANUAL

162-163

mates may be plausible provided it is within these

limits. The purpose of granting such privilege is to
correct inconsistencies from case to case .

However, it

is recognized that this privilege will be used in most
instances when a discrepancy, within the limits of
reasonableness , exists between the amount of loan

usable by the mortgagor and the amount of loan per
mitted by the Chief Valuator's approved valuation .
It shall be understood that the Chief Underwriter will

be directly and personally responsible for the reason
ableness of every Federal Housing Administration
Valuation fixed by him .
4. In a case where the Chief Valuator cannot conscien

tiously supply an approved valuation that is satisfac
tory to the Chief Underwriter, the Chief Underwriter
may completely relieve the Chief Valuator and the

Valuation Section from all responsibility. He may
then make a complete Report of Valuator, based on
his own personal inspection and examination of the
property and sign the report as “Chief Underwriter ".
In such a case his valuation is fixed as the Federal

Housing Administration Valuation. All previous
copies of Report of Valuator are marked "Super
seded by Chief Underwriter's Report of Valuator" .
When a Chief Underwriter has thus preempted the
prerogatives of the Chief Valuator and the Valuation
Section, and has recommended the issuance of a com

mitment, he shall forward the complete Case Binder to
the Underwriting Division, Washington, D. C., for
review . This does not prevent the issuance of a com

mitment prior to the review of the case by the Under
writing Division .
163. Relationship of Underwriting Division to Un

derwriting Organization in Field Offices. The primary function

of the Underwriting Division is to assist the underwriting organiza
tion in field offices in the conduct of underwriting activity. Pro

cedures and techniques for the processing of applications are devel
oped by this Division . A constant effort is made to eliminate duplica
tion of effort and to improve the methods, techniques, forms, and

guides to judgment required in underwriting analysis of applications,
so that uniform attitudes and interpretations will be assumed and
rendered by all members of the Underwriting Staff. The instruc
tion and guidance extended by the Underwriting Division to the field

UNDERWRITING ORGANIZATION

163–166

underwriting organization is accomplished by correspondence and
personal supervision. Correspondence takes the formof individual
and general letters and, in emergency cases, telegrams and telephone
conversations. All correspondence emanating from the Underwrit

ing Division is over the signature of the Director of the Underwriting
Division .

164. Personal supervision supplies assistance and guid
ance concerning all phases of underwriting activity including the
following:
a . Underwriting decisions on particular cases
b. Interpretation of established underwriting practices
c. Interpretation of established underwriting techniques

d . The executive control of sections and entire Underwriting
Staffs.

165. These activities are accomplished by two types of

personal supervision : general underwriting supervision , and special
ized underwriting supervision. For the purpose of ascertaining

quality of work, obtaining information for training activity, and for
other purposes, field verification of completed cases is made by Un
derwriting Supervisors and Underwriting Examiners.
166. Underwriting supervision represents an over-all
check of the performance of an Underwriting Staff from the points
of view of both quality and efficiency. An effort is made to solve the
particular problems confronting Sections of the Underwriting Staff.
Instruction is given to underwriting personnel, and an effort is made
in the interest of efficiency and economy to improve the executive
performance of Section Chiefs and Chief Underwriter. Underwrit
ing supervision embraces all phases of personal assistance given by
the Underwriting Division and is based on training activities rather

than disciplinary control, except under extreme conditions. General
underwriting supervision involves periodic inspections by Under
writing Supervisors to whom certain offices are assigned. General
underwriting supervision is made for the purpose of analyzing over
all performance, coordinating activities, improving executive control

and management, determining soundness of underwriting decisions,
andgeneral training in all phases of the activity of the Underwriting
Staff. Specialized underwriting supervision involves occasional in
spections by Underwriting Supervisors to whom are assigned specific

underwriting techniques. Specialized underwriting supervision is
usually made after the discovery of an important problem or need for
training involving a specific technique and usually takes the form of a
most intensive examination and instruction program for the par
ticular section involved .

UNDERWRITING MANUAL

167-170
UNDERWRITING PERSONNEL

167. The underwriting organization is comprised of
selected and duly accredited staff employees and fee consultants. No
persons are permitted to engage in underwriting activities before

they are duly accredited by the Underwriting Division, Washington,
D. C. Staff personnel of the underwriting organization are com
pensated in accordance with established scales of salary determined

by the responsibility and technical requirements of each position.
Per diem personnel are compensated in accordance with established
scales. Fee consultants are paid for each assignment completed ,
according to an established scale of fees.

168. The rules applying to salaried staff personnel shall

apply to per diem personnel, except that paragraphs 189–191 in
connection with the writing of hazard insurance shall apply to per
diem personnel and paragraph 178 shall not apply.
169. Salaried Staff Underwriting Personnel. Appli
cants for positions on the salaried staff in the underwriting organ
ization are expected to have the qualifications outlined in paragraphs
below . These are presented here to guide the judgment of Direc
tors and Chief Underwriters when recommending applicants for
positions.

170. Applicant for the position of Architectural Inspec
tor should have at least the following qualifications:
a . Educational Requirements. Academic and technical train
ing of such nature that he has acquired a thorough and
sound knowledge of residential design or construction , and
business practice
b. Professional Background.

1. A number of years of actual experience in the design and
supervision of residential construction of all classes,
including:

(a) Record of successful field operation and super
vision of actual construction of residential prop
erties

(6 ) Record of routine architectural or practical
training in design or cost estimating
2. Reputation for personal integrity and ethical conduct.
c . Personal Attributes. Flexibility of mind, power of analysis,
sound judgment, industry and application, cooperative atti
tude, willingness to accept suggestions and training, resist
ance to outside influences, and pleasing personality

UNDERWRITING ORGANIZATION

171-173

171. Applicants for the position of Architectural Aide
should have at least the following qualifications:
a. Educational Requirements. Academic and technical train
ing of such nature that he has acquired the groundwork
for residential design or construction

6. Personal Attributes. Flexibility of mind, power of analysis,
industry and application, cooperative attitude, pleasing
personality, and willingness to learn
172. Applicant for the position of Valuator should have
at least the following qualifications:
a . Educational Requirements. Academic and technical train
ing of such nature that he has acquired a thorough and

sound knowledge of residential valuation techniques, and
business practices
6. Professional Background.

1. A number of years actual experience in the valuation of

residential properties of all classes, including :
(a) Extensive general real estate experience, handling
sales, rentals, or property management

( 6 ) Practical knowledge and experience in residential
construction

(c) Mortgage lending experience, including valuation
of residential properties for mortgage -lending
purposes

(d) Ability to apply properly, comparative and in
come capitalization valuation methods

2. Reputation for personal integrity and ethical conduct
c . Personal Attributes. Flexibility of mind, power of analysis,
sound judgment, industry and application, cooperative atti
tude, willingness to accept suggestions and training, resist
ance to outside influences, and pleasing personality
173. Applicants for the position of Mortgage Risk Ex
aminer should have at least the following qualifications:

a . Educational Requirements. Academic and technical train
ing or experience of such nature that he has acquired a

thorough and sound knowledge of business practices and
credit analysis preferably in connection with mortgage
lending
6. Professional Background .
1. A number of years actual experience in credit analysis,
including :
(a ) Ability to assemble credit and character data

UNDERWRITING MANUAL

173–175

( 6 ) Ability to analyze credit data and financial state
ments

(c) Mortgage lending experience, including fairly ex
tensive knowledge of general real estate sales,
rental and property management practices
2. Reputation for personal integrity and ethical conduct.
c. Personal Attributes. Flexibility of mind, power of analysis,
sound judgment, industry and application, cooperative atti
tude, willingness to accept suggestions and training, resist
ance to outside influences, and pleasing personality

174. Applications for salaried positions on an Under
writing Staff shall be directed to the Insuring or Underwriting

Office. Before appointment can be made, the Underwriting Division,
Washington, D. C., must be able to certify that the applicant is quali
fied for the position and that additional personnel is necessary. Such
certification shall be denied unless :

a . The applicant's experience meets with the requirements for
the particular position
6. There is a definitely demonstrated need for additional
personnel

c. The recommendation for appointment bears favorable com
ments and signatures of the Insuring Office Director or
Manager, the Chief Underwriter, and the Chief of the
Section in which the appointee will work
d. The file includes the proper forms accompanied by the
required letters of recommendation

e. The file, in the case of an applicant for a position in the
Valuation Section, other than Valuation Aide, includes
a copy of a residential appraisal report in narrative form
made solely by the applicant. Applicants will not be per
mitted to submit appraisal reports on forms such as those
used by financial institutions or government agencies
f. The file, in the case of an applicant for a position in the
Architectural Section other than Architectural Aide and

Junior Architectural Aide, contains evidence that the ap
plicant has designed or supervised the construction of
residential buildings

175. Staff members are required to refuse assignments
in connection with any case in which they have directly or indirectly

any present or prospective personal interest. In such event, the
Staff member shall promptly notify his immediate superior.

UNDERWRITING ORGANIZATION

176-181

176. In no case shall a Staff member accept an assign

ment on a case or property if he has been previously employed by
the mortgagee, the applicant, the borrower, the builder, the contractor,
or the broker in connection with the same case or property. The

rendering of an appraisal or similar report, not in connection with
the pending mortgage transaction , shall not in itself, disqualify a
Staff member.

177. Staff members are not allowed to engage in political
activities or be candidates for or hold any political office except one
of minor nature, and then only with the approval of the Underwrit
ing Division, Washington, D. C. Such activities, even though purely
informal, are prohibited where there is any possibility of causing
embarrassment to the Federal Housing Administration .
178. No member of the underwriting staff in any Insur

ing or Underwriting Office shall
a . Place, as agent, broker, or otherwise, any new hazard in
surance on properties on which mortgages are insured or
on which there is application for mortgage insurance
6. Endeavor to influence any party to a mortgage insured or
submitted for insurance to place hazard insurance on the

property involved , with or through him or any particular
agent, broker, or company
c . Enter into any agreement or arrangement, formal or infor
mal, with an insurance agent, broker, or company to fur
nish any information or do anything to assist in the writ
ing of new hazard insurance on properties on which there

are mortgages insured or applications for mortgages to be
insured by the Federal Housing Administration
179. It is the intention of the Federal Housing Adminis
tration that none of its staff members shall use any information
coming into their possession through the channels of the Adminis
tration for their own personal gain , or use it in any way that may
interfere with the activities of private persons or corporations en
gaged in hazard insurance or other lines of business.
180. Fee Consultants. Fee Consultants are engaged to

supplement the salaried underwriting staff. Fee Architectural In
spectors discharge the duties outlined for Architectural Inspectors.
Fee Valuators discharge the duties of Valuators .
181. Fee Consultants may not be used except for the pur

pose of processing cases in remote locations at lower expense or to
expedite the processing of cases when there is an unusual rush of
business. They shall not be used unless the Chief Underwriter can

UNDERWRITING MANUAL
181–189

demonstrate that such action is necessary either to save travel expense

or to expedite the processing of cases during an emergency.
182. Applicants for approval and appointment to posi

tions as fee consultants in the underwriting organization are expected
to have the same qualifications as those outlined for salaried staff
underwriting personnel. Applicants for approval as Fee Archi

tectural Inspectors should have the qualifications outlined in para
graph 170. Applicants for approval as Fee Valuators should have

the qualifications outlined in paragraph 172.
183. Application for appointment as fee consultant shall

be directed to the Insuring or Underwriting Office. The procedure
is the same as that outlined in paragraph 174 above.
184. Upon appointment as Fee Consultant, appointee

shall be notified immediately that assignments to him, if any, may
be made only when there is volume of business in an area beyond
the ability of staff employees to handle properly, or when the prop
erty covered in the application lies at a remote location .
185. Reports and contents of reports made for the Fed

eral Housing Administration by fee consultants are confidential and
may be made known only to the Chiefs of Sections or the Chief
Underwriter except with the authority and approval of the Chief
Underwriter or Director. A Fee Architectural Inspector may make

his findings known to the Valuator assigned the same case .
186. Fee consultants are required to refuse assignments

in connection with any case in which they have directly or indirectly
any present or prospective personal interest. In such event, the fee
consultant shall promptly notify the Chief Underwriter.
187. A fee consultant shall not accept an assignment on a
case or property if he has been previously employed by the mort
gagee , the applicant, the borrower, or broker in connection with the
same case or property. The rendering of an appraisal or similar re
port, not in connection with the pending mortgage transaction, shall
not, in itself, disqualify a fee consultant.
188. Fee consultants are not allowed to engage in politi
cal activities or be candidates for or hold any political office except
one of minor nature, and then only with the approval of the Under
writing Division, Washington, D. C. Such activities, even though
purely informal, are prohibited where there is any possibility of
causing embarrassment to the Federal Housing Administration .
189. No fee consultant shall :

a. Place, as agent, broker, or otherwise, any new hazard in
surance on properties on which mortgages have been in

UNDERWRITING ORGANIZATION

189–193

sured during the previous 12 months, or on which there
is application for mortgage insurance

6. Endeavor to influence any party to a mortgage insured,
or submitted for insurance, during the previous 12 months,

to place hazard insurance on the property involved, with
or through him or any particular agent, broker, or
company

C. Enter into any agreement or arrangement, formal or in
formal, with an insurance agent, broker, or company to
furnish any information or do anything to assist in the
writing of new hazard insurance on properties on which
there have been mortgages insured during the previous
12 months or applications for mortgages to be insured by
the Federal Housing Administration
190. Fee consultants engaged in the business of soliciting

or writing hazard insurance of any kind may rewrite policies they
have previously written on properties involved in mortgage insur

ance applications, but their appointments as fee consultants for the
Federal Housing Administration will be immediately terminated if
they violate the instructions promulgated hereinabove.

191. It is the intention of the Federal Housing Adminis
tration that none of its fee consultants shall use any information
coming into their possession through the channels of the Administra

tion for their own personal gain, or use it in any way that may inter
fere with the activities of private persons or corporations engaged in
hazard insurance or other lines of business.

192. Chief Underwriters and Section Chiefs shall take

special precautions to avoid favoritism in the assignment of cases to
fee consultants. The use of fee consultants is purely for the purpose
of economy and efficiency. In cases where a large number of sim
ilarly constructed houses is involved such as in a subdivision or an
operative builder's project, it is evident that use of the flat fee
system based on the number of houses might lead to criticism . In

all instances, decisions with respect to assignments shall be made by

determining the most economical procedure. It is obvious that in
most cases of this character, the use of staff personnel will prove to
be more economical and, therefore, obligatory.
193. Training of Underwriting Personnel. It is the

declared policy of the Federal Housing Administration to train its
underwriting personnel. This is considered to be a continuing ac
tivity and to apply to all ranks within the organization. Fee con
sultants are trained in schools conducted by Underwriting Staffs

UNDERWRITING MANUAL

193

and by instruction in the field while processing cases. Schools for
instruction of staff men recently employed are conducted periodically.
Each man, regardless of position, is instructed in every phase of
underwriting principles, methods, and procedure. At the conclu
sion of each school, each individual is thoroughly examined and
rated according to his ability, experience, and aptitude. Men found
to be unsatisfactory are not retained . Such schools are under the

direct supervision of the Underwriting Division, Washington, D. C.

1

PART I
SECTION 2
UNDERWRITING PROCEDURES

CONTENTS
Prescribed Procedures ----

Application of Procedures.
Regular Procedure Modified Procedure_

Paragraphs
--- 201-202
203-213
204
205

206

Unknown Borrower Procedure .
Wholesale Operation Procedure --

207
208

Undeveloped Subdivision Procedure --Compliance Inspection Procedure_.
Partial Release Procedure ---Casualty Damage Inspection Procedure_
Substitution of Mortgagor Procedure---

Tendered Property Inspection Procedure .
Procedure in Preliminary Examination .-Procedure in Architectural Section ----

209

210
211
212
213
214-219
220-231

Modified Procedure in Valuation Section ---

232–240
241-245

Procedure in Mortgage Risk Section ---Procedure in Review Section_
Director's Decision-----

254-266
267-268

Regular Procedure in Valuation Section -

246-253

Unknown Borrower Procedure ..
Wholesale Operation Procedure.--

269-270

Undeveloped Subdivision Procedure_

274-282

Partial Release Procedure_--

283-287

Damage Inspection Procedure_

288-289
290
291-294

Substitution of Mortgagor Procedure.-

Tendered Property Inspection Procedure .

271-273

Effective February, 1938
Federal Housing Administration

PART I

SECTION 2

UNDERWRITING PROCEDURES

PRESCRIBED PROCEDURES

201. The operations of the Underwriting organization
comprise a variety of investigations and examinations of properties,
prospective borrowers, and contemplated mortgage transactions.
They are of three kinds, as follows : (a) the examination of the
mortgage transactions offered for insurance to determine whether

commitments to insure may be issued and to determine conditional
requirements precedent to acceptance for insurance, ( b ) the inspec

tion of properties after the issuance of commitments, but before
insurance is granted , to determine whether there is compliance with

the conditional requirements specified in the commitments, and (c)
the examination of cases and the inspection of properties, after insur
ance of mortgages.

202. The prescribed procedures for non - farm mortgages
insured or to be insured under the provisions of Section 203 of the
National Housing Act are classified as follows:
a . Procedures prior to Commitment
1. Regular Procedure
2. Modified Procedure
3. Unknown Borrower Procedure

4. Wholesale Operation Procedure
5. Undeveloped Subdivision Procedure
6. Procedure after Commitment

1. Compliance Inspections
c. Procedures after Insurance
1. Partial Release Procedure

2. Damage Inspection Procedure
3. Substitution of Mortgagor Procedure

4. Tendered Property Inspection Procedure
APPLICATION OF PROCEDURES

203. The procedures described herein are prescribed to
control and encourage the orderly conduct of business. They are
described as applied by the typical large Insuring Office. Minor

UNDERWRITING MANUAL

203-206

variations from the prescribed procedures are permitted if the Chief
Underwriter can demonstrate that such variations serve to adapt the
procedures more effectively to local problems and to expedite the
processing of cases.
204. Regular Procedure. This procedure applies to all
cases where a mortgagee makes application for formal commitment
to insure a mortgage involving :
a . Proposed construction
b. Partially completed construction
c. Recently completed structures, where there is a probability
of unsatisfactory building practices

d. Existing structures where repairs, alterations, or additions
affecting major structural quality, are contemplated or
required
e. Existing structures which present unusual architectural ,
structural, or cost problems

Regular procedure is described in paragraphs 220 to 240, and 246
to 266.

205. Modified Procedure. This procedure applies to

all cases of existing construction where a mortgagee makes applica
tion for a commitment to insure a mortgage, with the exception of
those cases involving existing construction as described in para
graph 204 c, d, and e, which are handled according to Regular Pro
cedure. Modified Procedure differs from Regular Procedure only
in that the case is not routed to the Architectural Section . Under

Modified Procedure, the Valuation Section performs the duties
assigned to the Architectural Section .

Modified Procedure is

described in Paragraphs 241 to 245.
206. Unknown Borrower Procedure. This procedure
applies to those cases where a mortgagee makes application for a
conditional commitment predicated upon the subsequent submission
of an eligible mortgagor, except those cases which are processed
under Wholesale Operation Procedure. Unknown Borrower Pro.
cedure eliminates analysis by the Mortgage Risk Section . In all
other respects it is the same as Regular or Modified Procedure .
If a conditional commitment is issued and if the mortgagee sub

sequently makes application for a formal commitment, naming a
mortgagor, analysis is completed by the Mortgage Risk and Review
Sections. If a notice of rejection is issued in connection with the

named mortgagor, the status of the conditional commitment is not

affected and another application for formal commitment may be
entertained . Unknown Borrower Procedure is described in Para
graphs 269 to 270.

UNDERWRITING PROCEDURES

206

ROUTING DIAGRAM
REGULAR PROCEDURE

土
PRELIMINARY EXAMINER
RECOMMENDS
REJECTION

RECOMMENDS
PROCESSING

ARCHITECTURAL
SECTION

VALUATION
SECTION

MORTGAGE RISK
SECTION

REVIEW SECTION
CHIEF UNDERWRITER'S DECISION

DIRECTOR

TT

UNDERWRITING MANUAL
206

ROUTING DIAGRAM
MODIFIED PROCEDURE

PRELIMINARY EXAMINER
RECOMMENDS
PROCESSING

RECOMMENDS

REJECTION

VALUATION
SECTION

MORTGAGE RISK
SECTION
CO

REVIEW SECTION
CHIEF UNDERWRITER'S DECISION

DIRECTOR

Ti

UNDERWRITING PROCEDURES

206

ROUTING DIAGRAM
UNKNOWN BORROWER AND WHOLESALE
OPERATION

PROCEDURE

PRELIMINARY EXAMINER
RECOMMENDS PROCESSING

RECOMMENDS REJECTION

MODIFIED
PROCEDURE

REGULAR

PROCEDURE

ARCHITECTURAL
SECTION

VALUATION
SECTION

REVIEW SECTION

CHIEF UNDERWRITER'S DECISION

DIRECTOR

UNDERWRITING MANUAL

207-212

207. Wholesale Operation Procedure. This procedure

applies to those cases where a mortgagee makes application for
volume analysis of a large group of mortgages, or real estate owned,
or both . If a conditional commitment is issued and if the mortgagee

subsequently makes application for a formal commitment, naming a
mortgagor, analysis is completed by the Mortgage Risk and Review
Sections. If a notice of rejection is issued in connection with the
named mortgagor, the status of the conditional commitment is not
affected and another application for formal commitment may be
entertained . Wholesale Operation Procedure is described in Para
graphs 271 to 273.

208. Undeveloped Subdivision Procedure. This pro
cedure applies to the additional steps required to assist in the de
termination of location eligibility in undeveloped subdivisions, as

defined in Paragraph 274. It serves two purposes. It provides the
sponsor of undeveloped subdivisions with constructive suggestions,
and it determines compliance with certain minimum eligibility re
quirements. The application of the procedure is mandatory. Un

developed Subdivision Procedure is described in Paragraphs 274
to 282.

209. Compliance Inspection Procedure. This proce

dure applies to all cases of proposed or partially completed con
struction , and to those cases of existing construction where commit
ments have been issued containing requirements to complete addi
tions, alterations, or repairs before insurance may be granted. Com
pliance Inspections are made to determine compliance with the

requirements.

Compliance Inspection procedure is described in

Section 4.

210. Partial Release Procedure . This procedure ap

plies to mortgages previously insured where the mortgagee requests
approval to release a portion of the mortgage security. Partial
Release Procedure is described in Paragraphs 283 to 287.
211. Damage Inspection Procedure. This procedure
applies to those cases where the physical security under an insured
mortgage has been damaged. In those cases where the mortgagee
requests assurance that the correction of the damage is acceptable
under the contract for insurance, the Federal Housing Administra

tion is willing, after inspection , to render its opinion. Damage In
spection Procedure is described in Paragraphs 288 and 289.
212. Substitution of Mortgagor Procedure. This pro

cedure applies to insured mortgages where the mortgagee requests
permission to release the present mortgagor and to substitute another

UNDERWRITING PROCEDURES
212-216

mortgagor. Substitution of Mortgagor Procedure is described in
paragraph 290 .

213. Tendered Property Inspection Procedure. This
procedure applies in those cases where the mortgagee tenders a deed
for debentures and certificate of claim . Prior to the acceptance of
the deed an inspection is made for the following purposes : (a) to

ascertain if the property is physically acceptable under the contract
of insurance, ( 6 ) to present data and recommendations in connection
with management and resale, and (c) to determine present eligibility
of the security for an insured mortgage incidental to a resale transac
tion. Tendered Property Inspection Procedure is described in Para
graphs 291 to 294.
PROCEDURE IN PRELIMINARY EXAMINATION

214. Upon receipt of an application from an approved
mortgagee it is recorded and the case routed to the Preliminary

Examiner for a survey to determine whether the case appears eligible
and in proper form for further analysis by the Underwriting Staff.
If the Preliminary Examiner finds the case to be in proper form and

satisfactory for further analysis, he routes it in accordance with the
applicable procedure. The selection of the applicable procedure is
determined in accordance with the instructions contained in subse

quent paragraphs. If a deficiency incapable of correction is found,
he shall recommend rejection of the case . If the case is not in proper
form or a deficiency which may be remedied is found, he endeavors
to have the condition corrected . If the condition is not corrected,

he shall recommend rejection, but may suggest reconsideration upon
correction of the existing deficiency.

215. Preliminary Examination results in the following :

a. A determination that the information presented by the
mortgagee is, or is not, sufficient to make processing possible
6. A determination whether there is, or is not, possibility of
underwriting analysis resulting in a recommendation for
the issuance of a commitment to insure a mortgage

C. A selection of the applicable procedure
The instructions necessary to make the first two determinations are

described in Section 3, Preliminary Examination. Those necessary to
make the selection of the applicable procedure are described in the
two paragraphs immediately following.
216. The mortgagee's application, if made on the proper

form , establishes the type of procedure to be applied, with the ex
ception that it does not indicate whether Regular or Modified Pro

cedure is applicable. To ascertain whether Regular or Modified

UNDERWRITING MANUAL

216–220

Procedure is applicable, the Preliminary Examiner shall follow the
instructions below :

a . All cases involving proposed or uncompleted construction
shall be routed according to Regular Procedure

6. All cases involving repairs, alterations, or additions, affect
ing major structural quality, shall be routed according to
Regular Procedure
C. All cases of existing construction involving unusual struc
tural, architectural, or cost problems shall be routed accord
ing to Regular Procedure

d . All cases involving recently completed structures shall be
routed according to Regular Procedure with the excep
tion of the type of case described in Paragraph 218.
e. All other cases shall be routed according to Modified
Procedure.

217. Under Regular Procedure each case is routed to the
Architectural, Valuation and Mortgage Risk Sections simultaneously,
so that the Valuator can make his investigations while the Architec
tural Inspector is preparing his report, and the Mortgage Risk
Examiner can initiate his investigation.
218. It is a rule that all cases involving recently com

pleted structures shall be routed according to Regular Procedure,
except cases in which there is little probability of unsatisfactory

building practices. These are routed according to Modified Pro
cedure. The Chief Underwriter shall interpret this rule by analyzing
building practices previously encountered in local communities. The
Preliminary Examiner shall be guided by such interpretations. The
purpose of the rule is to save unnecessary expense and to expedite
the processing of cases.
219. If the Preliminary Examiner recommends rejection
of a case, he records his reasons for rejection on FHA Form No. 2004a ,

FHA Form No. 2201a, or FHA Form No. 2201 Wholesale, and routes
the file to the Chief Underwriter. If the Chief Underwriter approves

the recommendation, he signs the report and routes the case to the
Director. The Chief Underwriter or Director may order a case,

recommended for rejection by the Preliminary Examiner, to be com
pletely processed. Further instructions are given in Section 3,
Preliminary Examination .
PROCEDURE IN ARCHITECTURAL SECTION

220. The Architectural Section is responsible for the

completion of the Report of Architectural Inspector. Upon receipt
of a case in the Architectural Section , the Chief Architectural Super

UNDERWRITING PROCEDURES

220-224

visor requests an Architectural Inspector to make an investigation
and report the results on Report of Architectural Inspector, FHA
Form No. 2014. The assignment is made by transmitting to the
Architectural Inspector a copy of the property description which ac
companied the application and one set of drawings and specifications,
if any.

221. The report form indicates whether the property was
improved at the time of inspection, and the report must show whether
the Architectural Inspector made an inspection of an existing build

ing or worked from drawings and specifications. The Architectural
Inspector is required to make a thorough personal inspection of the
premises when reporting on existing or partially completed struc

tures. In addition to inspecting the main building, he is required
to make a thorough inspection of the entire property and report on

all other improvements, including driveways, garages, and other

accessory buildings. Working drawings and specifications, if sub
mitted with the application , are transmitted to the Architectural
Inspector for his use in making analyses and risk ratings. In cases
where drawings and specifications are not submitted , the Chief Archi
tectural Supervisor shall advise the Architectural Inspector as to the
nature and character of any sketches that shall accompany the report.
222. In cases where proposed new structures are to be
erected the Architectural Inspector may not find it necessary to visit
the site. The drawings and specifications are given him with the

assignment of the case, and he bases his ratings and conclusions upon
these documents and such other pertinent information as may be

supplied by the Valuation Section.
223. The Architectural Inspector makes an estimate of

the Replacement Cost of the Building Improvements in New Condi
tion in accordance with the instructions in Section 16, Methods of
Dwelling Cost Estimation, and Section 17, Application of Cost Esti
mation Methods, and indicates the distribution of his total estimate
among the major items of which it is composed. He also makes the

Rating of Physical Security in accordance with the instructions in
Section 8, Rating of Property. After the Architectural Inspector
completes and signs the report, he submits it to the Chief Architec
tural Supervisor for review .
224. The Chief Architectural Supervisor may modify a

Rating of Physical Security by changing the individual feature rat
ings and, also, the Estimate of the Cost Required to Replace Build
ing Improvements in New Condition when he believes that errors
have been made. Such changes are made by the Chief Architectural

Supervisor by notations in red on the report in the proper spaces.
He shall indicate the date of such modifications and sign his initials

UNDERWRITING MANUAL

224-228

in red . The Chief Architectural upervisor likewise may modify by
notations the Architectural Inspector's estimate of remaining physi
cal life if it appears incorrect. When possible, the Chief Archi
tectural Supervisor should consult with the Architectural Inspector
before making modifications. In all cases of new construction the

Chief Architectural Supervisor shall qualify his approval by making
a requirement, in the Report of Architectural Inspector, to the effect
that the construction shall equal or exceed the Federal Housing Ad
ministration's minimum construction requirements. When the Chief

Architectural Supervisor has completed his review he indicates his
conclusions on the report and routes it to the Valuation Section.
225. The Architectural Section is responsible for the

making of compliance inspections according to the procedure de
scribed in Section 4. The Chief Architectural Supervisor shall in
dicate in the space provided on the Report of Architectural Inspector
the number and kind of compliance inspections which shall be re

quired in order that the proper “Request for Compliance Inspection "
cards can be transmitted to the mortgagee.
226. The Architectural Section makes cost data available
for the use of Valuators in accordance with the instructions contained

in Section 16, Methods of Dwelling Cost Estimation.
227. If a local office receives a block of applications in

volving simultaneous construction of identical building improve
ments, a first Report of Architectural Inspector, FHA Form No.
2014, shall be completed. The various Underwriting Sections may
then, at the discretion of the Chief Underwriter, use the first report

as a basis for the remaining reports which may be partially com
pleted, provided sufficient cross references are made, and provided
the cost estimate, the Rating of Physical Security, and the estimate of

remaining physical life, the date made, signature, and such other
information that is pertinent, are included on every report. Each
report made by an Architectural Inspector shall be based on personal
inspection of the building improvements or the drawings and speci
fications.

228. Rulings on New Methods of Construction . If a
case is received in which the method of construction used is not

customary or is not the generally accepted practice, it is required
that the method shall receive the approval of the Technical Division ,
Federal Housing Administration, Washington, D. C., before a com

mitment may be issued . In general, request for approval of a new
method of construction shall be made only in conjunction with an

application for mortgage insurance. However, where there is assur
ance that the method of construction will have a broad market, or
that it is contemplated that a number of houses will be built using

UNDERWRITING PROCEDURES

228-231

the method, request for approval may be made without submitting an
application for mortgage insurance. In the event the request for
approval of the method of construction is made by the sponsors, it
may be directed to the Technical Division, Federal Housing Adminis

tration , Washington , D. C. However, in the event the request for
approval originates in the local office, it shall be forwarded to the
Underwriting Division, Federal Housing Administration , Washing
ton , D. C., over the signature of the Chief Underwriter.
229. In general, the following customary methods of
construction are acceptable when good materials and good workman
ship are applied.

a . Wood frame with wood siding or shingles
6. Wood frame with masonry veneer
C. Wood frame with stucco

d . Brick masonry or masonry block
e . Poured in place concrete
f. Adobe brick

230. The sponsor of a new method of construction is

required to demonstrate that the method proposed is a dependable
and durable type of construction . Evidence will usually be required
to show adequate tests demonstrating the characteristics of the mate
rials and method used . Evidence supporting the claims of the
sponsor should be submitted with each request for approval together

with descriptions, drawings, photographs, and samples of the mate
rials. The presentation should include a description of the materials,

their composition and size, and the method of assembling, together
with other pertinent data. Attested reports of tests performed by

recognized laboratories or authorities may also be included . Draw
ings should include wall sections showing footings, foundations, floor
intersections, roof intersections, partitions, framing about doors,
windows, and other openings, structural details, flashing, and other
pertinent details. Drawings should indicate sizes and materials at
a scale large enough to permit examination. Photographs should
show the various stages of construction. Samples of materials not in
common use should be submitted . If possible, a construction assembly
either in full size or as a model should be submitted .

231. After a thorough examination, a ruling on the
method of construction will be issued by the Technical Division for

the guidance of all offices. Rulings concerning new methods of con
struction will be limited to those methods which have been tried out

in actual construction by the erection of at least one house from which
definite conclusions may be drawn regarding structural soundness,

resistance to use , and resistance to elements. These rulings are not to

UNDERWRITING MANUAL

231-235

be construed as general acceptance of the types of construction. Each
individual property, in order to qualify for an insured mortgage, shall
be considered on its own merits.
REGULAR PROCEDURE IN VALUATION SECTION

232. The Valuation Section is responsible for completion
of the Report of Valuator. Upon receipt of a case in the Valuation

Section, the Chief Valuator requests a Valuator to make an investi
gation and report the results on Report of Valuator, FHA Form No.
2015. If the property classifies as a rental income dwelling in ac
cordance with the instructions in Section 15, Valuation of Rental
Income Dwellings, the Valuator completes both a Report of Valuator,
FHA Form No. 2015, and a Supplementary Report of Valuator, FHA
Form No. 2015a. The assignment is made by transmitting to the Val

uator a copy of the property description which accompanied the
application, together with one set of drawings and specifications, if
any, and such pertinent data as may be available and necessary to
complete the report. The Valuator is required to make a valuation of
all the property described in his assignment unless he concludes that

all the property described, considered as a whole, would not comprise
eligible security. In such a case , he delineates and describes the
eligible security and makes a valuation of it.
233. In Regular Procedure the Valuator does not fill in

those parts of the report which cover items appearing on Report of
Architectural Inspector, FHA Form No. 2014. The items left blank
are marked " See 2014 ” .

234. The Valuator is required to make a thorough per

sonal inspection of the premises, and the surrounding neighborhood.
He shall verify the statements made on FHA Form No. 2004a, FHA
Form No. 2201a, or FHA Form No. 2201 Wholesale, but is not

required to verify the correctness of the legal description. The Valu
ator shall compare the submitted photographs with the subject prop
erty for identification .

235. The Valuator shall have the Report of Architectural
Inspector, FHA Form No. 2014, for use in completing his report.
The Total Rating of Physical Security, as approved on the Report
of Architectural Inspector, but not the individual feature ratings,
shall be shown on the Report of Valuator. The Valuator is required
to study any drawings and specifications until he is able to visualize
the structure in completed condition . If the Valuator's inspection
of the site discloses any unusual features which may affect the ratings

and conclusions of the Architectural Inspector, he shall make mem
oranda of such conditions for guidance of the Architectural Section.

UNDERWRITING PROCEDURES

236-239

236. After the Valuator has made an investigation of

the property and neighborhood , he is required ( a) to make a rating
of the feature, Adjustment for Non -Conformity, in accordance with
instructions contained in Section 8, (b ) to complete the computation
of the Rating of Property, and (c) to make the Rating of Location
in accordance with instructions contained in Section 9. The Rating
of Location of the subject property shall be based on, and compared
with , a comparable Established Rating of Location, FHA No. 2082,
furnished to the Valuator with the assignment. In the event no com

parable Established Rating of Location has been made, the Valuator
shall make an Established Rating of Location in accordance with
instructions continued in Section 9, and record his conclusions on
FHA Form No. 2082.

237. The Valuator is required to make a valuation of the
property which he delineates and describes as eligible security for an
insurable loan. In making a valuation of an amenity income dwell
ings, he shall be guided by instructions contained in Sections 13 and 14
and report his conclusions on Report of Valuator, FHA Form No.

2015. In making a valuation of a rental income dwellings, he shall
be guided by the instructions contained in Sections 13 and 15 and
report his conclusions on Report of Valuator, FHA Form No. 2015,

and on Supplementary Report of Valuator, FHA Form No. 2015a.
In all cases he shall distribute the total valuation between the major
items of which it is composed . In completinghis report, a Valuator
has access to all available information except the Mortgagee's Ap
plication for Insurance. When the Valuator has completed and
signed the Report of Valuator, he submits it to the Chief Valuator
for review .

238. The Chief Valuator reviews the conclusions in the

Report of Valuator. He may modify them in certain respects. In no
event may the Chief Valuator approve a valuation in an amount in
excess of the valuation reported by the Valuator. Specific rules gov
erning the authority to approve the Federal Housing Administration
Valuation are prescribed in Section 1.
239. The Chief Valuator may modify the rating ascribed

to Adjustment for Non -Conformity or features of the Rating of Loca
tion in the Report of Valuator, FHA Form No. 2015, and the features

of the Rating of Earning Expectancy in Supplementary Report of
Valuator, FHA Form No. 2015a, when he believes errors have been
made. Such changes are made by the Chief Valuator by notations in
red on the report in the proper spaces. He shall indicate the date of

such notations and sign his initials in red. The Chief Valuator like
wise may modify, by similar notation, the Valuator's estimate of
remaining economic life if it appears incorrect. When possible, the

UNDERWRITING MANUAL

239-244

Chief Valuator should consult with the Valuator before making
modifications. When the Chief Valuator has completed his review

of the Report of Valuator, he indicates his conclusions on the report
and routes it to the Mortgage Risk Section .

240. If an office receives a block of applications involving
simultaneous construction of identical building improvements, a Re
port of Valuator shall be completed for each case .
MODIFIED PROCEDURE IN VALUATION SECTION

241. Modified procedure differs from Regular Procedure
in that the case is not routed to the Architectural Section and Report

of Architectural Inspector, FHA Form No. 2014, is not used . All por
tions of Report of Valuator, FHA Form No. 2015, and in certain cases,
Supplementary Report of Valuator, FHA Form No. 2015a, are com
pleted by the Valuator. Under Modified Procedure the services of the
Architectural Section are used in an advisory capacity.
242. Upon receipt of a case in the Valuation Section,
the Chief Valuator requests a Valuator to make an investigation and

report his conclusions on Report of Valuator, FHA Form No. 2015,
and, in addition, for cases involving rental income dwellings, Supple
mentary Report of Valuator, FHA Form No. 2015a. The assignment

is made by transmitting to the Valuator a copy of the property de
scription which accompanied the application, and such pertinent data
as may be available and necessary to complete the report. Under
Modified Procedure the Valuator completes the entire report form

and is required to follow the procedure outlined for Architectural
Inspectors and Valuators as described in Paragraphs 220 to 240, except
as provided in Paragraph 244 below .

243. When the Valuator has completed and signed the
report, he submits it to the Chief Valuator.

The Chief Valuator

reviews the conclusions in the Report of Valuator. He may modify
the report in accordance with the authority granted to the Chief
Architectural Supervisor and Chief Valuator under Regular Pro

cedure . When the Chief Valuator has completed his review of the
Report of Valuator, he indicates his conclusions on the report and
routes it to the Mortgage Risk Section .
244. If investigation by the Valuation Section discloses
that the property presents unusual architectural, structural, or cost
problems, the Chief Valuator shall return the case to the Preliminary
Examiner, indicating his reasons for requesting that the case be routed
to the Architectural Section . The applicable procedure requiring
analysis by the Architectural Section will be followed, when the case
is rerouted .

UNDERWRITING PROCEDURES

245-249

245. It is desirable that the Valuator prepare rough

sketches of certain types of structures. The Chief Valuator shall
determine the types of structures in connection with which sketches
shall be required and shall also determine the character of sketches to
be made. Structures presenting complex problems may require de
tailed sketches and plot plans.
PROCEDURE IN MORTGAGE RISK SECTION

246. The Mortgage Risk Section is responsible for the
completion of Report of Mortgage Risk Examiner. Upon receipt of
the required reports in the Mortgage Risk Section, the Chief Mort
gage Risk Examiner assigns the case to a Mortgage Risk Examiner
for analysis. The Mortgage Risk Examiner reports his conclusions
on Report of Mortgage Risk Examiner, FHA Form No. 2016, or No.
2016a, in accordance with instructions in Section 10, Rating of Bor
rower, or Section 11, Rating of Commercial Borrower. Staff per
sonnel only are used for Mortgage Risk Examination.
247. Upon completion of Report of Mortgage Risk Ex
aminer it is submitted to the Chief Mortgage Risk Examiner for

review . The Chief Mortgage Risk Examiner may modify the Rating
of Borrower by changing the individual feature ratings. Such
changes are made by the Chief Mortgage Risk Examiner by notations
in red on the report in the proper spaces. He shall indicate the date
and such modifications and sign his initials in red . The Chief Mort

gage Risk Examiner likewise may modify by similar notation the
other conclusions in the report if he believes errors have been made.

When the Chief Mortgage Risk Examiner has completed his review

of the Report of Mortgage Risk Examiner, he indicates his conclu
sions on the report and the case is routed to the Review Section .
248. In some instances the Mortgage Risk Examiner may

find that a mortgage would be eligible for insurance but in an amount
less than applied for. If he determines that modifications of the
reports within the prerogatives of the Chief Underwriter will make

the mortgage eligible for insurance, the case shall be routed to the
Review Section for consideration and decision . It is then returned

to the Mortgage Risk Section for completion of the Report of
Mortgage Risk Examiner.
249. There are instances in which the Chief Under

writer finds it necessary to suggest counter-proposals. Revision of

the Report of Mortgage Risk Examiner is necessary when such
counter -proposals involve major changes of the conditions and pro
visions of the mortgage described in the application. Such cases are
returned to the Mortgage Risk Section, where modifications consistent
with the conditions of the counter-proposal are made by indicating

UNDERWRITING MANUAL

249–252

the revised items in red . The revisions are initialed by the Chief
Mortgage Risk Examiner and the case resubmitted to the Review
Section .

250. Factual data reports on mortgagors are made avail
able to the Mortgage Risk Section . These reports, when necessary ,,

shall be obtained from commercial credit reporting agencies approved

by Washington Headquarters. The Preliminary Examiner, coop
erating with the Chief Mortgage Risk Examiner, may order a factual
data report from one or more of the approved agencies at the time
of preliminary examination, provided he recommends that the case

be processed. In the event that the mortgagee submits an adequate
credit report with the application, the securing of a factual data report
may be unnecessary .
251. In cases involving commercial Borrowers, the Mort

gage Risk Section makes an analysis in accordance with the instruc
tions contained in Section 11 and reports the conclusions on Report
of Mortgage Risk Examiner, FHA Form No. 2016. All cases involv

ing eligible Commercial Borrowers, other than operative builder bor
rowers, shall be completely processed, and the case containing all com
pleted report forms with supporting data , shall be submitted to the

Underwriting Division, Federal Housing Administration, Washing
ton, D. C., for final decision before commitment is recommended .
252. Washington Headquarters establishes maximum
credit allotments for individual borrowers and operative builder
borrowers, and cases may be recommended for commitment within

the limitation of the allotment, in the discretion of the Mortgage
Risk Section . In the event that it is desired to increase the estab

lished allotment, in every instance the case involved shall be com

pletely processed , except that the Chief Underwriter does not sign
his report form . It shall then be submitted to the Underwriting
Division, Washington, D. C., for decision. If more than one case is

involved, only one shall be processed until Washington Headquarters
renders its decision. The submission should be accompanied by :

a. A list of all other pending cases involving the same bor
rower, by serial number, showing the amount requested
b. A current financial statement in detail

c. A current operating statement in detail

d. A commercial report, or factual data report, or both
e. A detailed memorandum covering investigation as to the

mortgagor's professional and financial standing and the
economic soundness of the project
f. The original Mortgage Insurance Allotment Record, FHA
Form No. 2211, showing all previous transactions

UNDERWRITING PROCEDURES
252-255

9. A list of the number and amount of outstanding condi
tional commitments, if any

253. The Mortgage Risk Section is responsible for main
taining on a current basis Mortgage Insurance Allotment Record,
FHA Form No. 2211. An individual record shall be maintained for

each mortgagor to whom more than one formal commitment has been
issued .
PROCEDURE IN REVIEW SECTION

254. The Review Section is responsible for the prepara
tion of the applicable form of Report of Chief Underwriter. The

process of examining cases results in a recommendation by the Chief
Underwriter to issue :

a . A formal or conditional commitment to insure the mortgage

for the amount and term described in the application
6. A formal or conditional commitment to insure the mortgage
for a modified amount or term

c. A formal or conditional commitment to insure the mortgage

for the amount and term described in the application
subject to specified conditional requirements
d . A formal or conditional commitment to insure the mortgage

for a modified amount or term and subject to specified
conditional requirements

e. A notice of rejection indicating the terms on which the case
could be reopened,

f. A notice of rejection

If a formal commitment is recommended in connection with an eligi
ble amenity income dwelling, Report of Chief Underwriter, FHA
Form No. 2017a, is used . If a formal commitment is recommended
in connection with an eligible rental income dwelling, Report of
Chief Underwriter, FHA Form No. 2017b , is used . For every case

where application for a conditional commitment is made, Interim
Report of Chief Underwriter, FHA Form No. 2203, is used. For
every case where rejection of an application for a formal commit
ment is recommended , Report of Chief Underwriter, FHA Form
No. 2017c is used .

255. Upon receipt of the case in the Review Section, the
Assistant to the Chief Underwriter, under the direction of the Chief
Underwriter, examines all reports and substantiating data, noting
any evident inconsistencies or irregularities in the space provided on
FHA Form No. 2016 or 2016a. It is contemplated that upon com

pletion of the examination by the Assistant to the Chief Underwriter,
except in cases involving unusual problems requiring the decision of

UNDERWRITING MANUAL

255-257

the Chief Underwriter, a pencil copy of the applicable form of Report
of Chief Underwriter will be filled out. This facilitates the typing

of the final copy of report. All data required for the completion of
the Report of Chief Underwriter is transcribed from the various
reports to the applicable type of Report of Chief Underwriter.
Proper wording for reject phrases or conditions under which a com
mitment may be issued should be written in full or indicated by

proper symbols in their respective places on the applicable form .
256. Upon completion of the review and preparatory

work by the Assistant to the Chief Underwriter, he makes com
ments in the space provided for that purpose on Report of Mortgage
Risk Examiner, initials the Report of Chief Underwriter in the lower
left hand corner and submits the case to the Chief Underwriter.

He segregates those cases which he feels to be complete, except for
the final analysis and signature of the Chief Underwriter, from
those which he believes warrant consideration by the Review Com
mittee. The Chief Underwriter decides which cases are to be sub
mitted to the Review Committee. No record of the Review Com

mittee's action is required. However, it is permissible for the
committee to render signed statements setting forth opinions on a
particular case . The Review Committee has no authority, and it

has completely discharged its duty when it has expressed an opinion
or made a recommendation to the Chief Underwriter.

The com

ments and recommendations of the Review Committee shall be placed
in the space provided for that purpose on the Report of Mortgage
Risk Examiner. These include any comments and recommenda
tions which the Review Committee considers sufficiently important
to be brought to the attention of the Chief Underwriter. They may
also contain opinions with respect to factors constituting unusual
elements of risk, inconsistencies in reports, and suggested conditional
requirements or counter- proposals. After completion of the analysis
by the Review Section and after the Chief Underwriter has made his
recommendation , the case is routed to the Director.
257. The Chief Underwriter fixes the Federal Housing

Administration Valuation in accordance with the authority granted
in Section 1.

In those instances where the Chief Underwriter in

creases or decreases the approved valuation , he shall make an entry
in red on Report of Valuator, FHA Form No. 2015, or 2015a, imme
diately below the approved Estimate of Value, as follows :
FHA Valuation $-----Date

Chief Underwriter

If the Chief Underwriter considers increasing the valuation, but
does not do so , he may make an entry in red on Report of Valuator,

UNDERWRITING PROCEDURES

257-260

FHA Form No. 2015, or 2015a, immediately below the approved
Estimate of Value, as follows :

Increase of valuation considered but not granted.
Date

Chief Underwriter

The Chief Underwriter's entry shall be signed in either instance.
258. If any of the reports on the case are predicated on

compliance with specified requirements, the Chief Underwriter shall
base his findings and shall condition any recommendation for a com
mitment upon compliance with all such requirements, or return the

report to the proper section for reconsideration .
259. In some cases it will be found that the mortgage

described in the application, unless modified, will be unacceptable
for mortgage insurance . Such cases require thorough analysis to

determine the conditions and provisions of a counter -proposal which
will make the mortgage eligible for insurance and which in all prob
ability will be acceptable to the mortgagee and mortgagor. This

requires the Chief Underwriter to study each case, particularly with
respect to the borrower's financial position, and to determine that the
counter-proposal, if made, will be usable without recourse to second

ary financing, or other action which would violate provisions of this
Manual or of the Administrative Rules and Regulations. If it is
determined that a counter -proposal may be acceptable, it is incumbent

upon the Chief Underwriter to recommend a commitment according
to his findings. Such cases may be returned to the Mortgage Risk
Section for modification consistent with the terms of the counter

proposal. When the cases are resubmitted to the Review Section,
they are processed to completion in the regular manner. In the event

that the Chief Underwriter determines that there is no possibility of
the counter-proposal being acceptable, he shall recommend rejection
and draft a memorandum to the Director, setting forth the amount,

term , and conditions on which the case could be reconsidered, in order
that the Director may be in a position to inform the mortgagee.
260. It is expressly understood that the Chief Under
writer is responsible for the final decision in every case, and that

any duties assigned by him to an Assistant to the Chief Under
writer or other Staff members, are under his supervision. The Chief
Underwriter will be held strictly accountable for the reasonableness

of the Federal Housing Administration Valuation, for the correct
ness of his opinion regarding the economic soundness of the proposed
mortgage transaction, or for the adequacy of the reasons advanced
for his recommendation that a case be rejected.

UNDERWRITING MANUAL

261-262

261. If a case is approved by the Preliminary Examiner
for further processing, the Underwriting Staff shall complete its
analysis in all respects even though a “Reject” rating is approved
by the Chief of any Section . However, if, in the discretion of the

Director or Chief Underwriter, unusual circumstances justify final
disposition prior to complete processing, completion of the investi
gations and reports is not necessary. In most cases, completion
of the underwriting analysis is mandatory, so that all reasons for

rejection may be ascertained . If the Preliminary Examiner recom
mends rejection of the case prior to processing, the Director or Chief
Underwriter may disapprove the recommendation and order the case
processed by the applicable procedure.
262. No waiver of a local minimum requirement of
Property Standards may be granted unless the Chief Underwriter,
Chief Architectural Supervisor, and Chief Valuator unanimously
agree that the objective of the local minimum requirement, though

not technically compliedwith,is fully accomplished by other means.
To expedite the processing of such cases, the following procedure
shall be adhered to in all instances. Under Regular Procedure in the
Architectural Section, the Architectural Inspector, when encounter
ing a violation of Property Standards, shall place an X mark in the

Reject column of the Physical Security category feature affected,
on the Report of Architectural Inspector. If he does not recommend
waiver, the grid is completed in accordance with instructions in Sec
tion 8, Rating of Property. If waiver is recommended , he shall, in
addition , place an X mark in the column which will properly
reflect his conclusion . At this time he shall informally calculate

the Rating of Physical Security to determine that the total rating
will be acceptable provided the waiver is granted. If it will be

acceptable under these circumstances, the Rating column for the
feature affected is left blank , as is the Rating column for the Total
Rating of Physical Security. The applicable paragraph numbers of
Property Standards and the Architectural Inspector's reasons, justify
ing the recommendations for waiver, shall be entered under Remarks
on the report form . Upon receipt of the report by the Chief Architec
tural Supervisor, he considers the recommendation . If he does not

concur, the Rating of Physical Security is completed by writing in red
the word " Reject ” in the feature Rating column left blank by the Ar
chitectural Inspector, and likewise, the Rating column on the Total

Rating of Physical Security line. If he concurs, he indicates such
agreement with appropriate wording in the space provided for his re

marks on the report form , but does not complete the Rating of Physi
cal Security category. Upon receipt of a case in the Valuation Sec
tion, if the Chief Architectural Supervisor has recommended rejection

UNDERWRITING PROCEDURES
262

because of the violation of Property Standards, the Valuator to whom

the case is assigned will complete the Rating of Property in accord
ance with prescribed procedure. If the Chief Architectural Super

visor has recommended waiver of a violation of Property Standards,
the Valuator to whom the case is assigned shall make the rating of

the feature, Adjustment for Non -Conformity, on the Report of
Valuator in accordance with the instructions in Section 8, but he shall
not complete the Total Rating of Property. The Chief Valuator
indicates his concurrence with the recommendation of the Architec

tural Inspector by appropriate wording in the space for his remarks
on the report. If the Chief Valuator does not concur, he completes
the Report of Architectural Inspector in a manner similar to that
prescribed for the Chief Architectural Supervisor, and completes the

Rating of Property on the Report of Valuator by writing in the word
“ Reject” in the Rating column on the Total Rating of Property line.

Upon receipt of the case in the Review Section, consideration of the
waiver is again made. If the recommendation has been concurred in
by the Chief Architectural Supervisor and the Chief Valuator, and is
also concurred in by the Chief Underwriter, the Rating of Physical
Security on the Report of Architectural Inspector is completed by

carrying over to the extreme right hand column of the grid, the figure
in the square marked by the Architectural Inspector as his rating
provided the recommended waiver is granted. The Total Rating of
Physical Security is then obtained . The Rating of Property on the

Report of Valuator is completed next by transcribing the Total Rat
ing of Physical Security, deducting the Adjustment for Non-Con
formity, if any, and determining the Total Rating of Property. In
accomplishing this procedure, the notations shall be in red, dated, and
signed by the Chief Underwriter. The completion indicates agree
ment on the part of the Chief Underwriter. If the Chief Under
writer does not concur, he completes the Report of Architectural
Inspector and the Report of Valuator in a manner similar to that out

lined for the Chief Architectural Supervisor and the Chief Valuator.
Under Modified Procedure, the Valuator, when encountering a viola
tion of Property Standards, proceeds in accordance with the instruc

tions to Architectural Inspectors under the procedure described above.
Upon receipt of the report by the Chief Valuator, he determines
whether he will concur in the recommendation , and indicates his

decision in the same manner as prescribed for the Chief Architec
tural Supervisor. If the Chief Valuator recommends waiver of the
violation of Property Standards, the report is then routed to the
Architectural Section for consideration of the waiver by the Chief

Architectural Supervisor, who indicates his decision by appropriate
wording in red in the space for the Chief Valuator's remarks. His

UNDERWRITING MANUAL

262-267

decision shall be dated and signed . Treatment in the Review Section
under Modified Procedure is the same as under Regular Procedure.

When violations of requirements of Property Standards are waived ,
the serial number of the case and the paragraph number of the
requirement waived shall be reported to the Underwriting Division ,
Federal Housing Administration , Washington, D. C., on the proper
report form .

263. In those cases where additional reports supersede

previous reports, the superseded report shall be marked with red
, 193— " and signed by the
“ Superseded by New Report,
Section Chief having jurisdiction. In cases where a Chief Valuator
uses a first Report of Valuator in lieu of a second report, the unused
- 193— " and
report shall be marked in red , “ Unused,
signed. All superseded and unused reports shall remain in the case
binder.

264. All reports and information incidental to the pro

cessing of cases by the Underwriting Staff, except the Compliance
Inspection Report and the Report of Chief Underwriter, are strictly

confidential and for the sole use of the Federal Housing Administra
tion. Where reports are revised, the copy sent to the mortgagee shall
indicate final decisions only .

265. The Valuation and Location Record Card, FHA
Form No. 2073, is completed after a case has been processed in the
Review Section. Upon completion it is routed to the Valuation
Section for proper filing.

266. Occasionally, a mortgagee requests that a closed or
pending case be reconsidered. Upon receipt of such a request, the
case is routed to the Chief Underwriter who shall determine whether

reconsideration is merited. If he determines that the case shall be

given further consideration, he indicates the additional processing
necessary .
DIRECTOR'S DECISION

267. Space is provided on the Report of Chief Under

writer for recording the approval of the Director. The Director may
approve or disapprove the Report of the Chief Underwriter. He

approves the Report of the Chief Underwriter by making appropri
ate entries upon the form , thereby authorizing the issuance of Com
mitment for Insurance, or Notice of Rejection . If the Director dis
agrees with the conclusions and decisions of the Chief Underwriter,
he states the reason justifying his disapproval in a memorandum
attached to the Report of Chief Underwriter and forwards the com

plete case binder to Washington Headquarters, together with all re
lated data and correspondence. In addition, he acquaints the Chief

UNDERWRITING PROCEDURES
267-269

Underwriter with the reasons for his disapproval. The Chief Under
writer shall likewise forward to Washington Headquarters any sup

plementary information which he may deem helpful in gaining a full
understanding of the conditions and matters to which the divergent

points of view relate. When the case is received at Washington
Headquarters, it is reviewed, and final decision is made and trans
mitted to the Insuring Office. A commitment for Insurance or Notice
of Rejection shall not be issued in any case referred to Washington
Headquarters until the final decision has been made and transmitted

to the local office. The Deputy Administrator in charge of Title II
makes final decision in cases of this character.

268. The Report of Chief Underwriter contains space
for the Director to certify the processing time consumed for each

case . Processing time is figured from the date of receipt of applica
tion to the date of signing commitment or notice of rejection, and is
inclusive of the receipt date, the signature date, and of all interven

ing days including Sundays and holidays. For cases where condi
tional commitments were previously issued, the computed processing
time shall include the two processing periods (a) before issuance of
conditional commitment, and (b ) after receipt of application for
formal commitment.
UNKNOWN BORROWER PROCEDURE

269. Upon receipt of a Mortgagee's Application for Con
ditional Commitment, FHA Form No. 2201, it is recorded and the
case routed to the Preliminary Examiner for a survey to determine
whether the case appears eligible and in proper form for further

analysis by the Underwriting Staff. If the Preliminary Examiner
finds the case to be in proper form and satisfactory for further

analysis, he routes it according to the applicable procedure, except
that routing to and analysis by the Mortgage Risk Section is elimi
nated. Upon completion of the analysis by the Valuation Section,
it is routed directly to the Review Section. Upon receipt of the case

in the Review Section, the same analysis and procedure as described
in Procedure in Review Section is applied except that :
a. There is no Report of Mortgage Risk Examiner, and there
fore to determine the amount and term of Conditional

Commitment to be recommended , a trial calculation of
the Mortgage Pattern is used assuming the most plausible
Rating of Borrower

6. The decision is recorded on Interim Report of Chief Under
writer, FHA Form No. 2203 , for both eligible and ineli
gible cases

UNDERWRITING MANUAL

270-272

270. Subsequently, upon receipt of a Mortgageo's Appli
cation for Insurance, FHA Form No. 2004, it is recorded and the
case routed to the Preliminary Examiner for examination to deter
mine if the case is in proper form and eligible for analysis by the

Mortgage Risk Section . If the Preliminary Examiner finds that
the case is in proper form and satisfactory for further analysis, he
routes it to the Mortgage Risk Section where it is processed in
accordance with the procedure described in Paragraphs 246 to 253.
Upon completion of the analysis by the Mortgage Risk Section, the
case is routed to the Review Section where it is processed in accord
ance with procedure described in Paragraphs 254 to 266.
WHOLESALE OPERATION PROCEDURE

271. A Wholesale Operation originates when an ap

proved mortgagee submits a Mortgagee's Application for Whole
sale Operation , FHA Form No. 2281 Wholesale, to the Director in
charge of the local Insuring Office. If the Director recommends the
acceptance of the application, all copies are forwarded to Wash
ington Headquarters. If the recommendation of the Director is

accepted by the Administrator, the original copyof the application
is transmitted to the Underwriting Division, Federal Housing Ad
ministration , Washington , D. C., for attention . The duplicate and
triplicate copies are returned to the Director who retains the dupli
cate for the local office files and transmits the triplicate to the
applicant mortgagee.

272. Upon receipt of an accepted application, the Un
derwriting Division communicates with the Director by correspond

ence or by special visit of an Underwriting Supervisor, and in

coop

eration with the local Underwriting Staff outlines a procedure
adapted to the circumstances surrounding the portfolio to be exam

ined and to the Underwriting Staff's facilities. If these facilities
permit, cases are processed by the local Underwriting Staff. If not,
a Wholesale Operation Office is established, to which a member of
the local Underwriting Staff is assigned as Acting Chief Valuator.
The Director and Underwriting Supervisor arrange for a sufficient
number of Valuators, either by assignment from the staff or by
the appointment of qualified per diem personnel. In addition, they
contact the mortgagee relative to the details of the Operation. The
Underwriting Supervisor assists in organizing the Operation , train
ing Valuators, reviewing cases, contacting the mortgagee, and co
ordinating the activities in the Wholesale Operation Office with
those in the local office. He also maintains general supervision over
the Operation until it is completed.

UNDERWRITING PROCEDURES

273-276

273. The important features of Wholesale Operation
Procedure as usually applied , are described below . The mortgagee
selects the properties to be analyzed and the staff personnel completes
a preliminary survey. This survey consists of an examination of the
mortgagee's files and a field check of the properties involved which
embraces the eligibility tests of Preliminary Examination . The
field check contemplates a cursory inspection of the exterior and no

inspection of the interior of the properties. A list of those proper
ties acceptable for further examination is prepared and a notation
is made indicating which properties shall be processed under Regular
Procedure because they present unusual architectural, structural or
cost problems. From the list of acceptable properties the mortgagee
prepares Mortgagee's Application for Conditional Commitment,
FHA Form No. 2201 Wholesale, for each case it desires to submit
for further examination. Upon receipt of a Mortgagee's Applica
tion for Conditional Commitment, it is recorded and the case is
routed to the Preliminary Examiner. The Preliminary Examiner
routes the case in accordance with Unknown Borrower Procedure

described in Paragraphs 269 to 270. The notations made during the
preliminary survey shall be used by the Preliminary Examiner to
guide his routing decision . The case is then completely processed
in accordance with Unknown Borrower Procedure, except that con
ditional commitments when issued shall be in the maximum amount

and term consistent with sound underwriting practice.
UNDEVELOPED SUBDIVISION PROCEDURE

274. An Undeveloped Subdivision is defined as a tract of
raw. land which it is proposed to subdivide into smaller parcels and
to market as an area predominantly for residential purposes; or a

subdivision or portion of a subdivision, either old or now , in which
an insufficient number of homes exist to establish the character of

the neighborhood and which is in such a state of development and
unified control as to make major changes in layout, restrietions, or
other conditions practicable.

275. Opinions as to the eligibility of Undeveloped Sub
divisions are not issued by the Administration in any instance, nor

are subdivisions either approved or disapproved. However, the Ad
ministration welcomes the opportunity of rendering assistance to
subdividers in the form of advice and suggestions for the improve
ment of subdivision projects. Therefore, it is advantageous to
developers to submit their contemplated programs for analysis before
the point is reached where changes would be difficult or impossible
to effect.

276. If the undeveloped subdivision has an area of less

than five acres and is immediately adjacent to an established eligible

UNDERWRITING MANUAL

276-279

neighborhood, and if there is evidence or sufficient assurance that

thesmall tract will be laid out, developed , restricted and provided
with streets and utilities in an acceptable manner , the special pro

cedure described below is not required. However, it is always de
sirable to make constructive suggestions which will assist in improv
ing such tracts.

277. An undeveloped subdivision may come to the atten

tion of the Underwriting Staff in either of two ways, (a) through an
application for mortgage insurance, or (6 ) through a request by the
sponsor for advice and suggestions. In either event the applicant or

sponsor is requested to furnish the local office with completed Sub
division Information Form , FHA No. 2084, and certain required
exhibits.

278. Application for Commitment. Where one or more
applications for mortgage insurance involving property located in
an undeveloped subdivision are received accompanied by the Sub
division Information Form and the required exhibits, the applica
tions are recorded and the cases routed to the Preliminary Examiner.
If the Preliminary Examiner finds that the undeveloped subdivision
has not been analyzed previously and one of the cases is in proper
form and satisfactory for further analysis, he routes it in accord
ance with the applicable procedure. The other cases are held in

Preliminary Examination, pending final disposition of the case
routed for processing.
279. Upon receipt by the Valuation Section of a case in

volving a property located in an undeveloped subdivision which has
not been analyzed previously, suitable numbers for filing purposes
shall be assigned the subdivision file. In addition to the applicable

procedure, Undeveloped Subdivision Procedure shall be applied.
The Chief Valuator assigns the case to a Valuator qualified to analyze

undeveloped subdivisions. The Valuator shall proceed as follows:
a. Examine Subdivision Information Form, FHA Form No.
2084

b. Inspect the subdivision

C. Complete Subdivision Information Form where necessary
and make initialed corrections in red

d . Prepare Chief Underwriter's Subdivision Report, FHA
Form No. 2084a

e. Prepare Established Rating of Location, FHA Form No.
2082, indicating thereon the name and number of the sub
division file. In making the Established Rating of Loca
tion the Valuator shall be guided by the instructions con
tained in Section 9, Rating of Location

UNDERWRITING PROCEDURES

279-281

f. Complete Report of Valuator, FHA Form No. 2015, and in
certain instances, FHA Form No. 2015a. Valuations and

ratings are predicated upon compliance with requirements
embodied in the report

g. Prepare, where advisable, a letter to the mortgagee explain
ing the requirements of the commitment
h. Assemble "he file, for eligible cases only, and prepare a let
ter for transmittal to the Underwriting Division , Federal
Housing Administration, Washington, D. C.
i. Submit the entire file to the Chief Valuator for review , and

any necessary modifications, and the file is then routed to
the Chief Underwriter.
280. The Chief Underwriter shall review the file and

have the proper report form of Chief Underwriter prepared. In
those cases involving locations which cannot be made eligible he shall

recommend rejection without reference to Washington Headquar
ters. In all other cases he shall leave the report form of Chief Un
derwriter unsigned, and upon approval of the other reports forward

the complete case and subdivision file to the Underwriting Division ,
Federal Housing Administration, Washington, D. C. When the
instructions are received from Washington Headquarters, the Chief
Underwriter shall dispose of the case in accordance therewith. If a
commitment is recommended , subsequent recommendations for com
mitments shall contain all unfulfilled conditions of the original

recommendation for commitment. No subdivision shall be approved
nor shall any opinion be given as to its eligibility. The only definite
decision which can be given is in the form of a commitment or rejec
tion relative to the eligibility of a specific application for mortgage
insurance .

281. Request for Suggestions. When a request for sug

gestions accompanied by Subdivision Information Form and re
quired exhibits is received, it is routed to the Valuation Section and
assigned to a Valuator qualified to analyze undeveloped subdivisions.
The Valuator proceeds in the same manner as when an application
for mortgage insurance is involved, except that a Report of Valuator
is not prepared. He prepares, for the approval and signature of the
Chief Underwriter, a letter of suggestions for improving the subdi
vision or a letter discouraging its development. After review and
approval, the Chief Valuator routes the file to the Chief Under

writer, who analyzes the data. If the subdivision does not appear
sound or otherwise suitable for improvement at the time of consid

eration, the Chief Underwriter shall send the sponsor a letter dis

couraging development. If the development of the subdivision ap

UNDERWRITING MANUAL

281–284

pears justified , particular attention shall be given to the letter of sug
gestions. Each letter of suggestions shall make specific mention of
the following subjects:
a . It shall state that Circular No. 5, " Subdivision Standards "

and Technical Bulletin No. 5 , “ Planning Neighborhoods
for Small Homes" are enclosed and contain constructive

suggestions
6. It shall state that the recommendations in the letter are

suggestions only, and fulfillment will not necessarily
render any property located in the tract eligible for mort
gage insurance

c. It shall state that following the suggestions will, in the
opinion of the Administration , serve to create a more

sound and stable neighborhood
282. When the Chief Underwriter has completed his
analysis, the complete file is forwarded to the Underwriting Divi
sion, Federal Housing Administration, Washington, D. C. After

review , the Chief Underwriter is notified as to the advice or sug
gestions to be transmitted to the sponsor. If subsequently an ap
plication, involving a property in the subdivision, is received it shall
be considered on its merits and processed in accordance with the

applicable procedure. Consideration shall be given to previous sug
gestions when they have a direct bearing on eligibility.
PARTIAL RELEASE PROCEDURE

283. Mortgagees may request approval to grant release
of a portion of the property securing an insured mortgage. Partial
releases are permitted without invalidating the mortgage insurance,
provided there is compliance with the requirements. The entire net

proceeds received by the mortgagor, after deducting the necessary
expenses in collecting such proceeds, must be applied to the principal
of the mortgage or to the permanent improvement of the real estate

covered by the mortgage. Any loss in the value of the security as a
result of the release must be adequately compensated for by an equiva
lent reduction of the mortgage principal or an equivalent improve
ment of the remaining security. In addition, it is required that the
property, after severance , shall remain a natural and typical real
estate entity.

284. Insuring Offices shall not give consent to a partial
release of security until written approval is received from Washing
ton Headquarters.

UNDERWRITING PROCEDURES

285-286

285. Request for partial release shall be submitted by
the mortgage in writing to the local office, and shall include the
following :

a. Statement describing the condition of the mortgage loan
b. Complete description of the property to be released
c . Reasons for requesting such release

d. Sketch of the property showing dimensions, portion to be
released, location of improvements, relation to surround
ing properties, and proposed alterations
e. Specific consideration involved in the sale or transfer of the
portion to be released

f. The amount intended to be applied to principal
g. Contemplated use of any land to be released

h. Restrictions to be imposed upon the released portion, if any
i. Adequate drawings and specifications together with esti
mates of cost for any alterations or additions that are
proposed for the mortgaged property remaining
286. When a request for partial release is received, it
shall be referred to the Chief Underwriter to determine whether it

meets the general requirements. All requests found deficient in any

of these requirements shall be declined by the local office with an ap
propriate letter to the mortgagee. In all other cases, the Chief
Underwriter shall cause an examination of the property to be made
by the Valuation Section , and, if necessary, by the Architectural
Section . The request shall be finally submitted to Washington

Headquarters for approval, with the following information and
data :

a . The written request of the mortgagee for such release, to
gether with the information and data outlined in
Paragraph 285 above
b. Estimate of value of mortgaged property as it is immedi
ately prior to partial release
c. Estimate of value of property which would remain subject
to the mortgage lien after partial release, such estimate
to include alterations and improvements, if contemplated
d. Estimate of value of the portion of the property to be
released

e. Adequate justification of each value estimate
f. Comments on the eligibility of the remaining property,
considering contemplated alterations and additions
g. A recommendation of the restrictions to be imposed upon
the land to be released

UNDERWRITING MANUAL

286-288

h. Statement of the effect of the transaction upon the market
ability of the remaining property and surrounding prop
erties

i. Certification by the Chief Underwriter, and approval by
the Director or Manager in charge of the Insuring Office,
that the proposed release does not adversely affect the
interests of the Federal Housing Administration
j. Recommendation of the Chief Underwriter and approval
by the Director or Manager in charge of the Insuring
Office. Such recommendations shall be specific in ap
proval or disapproval of the request and in stating all
conditions to be imposed
287. A decision will be rendered by Washington Head

quarters after a review of the complete file, and the Insuring Office
will be informed of the decision so that it can be transmitted to the

mortgagee.
DAMAGE INSPECTION PROCEDURE

288. In cases where the physical security under an in

sured mortgage has been damaged, the mortgagee may request assur
ance that the repair of the damage is acceptable under the contract
for insurance. Upon receipt of a request from a mortgagee for an
opinion , as to the acceptability of contemplated or completed repairs
to a property damaged by casualty, it is referred to the Chief Under
writer. The Chief Underwriter determines if the request is in proper

form and the nature of the inspection necessary to formulate an
opinion. If the property securing the mortgage is considerably
damaged, suitable drawings and specifications shall be required. If

the damage is of little consequence, the Chief Underwriter, with the
advise of the Chief Architectural Supervisor, shall decide whether
an inspection is necessary . An inspection shall be made in all in
stances where the damage is in a substantial amount. In the latter

instance the Chief Underwriter shall order the preparation of Report
of Architectural Inspector and Report of Valuator in accordance with
instructions in Paragraphs 220 to 240. The reports shall be made as
of the time of the completion of the repairs. In addition , the Archi

tectural Inspector and Valuator are required to express an opinion
in writing on their report as to whether the property will be equally

or more acceptable for mortgage insurance after completion of the
repairs than it was immediately before the damage. In some in
stances, it may be necessary to complete two reports, one indicating

conditions that existed prior to damage, and the other indicating
conditions after repair.

UNDERWRITING PROCEDURES
289-292

289. The Chief Underwriter bases his opinion on the
reports rendered . To warrant a favorable opinion, the property
shall be equally or more acceptable for mortgage insurance than it
was immediately before the damage. The Chief Underwriter shall
render a complete opinion in memorandum form to the Director, in
order that the Director may be in a position to properly inform the
mortgagee.
SUBSTITUTION OF MORTGAGOR PROCEDURE

290. Upon receipt of Consent to Release of Mortgagor,
FHA Form No. 2210, and the Mortgagor's Statement on FHA Form
No. 2004, they are recorded and routed to the Mortgage Risk Section
with the file on the subject case where analysis is made in accordance
with the procedure described in paragraphs 246 to 253. Upon receipt
of the case in the Review Section, the Chief Underwriter reviews the

Report of Mortgage Risk Examiner and indicates his recommenda
tion in the space provided for remarks by the Review Committee on
FHA Form No. 2016 or 2016a . The Chief Underwriter shall decide

whether to recommend release and substitution of mortgagor. He
shall base his recommendation on a recalculation of the Mortgage
Pattern, using exactly the same ratios and category ratings previ

ously indicated, except that the rating of the substituted mortgagor
shall be used.

The Chief Underwriter shall make a favorable recom

mendation only if the Rating of the Mortgage Pattern , as revised,

equals 50 points or more. The case is then routed to the Director
for his approval. A recommendation for rejection does not alter
the former status of the case .
TENDERED PROPERTY INSPECTION PROCEDURE

291. In those cases where the mortgagee tenders a deed
for debentures and certificates of claim, the Tendered Property In

spection Procedure is initiated . Upon request of the Director, the
Chief Underwriter shall have the Architectural and Valuation Sec

tions make an inspection of the property and complete the necessary
reports and memoranda. This is done by both Sections simulta
neously.

292. The Architectural Section shall complete Report of
Architectural Inspector, FHA Form No. 2014, in accordance with
the instructions contained in Paragraphs 220 to 231. In addition,
the Architectural Inspector is required to report his conclusions with

respect to the following :

UNDERWRITING MANUAL
292-294

a . The physical condition of the property, including a de
tailed description of any damage that would prohibit the
Administrator from accepting the property under the Reg
ulations in accordance with which the mortgage was in
sured

b. The apparent cause of any damage described under (a)
above

c. A list of repairs, if any, required to make the property
acceptable to the Administrator.

Such list should be in

the nature of specifications, with drawings if necessary ,
and with an itemized cost estimate of required repairs.
d. Specifications and estimates of cost of the repairs required
by the Valuator in the event they differ from the list
specified for acceptability on Report of Architectural In
spector, FHA Form No. 2014
293. The Valuation Section shall complete Report of
Valuator, FHA Form No. 2015, or both 2015 and 2015a, in accordance
with instructions in Paragraphs 232 to 240. In addition , the Valua
tor is required to report his conclusions with respect to the following :
a. General market conditions in the economic background
area, and immediate neighborhood

6. The customary local methods of selling and renting prop
erties of this type

C. Any additional information concerning the monthly rental
value as reported, stating rental value in present condi
tion and rental value reconditioned

d. The advisability of offering the property for sale in its
present condition, and an estimate of the price obtainable

e. Itemized list, together with estimate of cost, of repairs
recommended to make the property salable
f. Estimate of price obtainable for the property assuming
recommended repairs are made, with explanation if dif
ferent from Estimate of Value as stated in the report
form

g. Possible effect of listing at the prices estimated to be ob
tainable, items (d) and (f) above, on the market for
other properties in the locality
h. All other information which would be of assistance in

developing a management program for the property
294. Upon receipt of the completed reports the Chief
Underwriter shall carefully study the file. Whenever feasible, he

shall make a personal inspection of the property. In every case the

UNDERWRITING PROCEDURES

294

Chief Underwriter shall comment on the recommendations con

tained in the file. If the property and location are eligible for
mortgage insurance, the Chief Underwriter shall state for what
amount and term , assuming a satisfactory purchaser. The file is
then transmitted to the Director. He shall forward the complete

file to Washington Headquarters with any additional comments and
recommendations. Other problems, such as the supplying of a

recommended list of brokers and the advertising for bids for recon
ditioning contracts, shall be handled by the Director under the super
vision of the Washington Headquarters. The Underwriting Staff
shall assist, when requested, in such matters as compliance inspec
tions and periodic reinspections.

SEP 18 1945
SEPT, OF
AGRIC . EOON

PART I

SECTION 3
PRELIMINARY EXAMINATION

CONTENTS
Paragraphs
301-309
301-302

Methods of Preliminary Examination ----Purpose of Preliminary Examination.
General Instructions

Preliminary Eligibility Tests_
Preliminary Examination of Property Eligibility
Preliminary Examination of Location Eligibility .

Preliminary Examination of Borrower Eligibility
Routine of Preliminary Examination ..
Grouping of Cases ---

303-309
310-315
310
311-312

313-315
316-322
317
318
322

Procedure after Grouping

Effective February, 1938

Federal Housing Administration

PART I
SECTION 3

PRELIMINARY EXAMINATION

METHODS OF PRELIMINARY EXAMINATION

301. Purpose of Preliminary Examination . — Prelim
inary examination is the initial survey of an application and occurs
as soon as possible after the receipt of the application by the Under
writing Staff. Preliminary examination is made for the following
purposes :

a . To save mortgagors unnecessary expense for examination

fees in cases which are obviously ineligible.
b. To save the Federal Housing Administration the expense

of completely processing ineligible cases.
c. To prevent delays in processing, resulting from incomplete
presentations.
d. To ascertain whether certain legal requirements, including
the suitability of contract documents, are complied with

before the issuance of commitments for mortgage insur
ance .

302. Examination fees are charged by the Federal Hous
ing Administration to offset the cost of processing cases. Applicants
who submit unacceptable cases are required to bear a portion of the
expense , but only when the actual expense is incurred subsequent to
preliminary examination. Preliminary examination which results in
rejection of the case before additional expense has been incurred
qualifies the applicant for refund of the examination fee. It follows

that preliminary examination, to be fair to the applicant, should
be thorough .
303. General Instructions. — The examination requires

the following two operations :
a. An examination to ascertain ( 1 ) whether the case presents

conditions which obviously render it ineligible, thereby
making it inadvisable to require processing by the Archi
tectural, Valuation, and Mortgage Risk Sections of the

Underwriting Staff, or (2) whether it seems that the

UNDERWRITING MANUAL

303-306

completion of such processing may result in a sound in
sured mortgage.

b. An examination to ascertain whether the application forms
and accompanying exhibits are complete or whether it is
necessary to secure corrections and amplifications which
will enable the case to be given proper consideration .

When necessary , this operation is followed by one or both
of the following :
1. The securing of supplemental data to amplify, confirm ,
or clarify items in the application.
2. The securing of more complete drawings, specifications,
and contract documents .

304. Mortgagees expect the Federal Housing Adminis
tration to render its decisions in the shortest possible time consistent

with sound analysis. It is to their best interests to supply any in
formation which is necessary to assist in processing cases with dis

patch. Application forms require only such information as the
mortgagee and mortgagor can conveniently present, and there is a
sound and adequate reason for the presence of every item on the

forms. The completeness of the applications, together with all ex
hibits, will be reflected in economy of operation and reduction in
processing time.
305. It has been found that some prospective home own

ers permit loose and vague contractual agreements when building
their homes. Such practices are likely to lead to unnecessary mis

understandings and avoidable difficulties and may result in loss to

one or more of the parties in the transaction. Experience has shown
the importance of well executed and complete drawings and specifica
tions upon which the mortgagor, builder, mortgagee, and the Federal
Housing Administration can make and carry out binding contracts.
Preliminary examination must include a close scrutiny of the ade

quacy and sufficiency of submitted drawings and specifications.
306. The term " application ” is used in this section to
describe all the papers, photographs, drawings, and other exhibits,
jointly, which are presented by the mortgagee and mortgagor. Com
plete applications include the following items:
a . Proposed or partially completed construction :
1. Mortgagee's Application for Insurance, FHA Form No.
2004, or Mortgagee's Application for Conditional
Commitment, FHA Form No. 2201.
2. Mortgagors' Property Description, FHA Form No.
2004a or Property Description , FHA Form No. 2201a .

PRELIMINARY EXAMINATION

306-309

3. Photographs showing front view of property, and street
view of property with properties adjoining on side.
4. Drawings and specifications.
5. Plot plan showing relationship of proposed improve
ments to lot.

6. Completed construction :
1. Mortgagee's Application for Insurance, FHA Form

No.2004 or Mortgagee's Application for Conditional
Commitment, FHA Form No. 2201.

2. Mortgagors' Property Description , FHA Form No.
2004a or Property Description, FHA Form No. 2201a.
3. Photographs showing front view of property and
street view of property with properties adjoining on
side.

4. A description of proposed alterations or additions, if
any, with the estimated cost and complete drawings
and specifications.

307. The Preliminary Examiner shall determine
whether an application has any possibility of being the basis of ulti

mate commitment for insurance. This requires preliminary analysis
from all underwriting points of view . For example, the application ,
with or without drawings and specifications, may indicate that rejec

tion is certain because of lack of adequate access, extremely excessive
lot coverage, or insufficient cash equity, or the fact that the security
may represent an ineligible type of property such as one designed

entirely for commercial use. The detailed instructions contained in
paragraphs 310 to 315 are to be followed in order to arrive at a deci
sion as to probable eligibility or the need for additional information.

308. While the Preliminary Examiner makes the quick,

initial check for probable eligibility he notes any omissions or errors
on the application and exhibits. Minor corrections may be made
and initialed in red by the Preliminary Examiner, but information
concerning important changes or additions must be received from ,
or be confirmed by, the mortgagee prior to such alteration of the ap
plication . For example, the amount and term of the application may

not be changed by the Preliminary Examiner, but the computation of
monthly payment may be revised in red pencil or ink and shall be
initialed. Discrepancies on the Mortgagors' Property Description,

FHA Form 2004a, or 2201a, should be noted on the lower portion,
Preliminary Examiner's Report.
purpose

309. Inasmuch as preliminary examination has the dual
of determining probable eligibility and of preparing the case

for undelayed processing, the routine procedure provides for the

UNDERWRITING MANUAL

309-310

simultaneous accomplishment of both purposes. Cases fall into four

groups according to the most efficient method of handling them .
This grouping is described in paragraph 317. The final result of

preliminary examination is either, (a) a recommendation that the
case be rejected and that the examination fee be refunded to the ap
plicant, or (b ) a decision to process the case by Regular or Modified
Procedure. Procedures are described in Section 2. The decision is

recorded in the space designated as Preliminary Examiner's Report
on the Mortgagors' Property Description, FHA Form No. 2004a
or 2201a. Paragraphs 318 to 322 give detailed instructions on the
recording of decisions.
PRELIMINARY ELIGIBILITY TESTS

310. Preliminary

Examination

of Property

Eli

gibility . - Included in eligibility of property are the factors consid
ered in Rating of Property, Section 8, including Property Standards,
both national and local, Minimum Construction Requirements, and

related Minimum Eligibility Requirements contained in Section 5 of
this Manual. This examination does not include a complete analysis
of mortgage risk , but it does consist of checking the items contained

in an application against definite requirements and past decisions on
similar cases . The application contains the following items which

are useful for the preliminary determination of property eligibility:
a. Diagram showing size of lot, whether it is corner or inside,
presence of alleys or easements , and whether the street is

paved
6. Lot dimensions

c. Age of building
d . Number of family units, rooms, and baths
e. Type of construction and number of stories

f. Presence of garage and type of garage , if

any

g. Percentage of non - residential floor area

h. Photographs which (1 ) supply a partial check of the above,
(2 ) indicate approximate percentage of lot coverage, and
(3) indicate approximate width of at least one side yard
i. Source of water supply

j. Method of sewage disposal
k. Contemplated improvements, if any

The above items of information make it possible for the Preliminary
Examiner to arrange for the revision, withdrawal, or rejection of any
case which fails to comply with Property Standards and Minimum

Construction Requirements. The Preliminary Examiner should work
in close cooperation with the Architectural Section, and the Chief

PRELIMINARY EXAMINATION
310-313

Architectural Supervisor should advise him as to adequacy of plans
and specifications or of the need for additional data to expedite
processing of cases.
311. Preliminary Examination of Location Eligibil.

ity . — This examination does not include the actual analysis of loca
tions, but it does use predetermined location ratings made by the

Valuation Section. The Preliminary Examiner should be able to
segregate for rejection many of the applications involving locations
not suitable for long-term amortized loans. Comparisons shall be

made between the location described in the application and nearby
locations previously rated by the Valuation Section. If the accumu
lated data indicate that the case is on the borderline of location eligi

bility, preliminary examination shall not result in a recommendation
for rejection solely because of location factors.

312. The Preliminary Examiner has the following data
with which to check probable eligibility of locations:
a. Street address and legal description of land, on Mortgagors'
Property Description, FHA Form No. 2004a.
b. Diagram showing location of lot in block . on FHA Form
No. 2004a .

c. Photographs showing street view of property with proper
ties adjoining on side, attached to FHA Form No. 2004a.
d. Material used for street surfacing, indicated on FHA Form
No. 2004a .

e. Maps of municipalities prepared by Valuation Section
showing outlined neighborhoods, established ratings of
locations, and ineligible areas.
f. Location record files, which show ratings and other data on
all previous cases .

g. Subdivision files, which indicate whether undeveloped sub
divisions have been previously analyzed and, if so , the
results of such analysis.
h. Other data files, such as those described in Section 18,

Compilation and Recordation of Data.
313. Preliminary Examination of Borrower Eligibil

ity - This examination may be made with considerable confidence
because the Preliminary Examiner uses data supplied by the mort
gagor himself on FHA Form No. 2004. When the information indi
cates obvious ineligibility, a recommendation to reject the application
is adequately supported because of the source of the data. In a case
in which the ratio of total monthly payment to the stated monthly
income or the ratio of property value to stated annual income is
seriously excessive, the Preliminary Examiner should recommend re

UNDERWRITING MANUAL

313-317

jection to the Chief Underwriter. Preliminary Examiners are re
quired to be familiar with and apply the major principles contained
in Section 10, Rating of Borrower, and Section 11, Rating of Com
mercial Borrower.

314. The Preliminary Examiner shall use data included
in the application for the following purposes :
a. To compare mortgagor's stated income with the amount of

total payment as previously figured. The Mortgage Risk
Section should supply certain outside ratio limits which ,
if exceeded , would require recommendation to reject.

6. To compare the amount of mortgage applied for, plus cur
rent assets, with cash required in cases of purchase or with
outstanding liens in cases of refinancing. Proper allow
ance should be made for advance taxes, special assessments

due, delinquent taxes, initial service charges, and other
costs of settlement.

c. To ascertain whether the proposed transaction complies with
the established cash equity requirements.
315. In addition to the data included on the application,
the Preliminary Examiner has the following available :

a. Borrower cards on all previous applications, FHA Form No.
2006b, which make possible ready reference to other office
files and the decisions made on cases previously submitted
by the same mortgagor.

b. Mortgage Insurance Allotment Cards, FHA Form No. 2211,
prepared for every mortgagor in whose name more than
one formal commitment has been issued.

c. Data on tax rates, insurance rates, and special assessment
areas prepared by the Valuation Section . This informa
tion is most useful in checking debt service and the

amount of cash required to close the transaction .
ROUTINE OF PRELIMINARY EXAMINATION

316. Speed is essential in preliminary examination.
However, preliminary examination shall not consist of a mere stamp
ing of the application with no prior analysis. The routine procedure
consists of sorting cases according to a suitable classification and
then treating the cases in the several groups so as to expedite pre
liminary examination and the rendering of the reports of the Prelim
inary Examiner.

317. Grouping of cases. - A method of quickly classi
fying cases by a standard routine shall be used by the Preliminary
Examiner. Described below is a suggested method of grouping:

PRELIMINARY EXAMINATION

317–318

Group 1. Cases meeting preliminary eligibility tests and with com
plete information.
Group 2. Cases meeting preliminary eligibility tests but with cer
tain minor information lacking.- Examples are cases in which :

a . The legal description does not conform to the lot size.
b. Specifications for repairs are general rather than specific.
c. Minor items are omitted from plans and specifications.
d. The nature of the borrower's assets or income is such that

more detailed information will be required by the Mort
gage Risk Section.

The cases to be placed in this group must satisfy two tests. First,
the case must be one which has a fair chance of finally being com

mitted upon, and, second , the missing information is not essential
for processing in the Architectural or Valuation Sections.
Group 3. Cases with certain major information lacking 80 that
preliminary determination of eligibility cannot be made. - Examples
of cases falling into this group are :

a . Applications which appear ineligible, but cannot be defi
nitely classed as such without further information .

b. Applications where information is lacking which is essen
tial for processing in the Architectural or Valuation Sec
tions.

C. Applications where violations of requirements can be cor
rected, but not without difficulty or considerable expense
to the applicant.
Usually the percentage of cases falling into this group will not be
large.

Group 4. Cases not meeting preliminary eligibility tests. — This

group includes only those cases which are clearly ineligible, and for
which remedies are not possible or practical.
318. Procedure after Grouping . - The lower portion of
the face of Mortgagors' Property Description FHA Form No. 2004a

is used as the Preliminary Examiner's Report. Certain obvious dis

crepancies in the application may be corrected and initialed in red by
the Preliminary Examiner. Paragraphs following require that cer
tain correspondence, investigations, and requests be made. Notations
indicating the lines of action should be made on the application.
Inasmuch as the two sheets of the application are separated, the
Preliminary Examiner should make certain that notations and corre
spondence of interest to the Architectural or Valuation Sections are
noted on or attached to FHA Form No. 2004a, and that similar

items of interest to the Mortgage Risk Section are noted on or

UNDERWRITING MANUAL

318319

attached to FHA Form No. 2004. The Preliminary Examiner de
cides whether Regular or Modified Procedure is to be used . The

decision is indicated by a check in the proper space on the “ Ap
proved ” stamp of the Preliminary Examiner. Instructions con

cerning the choice of Regular or Modified Procedure are contained
in Section 2.

319. When a case has been thoroughly checked , and it
has been found that all information necessary for processing has

been included and the application has met all the preliminary tests
for eligibility (Group 1) , the Preliminary Examiner proceeds as
follows:

a. He orders a Factual Data Report. This should usually be
requested from a credit reporting agency by proper nota
tion on and transmittal of FHA Form No. 2006a.

The

name of the credit reporting agency and the date of the
request shall be noted on FHA Forms Nos. 2004 and 2006b .

The request is forwarded to an agency approved by Wash
ington Headquarters. It is not required that a Factual
Data Report be requested in every case. The Chief Mort
gage Risk Examiner shall indicate to the Preliminary
Examiner the policy with respect to such requests. When
the mortgagee attaches a copy of an adequate credit
report or other satisfactory data on the borrower, the
ordering of a Factual Data Report is not required.
6. He sendsout such form credit inquiries as are necessary to

confirm bank balances, salary statements, and status of
other obligations.

These form letters are identified as

FHA Form Nos. 2016b, 2016c, and 2016d . The Prelimi
nary Examiner notes on the margin of the Mortgagors'
Statement that such inquiries have been transmitted.
c. For certain cases, he prepares the headings of FHA Form
No. 2217, Certificate of Approval of Private Well, and
FHA Form No. 2218, Certificate of Approval of Private
Sewage Disposal System . These forms are forwarded to

the proper Public Health Authority, and notation of this
should be made on the Preliminary Examiner's Report.
In some offices these forms are mailed at the time of com

mitment. This practice is acceptable in areas where

private installations are not a frequent cause of rejection.

d. For cases in undeveloped areas, he indicates on the Prelimi
nary Examiner's Report, whether or not subdivision anal

ysis has been made previously. If so , the name or number
of the subdivision file should be noted on FHA Form No.
2004a.

PRELIMINARY EXAMINATION

319-322

e. For cases in built -up areas, he notes the number of the out
lined neighborhood on FHA Form No. 2004a.
f. He indicates that the case is approved for processing, desig
nates the proper procedure, Regular or Modified, and
transmits the case.

320. When a case has been thoroughly checked, and it
has been found that certain minor information is lacking, but the
information available indicates probable eligibility (Group 2) , the

Preliminary Examiner shall follow the instructions in paragraph
319 and shall, in addition, prepare correspondence requesting the
required information . The replies should be directed to the attention
of the Section Chief concerned . Further correspondence is prepared

by that Section Chief, not the Preliminary Examiner.
321. For those cases in which the lacking information is

so important that preliminary determination of eligibility is im
practical or in which the lacking information is essential to proces

sing in either the Architectural or Valuation Sections (Group 3) ,

correspondence shall be initiated requesting the information.

A

statement shall be included in the letter to the mortgagee to the effect
that rejection will be made if the information is not received by a
specified date . No further correspondence should be necessary , and
if, on the specified date, the requested information has not been re
ceived , the case shall be recommended for rejection according to the
procedure described in the following paragraph.
322. For those cases in which preliminary eligibility

tests indicate the necessity for recommending rejection (Group 4) ,
the Preliminary Examiner so indicates on the Preliminary Exam
iner's Report by the standard stamp, “Rejection Recommended ."
It is required that the amount and term applied for and the reason
for rejection be indicated on the stamp. The processing time must

also be shown . There should be additional explanation for the in
formation of the Chief Underwriter and Director. All rejections re
quire the approval of the Chief Underwriter and the Director, either

of whom has authority to require that the case be completely
processed.

PART I
SECTION 4

COMPLIANCE INSPECTIONS

CONTENTS
Paragraphs
401-410
401-403
404-410
411-426
411-416

General Instructions

Purpose of Compliance Inspections_Procedure for Compliance Inspections -

Methods of Compliance Inspection --First Compliance Inspection ..
Second Compliance Inspection

417-419

Third Compliance Inspection ----

420-423
424
425 426
427-430
427-429

Additional Compliance Inspections_
Repair Compliance InspectionsCompliance Inspection Forms--Compliance Inspection Report_
Memorandum of Compliance Inspection ,
Special Problems -Relation Between Inspector and Builder
Large Operations.--Mortgagee's Assurance of Completion ..

430
431-438
431-432

433
434-437

Effective February, 1938

Federal Hausing Administration

401-404

PART I

SECTION 4

COMPLIANCE INSPECTIONS

GENERAL INSTRUCTIONS

401. Purpose of Compliance Inspections.

Commit

ments for mortgage insurance are agreements binding the Federal
Housing Administration to insure mortgages. The commitments are
based upon certain requirements, including the completion of con
struction, alterations or repairs. The Federal Housing Administra
tion, for its own interest, makes inspections to determine whether

construction, alterations or repairs are made in compliance with the
conditions of commitments. Such inspections are termed Compli
ance Inspections and are made under the supervision of Chief Archi
tectural Supervisors.

402. The Inspector shall keep the purpose of Compliance
Inspections foremost in his mind while conducting these inspections.
This will guide his actions in any situation for which instructions are
not provided in this Manual.
403. In practice, Compliance Inspections result in the
accomplishment of three functions :
a. The determination of whether the improvements, alterations
or repairs are completed in accordance with the approved
drawings and specifications. The term “ approved draw
ings and specifications" as used here and elsewhere in this

Manual, means those drawings and specifications includ
ing all amendments, which were approved by the Federal
Housing Administration and made the basis and terms of
the commitment for mortgage insurance.
6. Assistance to builders in the form of advice and suggestions

as a means of securing compliance
c. The rendering of reports and securing of photographs of
the property as evidence and record of completion
404. Procedure for Compliance Inspections. The
Chief Underwriter authorizes Compliance Inspections and notifies
the Chief Architectural Supervisor by transmitting a copy of the

commitment to the Architectural Section. Record of this is kept in

UNDERWRITING MANUAL

404 408

an active file of properties awaiting inspection. These are usually
separated into groups according to the types of inspection which are
to be made.

405. When the Director transmits the commitment to

the mortgagee in a case which requires compliance inspection, there
are attached Requests for Compliance Inspections, FHA Forms Nos.
2289, 2289a, 2289b , 2289c, and 2289d, as required. These are postal
cards which should be used to inform the Insuring Office of the
proper date for the next inspection.

406. When notified that a property is ready for a Com
pliance Inspection , the Chief Architectural Supervisor assigns an

Inspector to the case . In practically all instances, fully accredited
Architectural Inspectors will be assigned Compliance Inspections.
However, the Chief Underwriter may assign to this work any mem

ber of the Underwriting Staff who, in the opinion of the Chief Archi
tectural Supervisor, is qualified.
407. In instances when the Inspector receives the assign

ment while in the Insuring Office, he may use the office copy of the
approved drawings and specifications and, if necessary, a copy of the
commitment. When the Inspector receives the assignment by tele

phone or telegraph, he uses that set of approved drawings and
specifications which were forwarded to the mortgagee with the com
mitment. The most recent Compliance Inspection Report or Memo
randum of Compliance Inspection shall be used as a reference.
408. The Inspector executes the Memorandum of Com
pliance Inspection, FHA Form No. 2200, in duplicate and the original
is posted conspicuously at the site of construction. The Compliance

Inspection Report, FHA Form No. 2051, is executed in pencil and
transmitted to the Chief Architectural Supervisor for his apporval.
For final Compliance Inspection Reports, it is the responsibility of the
Chief Architectural Supervisor to obtain assurance that all certifi

cates of approval which are necessary for occupancy of the property
have been issued . This may include approval by local building au

thorities or approval of the electrical installation by the public utility
company. With the exception of certificates of approval of private
water supply and sewage disposal systems, this evidence is not required
in writing for inclusion in the case binder, but may be obtained during
the final compliance inspection or by telephone. When a Compliance
Inspection Report indicates that the construction is finally approved
by the Chief Architectural Supervisor, it is transmitted to the Chief
Underwriter for final approval, which approval is required before the
mortgage may be insured.

COMPLIANCE INSPECTIONS

409-411

409. In the event that the Inspector reports noncom

pliance which adversely affects the cost estimate or Rating of Physi
cal Security, the Chief Architectural Supervisor shall transmit the
Compliance Inspection Report to the Chief Underwriter. If the
Chief Underwriter determines that such noncompliance renders the

proposed mortgage, in the amount committed , ineligible for insur
ance, and that compliance is not probable, the Director shall notify
the mortgagee that present conditions indicate that it will be impos
sible to insure the mortgage. If the mortgagee requests that the
case be reconsidered, reprocessing shall be completed at the discre
tion of the Chief Underwriter. In most instances, a complete reval

uation, including reexamination of the property , shall be made.
410. On commitments issued for proposed construction ,
it is required that a First, Second, and Third Compliance Inspec

tion be made, together with such additional inspections as may be
necessary . When , at the date of commitment, construction has

progressed beyond the stage specified for First Compliance Inspec
tion, the Chief Architectural Supervisor will require that an imme
diate inspection be made of all completed work. The Inspector will
designate whether this is a First, Second, or Third Compliance

Inspection, depending upon which is applicable to the existing stage
of construction, and will note on the report that there has been no

previous inspection. This inspection takes the place of any inspec
tions which ordinarily would have preceded it. For instance, if, at
the date of commitment, construction is past the stage prescribed for
Second Compliance Inspection but not completed , the initial inspec
tion will be indicated as the Second Compliance Inspection and must
include, to the extent possible, examination of all work usually
inspected in both the First and Second Compliance Inspections. In
such instances it may be advisable to have certain vital portions of
the structure uncovered .
METHODS OF COMPLIANCE INSPECTION

411. First Compliance Inspection. The First Com
pliance Inspection shall be made at either of the two following
stages of construction :

a . When excavation is completed and ready for footings and
foundations, or
6. When the foundation walls are complete and ready for
backfill

An inspection made at the latter stage of construction is designated
" Alternate First Compliance Inspection ."

UNDERWRITING MANUAL

412-416

412. The Chief Architectural Supervisor shall notify the
Chief Underwriter at which stage of construction the First Com
pliance Inspection is to be made. This decision shall be indicated
on the Report of Architectural Inspector, FHA Form No. 2014, in
order that suitable notification cards may be selected to accompany
the commitment.

413. In deciding at which stage of construction the First

Compliance Inspection is to be made, the Chief Architectural Super
visor should consider, (a) soil conditions, ( 6 ) dependability and
competence of builder, and (c) anticipated construction conditions.
In some instances it will be advisable to make inspections at both
stages of construction.

414. When making a First Compliance Inspection, the
Inspector determines if the construction is proceeding in conformity

with the approved drawings and specifications and in conformity
with acceptable standards of workmanship and good engineering
practice by observing the following :
a . Location of the building lines on the lot
6. The depth and size of the excavation
c. The character and formation of the subsoil including :
1. Bearing capacity, and
2. Presence of filled earth or faults

d. The presence of springs or ground water
e. The fall between the house lines and the main sewer as
well as the adequacy of drainage for the entire property

f. The condition of footing trenches and the suitability of
forms where required
415. If unsatisfactory soil conditions are encountered ,
the Inspector shall suggest suitable corrective measures, such as the
use of specially designed footings and foundations. The suggested
corrective measures shall be indicated on the prescribed forms, and
the Chief Architectural Supervisor shall determine whether these
remedies are adequate. If deemed necessary , the builder may be
required to obtain the services of a competent engineer to assist in
this work . If no corrective measures are feasible, the Inspector shall
report such conditions.

416. When the First Compliance Inspection is deferred
until foundation walls are completed and ready for backfill, the

Inspector observes, in addition to the items already listed in para
graph 414, the following :
a. Size and shape of footings, foundation walls and piers
6. Quality of the materials and workmanship, particularly
the neatness and soundness of masonry

COMPLIANCE INSPECTIONS

416-418

c. Dampproofing and drainage of foundation
d. Location and quality of columns and other substructure

417. Second Compliance Inspection. This inspection
is made when the main building is enclosed and all structural mem

bers are exposed and while roughing-in is in place and visible. Ati
this time all structural details and materials can be inspected . In

addition all heating, plumbing and electrical work that is to be
concealed, is installed and ready for inspection.

418. When making a Second Compliance Inspection, the
Inspector determines whether the construction is proceeding in con
formity with the approved drawings and specifications and in con
formity with acceptable standards of workmanship and good engi
neering practice, by observing the following :
a . Foundations if not inspected during First Compliance In
spection

1. Size and shape of footings, foundation walls and piers
2. Quality of the materials and workmanship , particu
larly the neatness and soundness of masonry

3. The dampproofing and drainage of foundation
4. The location and quality of columns and other sub
structure

6. Superstructure of building
1. The grade or quality and soundness of all materials
used

2. Structural details, such as plates, spacing of structural

members, bridging, corner bracing, sheathing,
masonry wall ties or bonding, and the application
of roofing and flashing

3. Methods of assembly and workmanship employed in the
construction, including masonry, cutting, fitting and

joining of materials, roofing, flashing and insulation
c . Roughing -in for mechanical and convenience equipment
1. The plumbing and sewerage, with particular attention
to venting, size and pitch of pipes and methods of
installation

2. The heating system , with emphasis on the capacity,
location, and method of installing piping or duct
work

3. The electrical system , with special attention to the
type, method, and adequacy of wiring, distribution of
circuits, and location of outlets

UNDERWRITING MANUAL

419-423

419. In the event construction is not proceeding in con

formity with the approved drawings and specifications, the Inspec
tor lists the deficiencies or variations on the required forms and sug
gests a satisfactory remedy to the builder. For example, where the
structural strength of joists or other load bearing members are defi

nitely impaired by cutting, drilling or by inherent defects, the In
spector shall indicate that such members will require replacement or
adequate reinforcement prior to approval of the construction.
420. Third Compliance Inspection. This inspection is

made when all improvements are completed and the buildings are
ready for occupancy. Walks, drives, grading and accessory build
ings are included in the improvements which must be complete.
421. When making a Third Compliance Inspection , the
Inspector determines whether all improvements have been completed
in accordance with the approved drawings and specifications and
the terms of the commitment by observing the following :
a . Plaster and plaster base
b. Mill, cabinet and stair work
c . Floor and wall materials and finishes

d . Painting, wall covering and decorating

e. Glazing, weatherstripping, and caulking
f. Rough and finish hardware
g. Plumbing fixtures and equipment
h. Radiators, ducts and grilles, boilers, heaters, air -condition
ing units, stokers, oil burners, and auxiliary devices such
as automatic controls.

i. Electrical equipment

j. Certificates of approval if these are on the premises
k. Gutters, downspouts, and other sheetmetal work
1. Walks, drives, and grading
m. Accessory buildings
n . Private water and sewage disposal systems

422. If the Inspector determines that the improvements
have been completed in a satisfactory manner , he indicates his ap

proval on the required forms and then photographs the subject prop
erty. One street view is taken showing the adjoining properties and
a front view showing the completed improvements. In order to

identify the photographs it is suggested that the last three digits of
the serial number appear in each photograph.

423. In the event the property is not completed in a

satisfactory manner the Inspector will indicate his findings on the
required forms and withhold his final approval. In such instances,
an additional Compliance Inspection may be necessary.

COMPLIANCE INSPECTIONS

424-426

424. Additional Compliance Inspections. The Chief
Architectural Supervisor may deem it advisable or necessary to have
more than the three regular compliance inspections made. For ex
ample, it may be found that additional compliance inspections are
necessary in cases where special installations are contemplated that
will require more frequent examination, or where certain work will
be concealed earlier in the building operations than ordinarily is the
case. Additional inspections are also necessary in cases where non

compliance with approved drawings and specifications is discovered
during one of the regular compliance inspections, and it is necessary
for the contractor to correct variations, defective work, or materials.

This will be required only when the method of correcting the non
compliance cannot be examined in a subsequent regular compliance
inspection. Reports shall indicate whether such deficiencies have

been satisfactorily remedied. Additional inspections may be advis
able, and shall be made where certain builders have manifested a

tendency toward noncompliance which cannot be observed during a
regular compliance inspection. In such cases, unexpected inspections
may be used as a device where they are felt to serve specific purposes.

When additional equipment or other extras have been installed and
the mortgagee requests a commitment in a larger amount, the Chief
Underwriter may request the Chief Architectural Supervisor to
cause additional inspections to be made.
425. Repair Compliance Inspections. In instances

where commitments in connection with existing construction require
the completion of alterations, additions or repairs, the Chief Archi
tectural Supervisor shall furnish evidence satisfactory to the Chief
Underwriter that the requirements have been fulfilled. Such evi
dence is necessary before the mortgage may be insured . The Chief
Architectural Supervisor may secure such evidence either by having

a Repair Compliance Inspection made, or by obtaining from the
mortgagee a statement that the alterations, additions or repairs have
been fully and satisfactorily completed. In all cases involving alter
ations, additions or repairs which affect the structural qualities or

design of the structure, it is mandatory that a Repair Compliance
Inspection be made.
426. Particular care must be exercised in making Re
pair Compliance Inspections. The Inspector shall determine whether
any section or members of the structure have been weakened due to

cutting or changing and whether bearing loads have been dangerously
increased. He shall further determine whether various structural
members have been assembled according to sound and acceptable
building practices.

UNDERWRITING MANUAL
427-431
COMPLIANCE INSPECTION FORMS

427. Compliance Inspection Report. The Inspector
executes the portion of FHA Form No. 2051 which is allotted to his
use and indicates the required information in accordance with the di
rections contained on the form . Space is provided for the listing of in
complete work , defective materials and variations from the approved

drawings and specifications. The question concerning the effect of
these items upon the cost estimate or Rating of Physical Security
shall be given very careful consideration and shall be answered in
definite terms. The Inspector must reflect the actual condition of

the property, and recognition must be given equally to favorable or
adverse findings. He indicates the amount of the change in the
replacement cost estimate, and the effect on the rating of any of the
physical security features. If changes have no effect, it is so stated.
428. It is permissible to allow changes or deviations
from the approved drawings and specifications, provided that these
changes do not adversely affect the original Rating of Physical
Security or lower the estimate of replacement cost . Substitution of

materials is also permitted , provided that the substituted materials
equal or exceed those specified.
429. The Chief Architectural Supervisor reviews the

Compliance Inspection Report and reaches a decision, which is
indicated in the space provided in his portion of the report. This
decision is determined by the information contained in the report
and any knowledge based upon previous experience with the builder
and conditions surrounding the case .
430. Memorandum of Compliance Inspection. FHA

Form No. 2200 is provided for the purpose of avoiding unnecessary

delays in construction by giving notice directly to the builder that
the construction has, or has not, passed a particular inspection.
The Inspector indicates as clearly as possible those items which
require correction. These items must correspond with the informa
tion set forth in the Compliance Inspection Report, FHA Form
No. 2051 .
SPECIAL PROBLEMS

431. Relation Between Inspector and Builder. While

compliance inspections render an indirect service to mortgagee,
mortgagor and builder by securing compliance with approved draw
ings and specifications, distinction is made between architectural or
construction supervision, and compliance inspections as made by
the Federal Housing Administration . Compliance Inspections are
made by the Federal Housing Administration entirely for its own

interest with no direct responsibility to the mortgagee or mortgagor,

COMPLIANCE INSPECTIONS

431-434

and these inspections do not in any sense constitute architectural
or construction supervision. In the event that compliance with

approved drawings and specifications is not evident, the Federal
Housing Administration cannot stop construction, nor can it directly
demand corrections. Its only action in such cases is to refuse to
insure the proposed mortgage, on the grounds of noncompliance with
the terms of the commitment, unless proper corrections are made.

432. When a Compliance Inspection reveals a discrep
ancy which must be corrected to render the property eligible for
mortgage insurance under the terms of the commitment, the Inspec
tor shall point out such conditions to the applicant, builder or their

agents while on the premises, and shall recommend any corrective
measures that are reasonable and in accord with good building
practice. This is the quickest and the preferred method of obtain
ing compliance. The Inspector should make every effort to dispose

of these problems by direct communication in a diplomatic manner.
Future relations may be improved if the Inspector endeavors to give
builders a better understanding of the requirements of the Federal
Housing Administration .
433. Large Operations. In areas where dwelling con

struction is conducted on a quantity basis, or where there is a con
centration of building activity, it may be necessary for the Chief
Architectural Supervisor to amplify the procedure outlined in para
graphs 404 to 410, so that it will be possible to keep pace with
the construction. The extent and speed of the operations will deter

mine the policy and procedure to be adopted. During certain stages
of work on very large projects, Inspectors may be required to devote
full time to the project. In other instances a schedule of daily or
periodic visits may be a satisfactory solution,.
434. Mortgagee's Assurance of Completion . In order

to insure a mortgage when it is impossible to complete the improve
ments because of weather or conditions beyond the control of the
mortgagee and mortgagor, the Federal Housing Administration

employs a procedure of which Compliance Inspections are a part.
This procedure may be exercised only when all of the following
conditions are effective :

a . The mortgaged premises include a dwelling that is habit
able and essentially complete

UNDERWRITING MANUAL

434 437

6. The work to be deferred is such that completion cannot
be accomplished within a reasonable period of time, but

can be accomplished within the six months period follow
ing the presentation of the credit instrument for endorse
ment

c. The reason for noncompletion is weather or other condi
tions which make it impractical to proceed. For instance,
in the case of street improvements, this may mean the
retarding of street surfacing until all of the construction
in the block is completed.
435. In order to assure completion of the improvements,

the mortgagee withholds from the proceeds of the mortgage trans
action an amount sufficient to secure satisfactory completion. The
method of conducting this transaction between the mortgagor and
mortgagee is not to be construed as a responsibility of the Federal
Housing Administration.

436. Upon receipt of a written request from a mortgagee
for insurance of a mortgage prior to the completion of required
improvements, the procedure is as follows:
a. The Chief Underwriter will require the Architectural Sec
tion to make an inspection to determine whether the con

ditions described in paragraph 434 are present, and to

estimate the cost of completing the deferred improve
ments .

6. The Mortgagee's Assurance of Completion , FHA Form
No. 2300, is prepared, setting forth the deferred improve
ments. The designated period of time for completion
shall be as short as is practicable and the sum of money
to be withheld by the mortgagee shall be fixed at not
less than one and a half times the estimated cost of

completing the deferred improvements.

c. When the mortgagee has executed this document and re
turned it to the Insuring Office the credit instrument is
endorsed for insurance in the usual manner .

437. A record of each use of this procedure is kept in
the file of pending Compliance Inspections and the Insuring Office
endeavors to have the improvements completed as soon as possible.
When the deferred improvements are complete and approved , the

final Compliance Inspection Report is mailed to the mortgagee
which, under the terms of the agreement, disburses the remaining
funds. The Insuring Office then requires the mortgagee to furnish
written notification of the disbursement.

PART I
SECTION 5

MINIMUM ELIGIBILITY REQUIREMENTS

CONTENTS
Paragraphs

Classification of Eligibility Requirements----

Fixed Requirements Applied Without Field Interpretation --Requirements to discharge Statutory ResponsibilitiesRequirements With Established Factual Interpretations ..
Requirements Pertaining to Property --Requirements Pertaining to Location.
Requirements Pertaining to Mortgagors_
Secondary Requirements.Property Standards .-

501
502
503-504
505 524
506 516

517-519
520-524
525-532

Subdivision Standards_

Minimum Construction Requirements for New Dwellings.-

526-530
531
532

Effective February, 1938
Federal Housing Administration

PART I

SECTION 5

MINIMUM ELIGIBILITY REQUIREMENTS
CLASSIFICATION OF ELIGIBILITY REQUIREMENTS

501. The eligibility of mortgages secured by non -farm
properties for qualification and acceptance for mutual mortgage in
surance by the Federal Housing Administration under the provisions
of Section 203 of Title II of the National Housing Act, depends

upon compliance with provisions in the National Housing Act, com
pliance with Administrative Rules and Regulations, compliance with
established minimum standards, and compliance with established
policies and practices of the Administration. These eligibility re
quirements may be classified into four groups, as follows:
a. Fixed Requirements Applied Without Field Interpretation .
These are specific rules governing major matters. As re

quirements precedent to eligibility, they must be and are
applied without interpretation by local offices because they
are inflexible and definite as to meaning and intent, which

meaning and intent are interpreted by the General Coun
sel, Federal Housing Administration , Washington, D. C.
b. Requirements to Discharge Statutory Responsibilities.
These are not specific rules. They are general principles
and policies stated in the form of objectives and general
responsibilities. When applied as eligibility requirements,
they must be translated into reasonable decisions by inter
pretations and judgment.

c. Requirements with Established Factual Interpretations.
These are rules stated in specific terms, but require analysis
of the effect of factors or combinations of factors and use

of precedents and previous factual interpretations when
applied to determine minimum eligibility. The interpre
tations in previous cases become precedents . The prece
dents themselves become, in effect, eligibility requirements
which are applied to new cases.
d. Secondary Requirements. These are specific rules and
standards governing detailed matters. They are stated in
definite terms, but are subject to interpretation and to

UNDERWRITING MANUAL

501-502

waiver under certain circumstances. Secondary require
ments usually are specified means of attaining desirable
objectives. Waiver is permitted only when the desirable
objectives are fully attained in spite of technical violation
of the stated requirement.
FIXED REQUIREMENTS APPLIED WITHOUT FIELD INTERPRETATION

502. Fixed requirements applied without field interpre
tation are found in either the National Housing Act, as amended ,
or in the Administrative Rules and Regulations under Title II of the

Act. The more significant of these requirements are summarized as
follows :

a. The mortgage must be a first mortgage on real estate in fee
simple or on a leasehold (1) under a lease for not less than

99 years which is renewable, or (2) under a lease having a
period of not less than 50 years to run from the date the
mortgage is executed

6. The application for insurance must involve a mortgage
about to be executed or already executed

c. The mortgage should involve a principal obligation in an
amount of one hundred dollars ( $ 100 ) or multiples
thereof but must not exceed sixteen thousand dollars

( $ 16,000 ) and must not exceed eighty percent (80% ) of
the appraised value of the property as of the date the

mortgage is accepted for insurance except under the
following circumstances :
1. If the amount of the mortgage does not exceed $ 5,400

and there is located upon the property a dwelling de
signed principally for a single family residence , the
construction of which

(a) is begun after February 3, 1938, and which is ap
proved for mortgage insurance prior to the begin
ning of construction, or

( ) the construction of which was begun after Janu
ary 1 , 1937 and before February 3, 1938, and which
at the time the mortgage is accepted for insurance
has not been sold or occupied since completion.
Such mortgage may exceed eighty percent ( 80% ) , provided at the
time the mortgage is insured the mortgagor is the owner and occu
pant and has paid on account of the property at least ten percent
( 10% ) of its appraised value, but must not exceed ninety percent

- (90% ) of the appraised value of the property as of the date the
mortgage is accepted for insurance.

MINIMUM ELIGIBILITY REQUIREMENTS

502-504

2. If the amount of the mortgage does not exceed $ 8,600
and the property complies with all of the conditions
set forth in subparagraph 1. above, except as to the
amount of the mortgage, and has an appraised value
(as of the date the mortgage is accepted for insurance)
in excess of $ 6,000, but not in excess of $ 10,000, the
amount of such mortgage must not exceed ninety per
cent ( 90% ) of $ 6,000 of such value, plus eighty per
cent ( 80% ) of the balance of such value.
d . The mortgage must have a maturity satisfactory to the
Administrator not to be less than four nor more than

twenty years from the date of insurance, except that until
July 1, 1939 a mortgage of the character described in sub
paragraph c . - 1. above may have a maturity not more than
twenty - five years from the date of insurance

e. The mortgage must contain complete amortization provi

sions requiring monthly payments by the mortgagor
f. The mortgage must not bear interest at a rate in excess of
5 % per annum

g. The mortgage must be executed upon a form prescribed for

use in the jurisdiction in which the property is situated
with such modifications as may be approved by the Gen

eral Counsel, Federal Housing Administration , Washing
ton, D. C.

h . The mortgage must have been made to and held by, a mort
gagee approved by the Administrator as responsible and
able to service the mortgage properly
REQUIREMENTS TO DISCHARGE STATUTORY RESPONSIBILITIES

503. The accomplishment of the purposes of the Na
tional Housing Act is the definite obligation of the Federal Housing
Administration . The Act imposes two definite responsibilities on
members of underwriting staffs :

a. To determine that all mortgages accepted for insurance are
economically sound

b. Toamble,
further
the objectiveofthe Act asstated
in the pre
" --- encourage improvement
in housing stand
ards and conditions"

504. In compliance with these responsibilities, the Fed
eral Housing Administration has established broad principles of pro
cedure. These principles serve as general rules of practice. They
must be translated into more specific and precise rules which become

UNDERWRITING MANUAL

504-506

definite guides to more exact decisions. Among these principles the
following have been established for the insurance of mortgages secured
by non - farm properties :

a. Eligible properties must possess qualities which indicate
sound value, and which promise security and satisfaction
to home owners throughout the term of the loan
6. Eligible properties must possess sufficient promise of con
tinued utility to give assurance of enduring as sound
investments throughout the life of the mortgage
c. Eligible properties must possess characteristics which will
not induce neighborhood blight or threaten to influence
adversely the mortgage security in neighboring properties

d . The development of land should be such as to (1 ) comply
with sound and accepted principles of land planning, (2)
create neighborhoods of definite character to meet the

demand for definite types of homes, (3) conform to the
needs of the community for additional home sites, and
(4) conform to the type of expansion characteristic of, and
suitable to, the community

e. Eligible mortgages must involve obligations, the periodic
payments on which bear a proper relationship to the mort
gagor's income and other expenses

f. An eligible mortgage must be intrinsically a sound invest
ment

REQUIREMENTS WITH ESTABLISHED FACTUAL INTERPRETATIONS

505. Requirements with established factual interpreta
tions also appear as specific rules in either the National Housing Act,
as amended, or Administrative Rules and Regulations. To obtain
uniform decisions by the underwriting staffs, these requirements must

be interpreted, the interpretations being based upon policies formu
lated by Washington Headquarters. In compliance with the provi
sion of the National Housing Act which specifies that, " no mortgage
shall be accepted for insurance unless the Administrator finds that

the project with respect to which the mortgage is executed is eco

nomically sound”, the Federal Housing Administration has developed
a method of determining whether a mortgage submitted for insurance

is economically sound. The method is referred to as the Risk Rating
System , and is described in Section 6, Methods of Mortgage Risk
Rating. Mortgage transactions not meeting the requirements of this

system shall not be construed to be economically sound and, therefore,
shall not be accepted for insurance.
506. Requirements Pertaining to Property. Section

203 of the National Housing Act provides that a mortgage to be eligi

MINIMUM ELIGIBILITY REQUIREMENTS

506-510

ble for insurance shall be secured by a property upon which there is
located a dwelling or dwellings designed principally for residential
use for not more than four families in the aggregate, irrespective of
whether such dwelling or dwellings have a party wall or are otherwise
physically connected with another dwelling or dwellings.
507. Number of Structures on Plot. The phrase,
" dwelling or dwellings designed principally for residential use for
not more than four families in the aggregate” , means dwelling accom
modations for not more than four families irrespective of whether
such accommodations are included in one or more , but not more than
four, structures, provided that if the dwelling accommodations com
prise more than a single structure, such structures must be located

on a single plot or parcel and must be related functionally in such
a way as to constitute a readily marketable real estate entity for the
use of not more than four families.

508. Functional relationship between the several struc
tures must be present to such a degree that a natural marketable

real estate entity is created. This functional relationship may be
created by a combination of several factors or conditions such as the

layout of walks, driveways, lawns, or the location of the several
structures and their relationship to one another. It is important to
note that the mere presence of a single heating plant, sewage disposal
plant, or common water supply serving two otherwise unrelated
dwellings, does not constitute functional relationship as defined
above. Parenthetically, it should be noted that where two separate

dwellings are served by a single heating plant neither dwelling is
eligible for insurance.
509. In analyzing a case where this problem is involved,
one very significant approach to a satisfactory solution involves the
making of several valuations : (a) a valuation of the property as a
whole, and ( b ) valuations of the several properties which would be
created by a division of the original large property.
510. If the total of the values of the smaller proper

ties is less than the value of the original property before division ,
there is evidence that the property, as a complete entity, has greater
marketability than the smaller properties. If this result is obtained,
the property is eligible for insurance as a whole, provided sufficient
functional relationship is present, and provided that all other re
quirements of the Administration are fulfilled . On the other hand,
if the total value of the smaller properties which will be created by
dividing the property is greater than the value of the whole, greater
marketability of the smaller parcels is indicated . If so, it is re
quired that a division be made, and that each resulting smaller
property become collateral security for an individual insured mort

UNDERWRITING MANUAL

510-514

gage, provided that all other requirements of the Administration are
fulfilled . It is probable that the higher total value of the several
smaller parcels will occur only if the character of the larger prop
erty, undivided, is such that it would find a limited market, and only
if this fact has been reflected in the valuations.

511. It is the policy of the Administration to require
separate mortgages in cases where the property is readily divisible

without appreciable loss of marketability or value. Therefore, if the
transaction is sound on either basis. a division of the property is
required .
512. Non -residential Use in Addition to Residential Use

for Four Families. The phrase " dwelling or dwellings designed prin
cipally for residential use for not more than four families in the aggre

gate” is further interpreted to mean that a dwelling may include four
living units, any one of which may be partially devoted to nonresi
dential use, but may not include a nonresidential unit in addition to
the four living units. For example, a building with four living units,
one or two of which may be used in part for physicians' offices, may
be eligible, whereas a building with four living units and a profes
sional suite in addition would not be eligible. The computation of
the ratio of nonresidential area to total floor area is made on the basis

of the entire structure. In other words, a four family structure is

eligible even though most of the floor area of a single unit is devoted
to nonresidential use, provided , as further defined by Property Stand
ards, the floor area devoted to nonresidential use does not exceed 25%
of the total floor area , and provided such nonresidential use does not

adversely affect the desirability of the remainder for residential use.
513. Land Shall Comprise a Single Plot. Part IV ,
Property Standards, “ Conditions Determining Acceptability ”, Item
401, “ Plot”, states, “ all the land offered as security for a mortgage
shall be contiguous, forming a single plot”. “ Plot ” is defined in
Part III, Property Standards, as " a parcel of land including one or
more lots or portions thereof”. This should be interpreted as fol
lows : All the land offered as security for a mortgage shall be con

tiguous, forming a single plot, except in such cases where the plot
has been bisected by a way offering secondary access to the property
and the two resulting parcels comprise a readily marketable real
estate entity. This condition generally occurs where the garage or
some similar accessory building is located on a parcel adjacent to,
but separated from the principal structure by an alley.
514. Additional Property offered as Security. The

property constituting the security for an insured mortgage must be a
natural and readily marketable real estate entity. Land in excess of

MINIMUM ELIGIBILITY REQUIREMENTS
514-517

that which is needed to accommodate suitably the building improve
ments tends toward the creation of an unnatural real estate entity.

Where excess land is capable of separate utilization without impairing

the marketability of the remainder of the subject property, such excess
land should not be included as security for an insured mortgage. That

portion of the property which may be included should be separated
from the excess portion by delineation and actual changes in the legal

description that provide for the necessary separation. This may be

accomplished by citing the changed legal description as a condition of
the commitment.

515. This policy is established for two reasons :
a . The requirements in relation to the partial release of secur

ity make it necessary that substantially all of the sales'
price of the portion to be released be applied to the reduc

tion of the mortgage debt. The major portion of requests
for partial releases of security involve property either
noncontiguous or somewhat unrelated to that portion of
the property used for dwelling purposes. If this part of
the property were not included as security for the insured
mortgage, the mortgagor would be in a better position
to manage his property and financial affairs.
6. The success of the Mutual Mortgage Insurance Fund de
pends partly on the costs of managing and disposing of
the properties tendered in exchange for debentures. It
is the intention of the Administration that all the security
under any single foreclosed insured mortgage may be
rented or sold as one single unit, with the correspondingly
low management costs.
ance .

516. Subterfuges Resorted to Prior to Mortgage Insur
It is imperative that underwriting staffs exercise caution

and actively discourage any applicant from resorting to subterfuges
for the purpose of circumventing requirements of the National Hous
ing Act, the prescribed rules, regulations, and policies of this Admin
istration. For example, if the design of the building indicates either
the intention of, or the adaptability for, conversion into more than
four living units, the property is ineligible for mutual mortgage

insurance purposes. The same condition is frequently met in con
nection with nonresidential use .

517. Requirements Pertaining to Location . It is not

necessary that the mortgaged property be located within the cor
porate limits of any town or village. However, the property must
be situated in a locality which constitutes, or is adjacent to , a stable

UNDERWRITING MANUAL

517-523

residential area . The location must be suitable for use primarily as
a residence and must have reasonable marketability.

518. Isolated Locations. Estates, country homes, and

other residential properties which are not adjacent to land already
developed for residential occupation, may be given consideration if
the use of the land is for residential sites of comparable size in
the area . Generally, land values must derive from residential use
rather than agricultural, commercial or industrial use. The eligi

bility of such locations is determined by the use of the methods
described in Section 9, Rating of Location .
519. Subsidence. To be eligible for mortgage insurance
properties must be free from the risk of damage by subsidence. In
all cases where the danger of subsidence is present, the property shall
be ineligible for insurance unless satisfactory evidence is submitted

to the Insuring Office to demonstrate that the probability of loss from
such damage is remote or negligible.
520. Requirements Pertaining to Mortgagors. Sec
tion 203 of the National Housing Act requires that the periodic pay
ments by the mortgagor shall not be in excess of his reasonable ability
to pay.

521. Secondary Liens. A mortgagor must establish that
after the mortgage offered for insurance has been recorded, the
mortgaged property shall be free and clear of all liens other than
such mortgage, and that there will not be outstanding any other
unpaid obligation contracted in connection with the mortgage trans
action or the purchase of the mortgaged property, except obligations

which are secured by property or collateral owned by the mortgagor
independently of the mortgaged property.
522. Cash Investment Requirements. In a case involv
ing the purchase of property it must be established that the prospective

purchaser is, in addition to undertaking the mortgage obligation,
advancing cash or the acceptable equivalent thereto at the time of the
acquisition of the property . This investment must be in an amount
which will provide a sufficient motive for the mortgagor to keep the
mortgage in good standing. In any case, the cash investment must
be equal to the difference between the net proceeds of the mortgage
and the purchase price or cost of the property, and must in no event
be less than 10% of the appraised value of the property. If this
requirement is not met, the mortgage in such instances shall not be
acceptable for insurance.
523. When other property is offered in lieu of cash on
account of the purchase price of the property being acquired, the value

of the mortgagor's equity in such other property as established by this
Administration shall be used as the basis for computing the amount

MINIMUM ELIGIBILITY REQUIREMENTS

523-528

of the investment. If the applicant has owned the property offered

in lieu of cash for less than six months prior to the date of the applica
tion, the price actually paid for such property will usually determine
the amount of the investment. This is a statement of general principle
and the six months period is introduced into the statement solely for

the purpose of guiding judgment. It is not an arbitrary rule and
compliance with the cash investment requirement is to be determined
solely on the merits of the case.
524. Where applicants for insured mortgages own other

sound assets, such as realty or sound securities, and pledge such
assets for loans, the proceeds of which help establish the required
cash investment, such loans will be interpreted as transactions entirely
separate and apart from the insured mortgage contract. The mort
gages so presented are qualified for insurance in this respect, if it is
evident that the borrowed funds, in addition to the insured mort

gage, (a) will not create a secondary lien, ( b ) are adequately secured
by assets other than property securing the insured mortgage, and
(c) are comfortably within the borrower's ability to pay without
impairing payment on the insured mortgage obligation . Interpre
tations for actual cases shall be made in accordance with instructions

contained in Section 10, Rating of Borrower.
SECONDARY REQUIREMENTS

525. Under the provisions of the National Housing Act,
the Federal Housing Administration has established certain definite
standards embracing detailed matters of compliance with minimum
eligibility requirements.
526. Property Standards. Property Standards include
(a) Conditions Determining Acceptability, Part IV , ( b ) General
Minmum Requirements, Part V, and ( c) Local Minimum Require
ments, Part VI.

527. Conditions Determining Eligibility describe re
quirements as to :
a. Plot

6. Accessibility
c . Number of living units

d. Types of eligible dwellings
e. Nonresidential use of dwellings

528. General Minimum Requirements describe minimum
conditions precedent to eligibility. These appear under the general
headings of :
a . Compliance with local regulations
6. Natural light and ventilation

UNDERWRITING MANUAL

528–532

c. Room arrangement
d . Construction of dwelling

e. Services and equipment
529. Local Minimum Requirements are published sep
arately for each insuring office area , and define for each area the
General Minimum Requirements. Individual items are under iden
tical headings and in the same sequence as those in General Minimum
Requirements, and are necessarily local adaptations.
530. The only requirements of Property Standards
which are subject to waiver are those contained in Part VI, Local
Minimum Requirements. Waivers are permitted only in those cases

in which the desirable objectives are fully attained in spite of tech

nical violations of the stated requirements. The procedure to be
followed in considering waivers is described in Section 2, Under
writing Procedures.
531. Subdivision Standards. These standards, in ad

dition to outlining desirable objectives, define, under Minimum Re
quirements, the essential characteristics which must be present to
establish the suitability of the subdivisions as sites for homes eli
gible for mortgage insurance. These requirements appear in Circular
No. 5, Subdivision Standards, Part II, under the following general
headings:

a. Convincing Evidence of a Healthy Demand
6. Appropriate Surroundings and Topography

C. Accessibility to Schools, Employment, Shopping and
Recreational Centers

d . Suitable Utilities and Street Improvements

e. Compliance with Zoning Regulations and Provisions of
Adequate Deed Restrictions

f. Conforming to Planning Regulations
g. Suitability of Subdivision Plan
h. Sound Program with Respect to Mortgage and Tax In
debtedness

532. Minimum Construction Requirements for New

Dwellings. For the purpose of encouraging improvement in hous
ing conditions and construction practices and for the purpose of

minimizing mortgage risk, the Federal Housing Administration has
established Minimum Construction Requirements for New Dwell

ings for each insuring office area . These are definite eligibility re
quirements for cases involving conventional methods of construction .
Individual requirements are listed under the following general
headings :

MINIMUM ELIGIBILITY REQUIREMENTS

532

a . Excavation

b. Masonry : (1 ) General, (2) Footings, (3) Foundations,
(4 ) Exterior masonry walls, (5) Chimneys, (6) Cement
floors, driveways and walks
c. Dampproofing
d. Structural Steel and Iron
e. Lumber

f. Wood Framing : ( 1 ) Floors and Roofs, ( 2 ) Exterior walls,
(3 ) Interior partitions
g. Miscellaneous

h. Termite prevention
i. Roof coverings
;. Sheet metal
k. Lathing
1. Plaster work
m. Stucco

n. Painting
0. Plumbing
p. Heating
9. Electric work
r . General

PART II

SECTION 6

METHODS OF MORTGAGE RISK RATING

CONTENTS

Paragraphs
601
602-607
608-617

Definition of Risk Rating ---

Nature of Mortgage Risk .-Essentials in the Measurement of Risk ..
The Risk Rating Process --Control of Risk Measurement.

618-635
636-639

Effective February 1938

Federal Housing Administration .

601-603

PART II

SECTION 6
METHODS OF MORTGAGE RISK RATING

DEFINITION OF RISK RATING

601. Mortgage risk rating is the process of thoroughly
analyzing the major factors of risk undertaken in the making of a

mortgage loan and the rating of the mortgage in accordance with the
risk involved in the loan transaction or in connection with the insur

ance of the mortgage. Risk rating is made necessary by the terms of
the National Housing Act. It provides a uniform method for deter
mining whether or not a dwelling mortgage is eligible for mutual

insurance under Title II of the National Housing Act. In addition ,
it serves as a basis for the classification of mortgages in accordance
with their quality as investments.
NATURE OF MORTGAGE RISK

602. Mortgage risk is created whenever a mortgage is
made and continues throughout the entire life of the loan, although the
degree of risk may change. Each and every mortgage investment is
hazardous in some degree . However, different mortgages vary as to

degree of risk and it is fallacious to presume that mortgages fall
into merely two classes, viz, those that are safe and those that are
unsafe.

603. Mortgage risk is an entity and can be treated as
such. It is essential to so treat it in order to make it possible to express
a measurement of risk in simple terms. As an entity, the over-all de

gree of risk is composed of all the possibilities of trouble, expense,
and loss in connection with the lending of mortgage funds. In
other words, risk includes probability of :
a . Difficulty in connection with collections
6. Unusual expense in connection with collections
c. Excessive servicing costs
d. Cost of foreclosure

e. Delay in foreclosure
f. Cost of rehabilitation

g. Cost of carrying until sold

UNDERWRITING MANUAL
603-606

h. Cost of resale

i. Loss, if any, on resale
Distinction is made between the above elements which comprise
mortgage risk and the factors which cause or contribute to the

degree of mortgage risk.
604. The factors contributing to mortgage risk are nu
merous, complex, and subject to an almost infinite number of possible
combinations in practical cases. Included among these factors are
various neighborhood and location characteristics. Different types
of cities create different types of residential neighborhoods. A
variety of factors affects the probable future trends of neighbor
hoods and of the values of the homes in them . Neighborhoods have

varying degrees of stability, and some may be expected to have
longer attractive lives than others. In listing factors which con
tribute to risk, it is necessary to take account of the great variety

of architectural styles and designs. They have differing probabili
ties with respect to structural durability. They will be acceptable
in future markets in widely differing degrees. Different methods

of dwelling construction, different room arrangements, different sizes
of houses, and different provisions for mechanical equipment intro
duce different degrees of mortgage risk. In general, factors which are
vital in mortgage risk measurement in larger communities are some
times of less significance in smaller communities and towns. That is,
the ratings ascribed do not parallel the actual presence of risk factors
but rather the intensities with which they contribute to over -all risk .
Identical conditions, acceptable in small towns, are frequently unac
ceptable in larger communities.

605. A most important group of factors which affect
mortgage risk is the one which embraces the relationship between the
physical property and the neighborhood in which it is located. This
relationship directly affects marketability of the property. Market
ability is a basically important characteristic of good mortgage loan

security. Different degrees of marketability represent different de
grees of mortgage risk. There are varying degrees of conformity and
non -conformity between neighborhoods and individual houses in
them and this must be taken into account in listing factors which
contribute to mortgage hazard.
606. Also included are all those elements of risk asso

ciated with the earning power of the prospective borrower, his attitude
toward obligations, his ability to pay, and his prospects for the future.

In the final analysis the probability that a borrower will be able and
willing to meet the mortgage obligation represents the first line of
defense against trouble with the mortgage investment. Therefore,

METHODS OF MORTGAGE RISK RATING

606-611

a poor borrower, when considered in relation to the mortgage trans
action, requires a low rating of mortgage risk . At the same time,

a good borrower cannot go very far toward replacing the neces
sity for sound physical security in the real estate itself.
607. All the individual elements which contribute to

mortgage risk are presumed , in the final analysis, to combine and con
stitute the over - all risk involved in the insurance of the mortgage loan .

In this sense, mortgage risk is considered to be an entity susceptible
to measurement and expression as a single numerical rating.
ESSENTIALS IN THE MEASUREMENT OF RISK

608. The Underwriting Staff utilizes the risk rating pro

cedure ( a) to determine whether or not a proposed mortgageis eligible
for insurance, and ( b ) to rate the risk represented by the mortgage so

that it may be grouped correctly for mutual insurance purposes. The
risk rating process accomplishes both objectives simultaneously.

609. These two operations require the use of a prescribed

system which secures uniform decisions and conclusions when applied
by different competent men. It is necessary to deal with many com
plex elements of risk. It is apparent that these may combine into an
almost unlimited number of patterns. In order to secure uniformity
and consistency in decisions, the risk rating system prescribes that
the elements of risk shall be treated by interrelated groups and then
integrated into a final result according to a specified procedure. Ad
herence to the procedure is mandatory.
610. Mortgage risk lies in the future.

Therefore risk

rating involves forecasting and prediction. It deals with probabili
ties. Risk rating involves the determination of the chances and likeli

hood of default and loss. It seeks to foresee probable ways in which
failures and trouble may occur. Risk rating, therefore, is equivalent
to predicting chances or likelihoods as seen at the time of analysis.
611. All the factors of risk in mortgage lending are not
included in the list of features in the risk rating system . Some have

been omitted deliberately ; others are included under other designa
tions. For example, reference to the ability of the mortgagee to serv

ice a loan properly is omitted but not ignored. The Federal Housing
Administration will insure only those mortgages submitted by ap
proved mortgagees, and to gain approval a mortgagee must establish
that it is able to service mortgages properly. Other mortgage risk
factors of prime importance are future changes in conditions affect
ing world and domestic trade and changes in price levels. These
factors are too complex to be measured in individual cases except in
very general terms and do not come within the scope of the risk

UNDERWRITING MANUAL

611-613

rating system except insofar as they are considered in valuations.

Practically all other factors of risk, regarding which members of the
Underwriting Staff can be expected to have significant opinions, are
embraced in the system .

612. It cannot be presumed that the relative importance
given to the various factors has been determined with the ultimate
degree of accuracy. However, reasonableness is held as the objective,
and it is anticipated that future research and experience will enable a
greater degree of accuracy. Certain weights have been ascribed to
the elements of risk considered in the risk rating system . The nature

of these weights should be thoroughly understood by the men who
use the system . The weights ascribed were fixed by a large number
of experienced mortgage men. At the present time the introduction
of the weights into the system may be compared with the fire in
surance rate system adopted many years ago and gradually corrected
through the years as the relative importance of the risk factors

became known. Experience to date indicates, however, that the
weights used in the risk rating system are sufficiently correct to obtain
results which are reasonable and justified.
613. The absolute weights used in the risk rating system
do not directly reflect the presumed relative importance of the several
features. Certain features are distinguished as readily ratable

through a wide range of degrees of quality. Others are of such a
character that differences of acceptable quality are not as ratable by

degrees. The former features have, in general, been given higher
weights than the latter. That is, features which are readily ratable
have higher weights than important features in connection with

which the choice, presented to the man making the rating, is largely
between mere acceptance and a reject rating. Thus, in the Rating

of Location , the feature, Protection from Adverse Influences, which
is both important and ratable through a wide range of degrees of

protection, is ascribed a high weight, while the feature, Level of
Taxes and Special Assessments, which is important but is not ratablo
through a wide range of degrees, is ascribed a relatively low weight.
In the latter case the primary consideration is whether the feature
warrants a reject rating or whether it warrants any one of the ac

ceptable ratings. The degree of the acceptable rating is of secondary
importance. Weighting points are not wasted on features such as
the latter. As a consequence the weights ascribed to the several

features cannot be construed as representing the actual relative
importance of the features in the system unless consideration is
given to this treatment of the features.

METHODS OF MORTGAGE RISK RATING
614–616

614. Another characteristic of the risk rating system ,

evidenced by the mortgage pattern, is that in determining the total
measure of risk the weaker elements impose their penalties in greater
ratio than do the stronger elements. The relative importance of the
various risk factors differs from case to case and the more important
factors are always those which happen to be the weakest in particular
cases.

615. The risk characteristics and economic soundness of

a mortgage transaction cannot be determined on the basis of the loan

value ratio alone. This ratio merely expresses the relationship be
tween the loan and the property value at the time of appraisal. It
cannot throw sufficient light on the possibility of default by the bor
rower nor can it fully indicate what relationship may exist between the
loan and the property value at a future time. If the loan is to run
for twenty years, but the building which in part constitutes the
mortgage security cannot be expected to sustain economic usefulness
for that period of time, the loan transaction is not economically
sound ; and, though the loan -value ratio may be relatively low, a
rating of the mortgage risk may indicate that the proposed mortgage

is ineligible for insurance. Again, the loan might not be economi
cally sound if the probable rate of decline in property value will be
greater than the rate of amortization of the loan principal. There

fore, risk rating is significant because it makes possible the examina
tion of mortgages by other means than the traditional one of deter

mining the ratio between the principal amount of the mortgage and
the valuation. This ratio is included in risk rating but is only a
part of it.

616. Valuation analyses include consideration of a great
All of them are also mortgage risk factors, since
factors.
of
number
conditions with regard to them affect value which, in turn, affects the
index of risk indicated by the loan - value ratio in any case. Valuation
requires the analysis of structural, functional, and esthetic qualities
of buildings; the making of estimates of the cost of constructing
or reproducing structures ; the analysis of the quality and stability
of environments in which individual properties are located ; the ex
tent to which desirable or undesirable relationships exist between

individual properties and their surroundings, and numerous other
matters. All these analyses are significant in mortgage risk rating
as well as in valuation. However, the valuation of property is for

the purpose of establishing an estimate of the price which a pur
chaser is warranted in paying, while risk rating determines the

quality of a mortgage investment. The two processes have different
objectives. For this reason it is important to draw a careful distinc
tion between risk rating and valuation . Valuation is used by the

UNDERWRITING MANUAL

616-619

Federal Housing Administration (a) to make certain that loans which
exceed the maximum prescribed percentage of value are not accepted
for insurance, and ( b ) to ascertain the loan-value ratio, which is one

of the most heavily weighted features in the risk rating system . In
the first instance, possible ineligibility is determined by valuation ,
In the second instance , valuation is used to assist in the determina

tion of eligibility as dependent upon the presence of economic sound
ness in the mortgage transaction as revealed by risk rating.
617. The risk rating system is designed to guide the
judgment of Underwriting Staffs, to attain a degree of accuracy , and
to secure a degree of controlled uniformity. The system requires the
exercise of good judgment at every step in the procedure. It is not a
formula which can be applied without discrimination .
THE RISK RATING PROCESS

618. The many individual factors which contribute to
risk have been grouped into a few significant relationships which are
called "features” in the risk rating system . These features are, in

turn, combined into larger groups described as “ categories."
619. In the risk rating process applied to amenity income
dwellings, that is, to properties salable to prospective buyers interested
in the direct services of the properties rather than possible monetary

incomes, there are 27 features grouped into 4 categories, as follows :
Rating of Property :
Structural Soundness
Resistance to Elements

Resistance to Use
Livability and Functional Plan

Mechanical and Convenience Equipment
Natural Light and Ventilation
Architectural Attractiveness

Adjustment for Nonconformity

Rating of Location :
Relative Economic Stability
Protection from Adverse Influences
Freedom from Special Hazards

Adequacy of Civic, Social, and Commercial Centers
Adequacy of Transportation
Sufficiency of Utilities and Conveniences
Level of Taxes and Special Assessments
Appeal

Rating of Borrower :
Social and Economic Characteristics
Motivation in Relation to Transaction

Employability and Earning Stability
Relation of Obligations to Transaction
Relation of Income to Transaction

METHODS OF MORTGAGE RISK RATING

619
Rating of Mortgage Pattern :
Ratio of Loan to Value

Ratio of Total Payment to Rental Value
Ratio of Life of Mortgage to Economic Life of Building
Lowest Category Rating
Intermediate Category Rating

Highest Category Rating

620. In the risk rating process applied to rental income
dwellings, there are 34 features grouped into 5 categories, as follows:
Rating of Property :
Structural Soundness

Resistance to Elements
Resistance to Use
Livability and Functional Plan

Mechanical and Convenience Equipment
Natural Light and Ventilation
Architectural Attractiveness

Adjustment for Nonconformity
Rating of Location :
Relative Economic Stability
Protection from Adverse Influences

Freedom from Special Hazards

Adequacy of Civic, Social, and Commercial Centers
Adequacy of Transportation

Sufficiency of Utilities and Conveniences
Level of Taxes and Special Assessments
Appeal

Rating of Earning Expectancy :
Rentability of Units

Occupancy Percentage in Competitive Buildings
Likelihood of Serious Competitive Construction
Reliability of Rental Market Data
Reliability of Expense Prediction
Rating of Property

Rating of Location
Expense Ratio
Rating of Borrower :
Social and Economic Characteristics
Motivation in Relation to Transaction

Employability and Earning Stability
Relation of Obligations to Transaction
Relation of Income to Transaction
Rating of Mortgage Pattern :
Ratio of Loan to Value

Ratio of Debt Service to Net Income

Ratio of Life of Mortgage to Economic Life of Building
Rating of Earning Expectancy
Rating of Borrower

UNDERWRITING MANUAL

621-625

621. Certain individual elements of risk are incapable of

intelligent rating. For example, if an attempt is made to rate a prop
erty according to the number of baths, no satisfactory clue to rating is

possible unless the number of baths is related to the requirements
of the local market and the size of the house. However, when rating

a feature such as Livability and Functional Plan, it is possible to
form a very definite conclusion. Such a relationship is ratable .
The system does not rate the income of the borrower. Instead , it
rates the ability of the borrower to pay the debt service. That is,

judgment is applied to the relationship existing between the bor
rower's income and the debt service of the contemplated mortgage.
The selected features or relationships are sufficiently different from

each other so that an intelligent independent judgment in connec
tion with any one of them can be formed .

622. In the processing of an application for insurance,
each feature is given a rating. Each risk feature is either an indi
vidual risk factor or comprised of a number of correlated factors which
can be analyzed separately but treated as a unit. For example, the
feature, Sufficiency of Utilities and Conveniences, requires considera
tion of the extent and adequacy of street improvements, public utilities,

and municipal services. The resulting risk contributed by the pres
ence, absence, cost, or quality of any of these is reflected in the
rating of the entire feature.

623. In each of the categories of risk , the individual
feature ratings when combined comprise the rating of the category.
The Rating of Property is assigned by Architectural Inspectors and

Valuators. The Rating of Location is assigned by Valuators. The
Rating of Earning Expectancy is also assigned by Valuators. The
Rating of Borrower is assigned by Mortgage Risk Examiners. The
Rating of Mortgage Pattern is assigned by Chief Underwriters. All
ratings are reviewed and finally established by Section Chiefs or Chief
Underwriters in accordance with jurisdictions and responsibilities
outlined elsewhere in this Manual.

624. In the system used for amenity income dwellings,
the ratings ascribed to the first three categories are treated as three

features in the Mortgage Pattern category and when combined with
three other features in the Mortgage Pattern category result in the
final risk rating index of the mortgage. The final result is referred to
as the Total Rating of Mortgage Pattern .

625. In the system used for rental income dwellings, the
ratings ascribed to the first two categories are treated as features in the
Earning Expectancy category. The ratings ascribed to the Earning
Expectancy category and to the Borrower category are then treated

as two features in the Mortgage Pattern category, and, when com

METHODS OF MORTGAGE RISK RATING

625-627

bined with three other features in the Mortgage Pattern category,
result in the final risk rating index of the mortgage. The final result
is referred to as the Total Rating of Mortgage Pattern.
626. The forms used by the Underwriting Staff contain
the rating grids, one for each of the categories of risk. Each grid
lists the several features in a column at the left hand side. Opposite,
on the right hand side, are seven columns headed, respectively, Reject,

1, 2, 3, 4, 5, and Rating. The accompanying illustration of a grid
indicates the typical arrangement.

Attitudes

Rating of Borrower
REJECT

FEATURE

1

3

2

5 RATING

4

13

6

9

12

15

5

10

15

20

25

18

12

16

20

12

15

20

25

Social and Economic

Characteristics
Motivation in Relation

Ability
pay
to

to Transaction

Employability and Earn
ing Stability
Relation of Obligations to
Transaction

3

5

10

15

Relation of Income to
Transaction

TOTAL RATING OF BORROWER

627. In rating the individual risk features, the risk

rating system requires differentiation between six degrees of excel
lence or poorness of conditions. First, differentiation must be made
between a condition that results in risk so great as to warrant rejec

tion of the insurance application. Above this, differentiation must be
made between conditions ranging from “ poor but acceptable ” on up
the scale of excellence through " fair " and "good" to " excellent. "

These designations are presented here simply to indicate that the
system recognizes that risk measurements are relative. The terms

themselves are not used on the forms because they would convey
implications beyond the simple idea of rating as suggested by the use
of the figures 1, 2, 3, 4, and 5. Each feature is rated by placing an
X mark opposite it in the grid . Every feature must be rated but
not more than one such mark is made for any one feature. A feature
rating in the Reject column indicates that conditions relating to
it are such that insurance of the mortgage should be refused . A 1
column rating would indicate a very poor condition just above the

reject margin . A 5 column rating would indicate that excellent con

UNDERWRITING MANUAL

627-631

ditions pertain to the feature. Intermediate ratings would cover the
range in between.

628. A small numeral or "weight" appears in each rating
column after each feature. When all X marks have been entered on

the grid, the indicated weights are copied in the right hand column,
headed Rating. The sum of the weights carried over and placed
in the last column is entered at the lower right hand corner of the grid
and becomes the total rating ascribed to the entire category. The only
exception is found in the Property grid . In it one feature weight is
deducted instead of added in securing the final Rating of Property.
629. The final rating for the mortgage is obtained by
recording ratings upon a grid known as Rating of Mortgage Pattern .

On this grid there are several features involving certain relationships
in the mortgage transaction, such as the amount of the loan and the
mortgage term in years, and matters pertaining to the property, such
as its estimated value and the estimated remaining economic life of
the building. Also listed as features on this grid are the ratings of
the other risk categories. Ratings on this grid are made for these last
named features according to the amount of the category ratings

which have been previously determined. The sum of the ratings
made on the Rating of Mortgage Pattern grid is the final index of
the relative risk involved in the mortgage.
630. If the sum of the individual feature ratings in any

category is less than 50 points, this indicates a degree of risk too great
to permit insurance of the mortgage. A large number of low feature
ratings will result in rejection of the application for insurance be
cause the resulting category rating will fall below the 50 point
margin of acceptability. The range from 50 points to 100 points is
intended to represent different degrees of risk above the lower limit
of acceptability.
631. The risk rating system is so devised that after the
quality of the real estate security and the characteristics of the bor
rower have been determined and found to be such that no undue

mortgage risk is created on their account, then by means of the

system it can be determined what is the maximum loan principal and
maximum loan term in years which would represent the margin
beyond which economic soundness and, therefore, insurability would
cease to exist. Thus, after the ratings of Property, Location, and

Borrower have been made in a case involving an amenity income
dwelling, the Chief Underwriter, in rating the Mortgage Pattern ,
can determine whether or not the loan described in the application
is insurable, and, if not insurable because the loan is too large or
the term too long, or both , he can determine how large a loan would
be insurable and for what maximum term the loan could be made.

METHODS OF MORTGAGE RISK RATING

631-635

Or in another case, requirements might be made for the purpose of
improving the real estate security, with the result that higher cate

gory ratings would render unnecessary rejection or a counter-proposal
in a reduced amount or term .

632. Under the risk rating system the determination of
economic soundness and eligibility of mortgages proceeds in four
steps, as follows:
a . Determination as to whether mortgages submitted for insur
ance are eligible or ineligible for further consideration, as
indicated by the application of minimum eligibility,
requirements described in Section 5.
b. Determination as to whether mortgages accepted for further
consideration are insurable or noninsurable, by rating in
dividual risk features and ascertaining if any individual
feature receives a " Reject ” rating.
c. Determination as to whether mortgages receiving no indi

vidual feature reject ratings are insurable or noninsurable,
by rating risk categories and ascertaining if any category

receives a rating of less than 50 points.
d. Final determination of the degree of economic soundness of

mortgages receiving no individual feature reject ratings
and no category ratings under 50 points, by means of a
Mortgage Pattern rating based on all feature and category
ratings.

633. It may be pointed out that the relative importance
of the several categories of risk differs from case to case. For ex
ample, in a case of an amenity income dwelling in which either the

Property, the Location, or the Borrower Category receives a very low
rating and the other two categories receive relatively high ratings,
the relative importance of the one low rated category in the over -all
degree of risk is substantially greater than in a case in which all three
categories are rated alike. For this reason the final category, namely,
the Mortgage Pattern , includes a device by means of which to take

account of this relationship. The category having the lowest rating
is more heavily weighted than the other two on the grid of the
Mortgage Pattern.
634. The Mortgage Pattern is so arranged that it is
possible to determine counter -proposals on a uniformly fair basis.

Thus, in a case in which the loan is too hazardous to be acceptable
for insurance because the amount of the loan is too great, analysis
of the Mortgage Pattern makes it possible to determine how much of
a reduction in the amount of the loan is necessary to make it eligible.
635. Detailed instructions in connection with the rating
of the features and categories are presented in Part II of this Manual.

UNDERWRITING MANUAL

636-639
CONTROL OF RISK MEASUREMENT

636. In the use of the risk rating system , Underwriting
Staffs are instructed to consider the features as a check list. As sucki,
it will tend to prevent them from omitting consideration of any mat
ters of vital importance in the determination of risk . Furthermore ,

they are expected to rely heavily upon their personal judgment in
establishing the ratings. It is specifically suggested that they form
an over-all opinion with respect to the proper rating of an entire cate
gory and check the rating by a detailed analysis of the features. This
will serve to correct any tendency to treat the features and the

system as a fetish, and will tend to orient and control judgment in
connection with ratings. The minutiae in the system cannot be sig
nificant in the absence of the application of broad judgments. On
the other hand, broad general judgments are dangerous in that they

may fail to give sufficient consideration to important details. Both
approaches are necessary to a correct rating.

637. The program of the Underwriting Division, Wash
ington , D. C., includes the preparation and distribution of " instruc

tion blocks ” containing illustrations of correctly rated cases for the
guidance of the Underwriting Staffs in the Insuring Offices. These
illustrations include descriptions of actual cases and outline the
specific considerations which resulted in the risk ratings ascribed . It
is expected that members of the Underwriting Staffs will consult the
illustrations and make comparisons between them and current cases
to seek analogies and related situations. Such practice serves to bring

a high degree of consistency into the ratings ascribed throughout the
entire country and leads to a more correct segregation of mortgages
according to risk characteristics in the mutual mortgage insurance
groups.

638. Risk rating illustrations are not regulatory. They

represent aids to judgment only. Underwriting Staff members are
instructed to follow the illustrations insofar as feasible, but they are

not accountable for discrepancies between the illustrations and the
ratings which they ascribe in particular cases. Where the discrep
ancies are unwarrantedly great, Underwriting Staff members may be
held accountable on the basis of incompetence or lack of integrity, but
in such instances the variations between illustrations and actual cases

may not be presented as the sole evidence.

639. Risk measurements are also controlled through the

provisions for review , described in Section 2, Underwriting Pro
cedures. Every effort shall be made by Section Chiefs and Chief

Underwriters to bring consistency into the ratings ascribed to
mortgages.

PART II

SECTION 7
RATING OF MORTGAGE PATTERN

CONTENTS

Paragraphs
701-705

General Rating Instructions_
Ratio of Loan to Value ----

706-708

Ratio of Total Payment to Rental Value--Ratio of Life of Mortgage to Economic Life of BuildingCategory Ratings --Rental Income Dwellings---

709–715
716-718

719-721
722-730
723

Ratio of Loan to Value ----Ratio of Debt Service to Net Income ---

724-727

Ratio of Life of Mortgage to Economic Life of Building
Rating of Earning Expectancy ---

728

Rating of Borrower.--

730

Rejections and Counter-Proposals.

729
731-735

Effective February, 1938
Federal Housing Administration

PART II

SECTION

RATING OF MORTGAGE PATTERN

GENERAL RATING INSTRUCTIONS

Rating of Mortgage Pattern
1
1

REJECT

FEATURE

la

Ratio of Loan to Value

12

5

4
16

RATING

20

%
12

Ratio of Total Payment
to Rental Value

3

2

18

18

10

%

Ratio of Life of Mort
gage to Economic Life

of Building
Lowest Category Rating

%
12

27

17

-pts.
6

Intermediate

10

18

22

13

116

Category

Rating -

-pts .
10

Highest Category Rating
-pts.

TOTAL RATING OF MORTGAGE PATTERN

701. The term , Mortgage Pattern, refers to the relation
ships which exist between the mortgage security, the borrower, and
the provisions and conditions in the mortgage transaction. The ex
pression, Rating of Mortgage Pattern, refers to the degree to which
these relationships are satisfactory, acceptable, proper, and advan
tageous from the point of view of investment in the mortgage. There
fore, the Rating of Mortgage Pattern is a measurement of the eco
nomic soundness of the mortgage. For practical purposes a mortgage

is considered to be economically sound when the Mortgage Pattern
is rated 50 points or more. If the rating is less than 50 points, the
mortgage is not considered to be economically sound, and is ineligible
for insurance. Ineligible mortgages must be rejected unless modifi
cations can be introduced which raise the rating to at least the 50
point level.

UNDERWRITING MANUAL

702-703

702. Rating of this category is accomplished by consid
ering the extent to which risk is created by the characteristics of the
security, the borrower, and the provisions and terms contained in the

mortgage instrument. In determining the eligibility of mortgages
secured by amenity income dwellings, the Rating of Mortgage Pat

tern combines the Rating of Property, the Rating of Location, the
Rating of Borrower, and the major factors in the mortgage transac
tion. The six features which are embraced in the Mortgage Pattern ,
applied to amenity income dwellings, are listed below with the
weights which have been ascribed to them :
a. Ratio of Loan to Value -----

6. Ratio of Total Payment to Rental Value ...
c. Ratio of Life of Mortgage to Economic Life of Building ----d. Lowest Category Rating --e. Intermediate Category Rating-

f. Highest Category Rating -----

20
10
27
22
16

In determining the eligibility of mortgages secured by rental income
dwellings, the Rating of Mortgage Pattern combines the Rating of

Earning Expectancy, the Rating of Borrower, and the major factors
in the mortgage transaction to arrive at a final conclusion . The five
features which are embraced in the Mortgage Pattern applied to
rental income dwellings, are listed below with the weights which
have been assigned to them :
a. Ratio of Loan to Value----6. Ratio of Debt Service to Net Income --

c. Ratio of Life of Mortgage to Economic Life of Buildingd. Rating of Earning Expectancy
e . Rating of Borrower-

20
20
5

40
15

The ratios which comprise the first three features are expressed,

in all cases, in whole numbers, except as stated below . All decimals
and fractions are dropped. Thus, if the ratio of total payment
to rental value is 78.8 %, the ratio is recorded as 78% ; if 102.3 % , it
is recorded as 102 % . However, if the ratio of loan to value is any
amount in excess of the legal limit, the exact percentage to one

decimal place must be recorded . This, of course, will occur only
where no counterproposal is feasible.

703. Rating of Mortgage Pattern is accomplished by
rating each feature separately. At the left side of the Mortgage
Pattern grid is a column for the various ratios and ratings used in
rating the features in this category. The Chief Underwriter tran

scribes or computes these figures and places them in this column.
On the Mortgage Pattern grid for amenity income dwellings, three

blank spaces are provided opposite the last three features in which

to place the abbreviations, " Property ”, “ Location ”, and “Borrower”,

RATING OF MORTGAGE PATTERN

703-705

in the order applicable in the particular case. On the grid used
for rental income dwellings, no such provision is necessary. The
features on either grid have been weighted upon a scale of 100
points in order to retain the relative importance of each when all
are combined to obtain the Total Rating of Mortgage Pattern .

Each feature is rated on a scale of from 1 to 5, 5 being the highest

rating. The rating grid, which appears on Report of Chief Under ,
writer, enables this rating to be recorded easily and quickly. For
example, assume that the Chief Underwriter is ready to rate the
various features. The first is Ratio of Loan to Value. If the ratio

is less than 60 % , he puts an X mark in the 5 column. He immediately
carries over to the extreme right hand column of the grid the figure

appearing in the marked square, in this case 20. If the mark is in
the 1 column, the number in that square would be carried over, 6 in
this case . If the ratio is more than the legal limit, or more than is

considered economically sound, the Chief Underwriter determines the
amount he is willing to recommend for insurance and then rates the

feature, Ratio of Loan to Value, in the appropriate column. One

reject rating anywhere in any risk category will necessitate a recom
mendation for the rejection of the application for insurance. In the
event an X mark appears in the Reject column, the word " Reject”
must be written in the Rating column opposite the feature so rated

and again on the Total Rating line. If no such rating appears after
any of the features, the final rating of the Mortgage Pattern is
obtained by adding the figures in the right hand column. Para
graphs 706 to 721 describe the rating of the six features in the
Mortgage Pattern grid applied to mortgages on amenity income
dwellings. Paragraphs 722 to 730 describe the rating of the five
features in the Mortgage Pattern grid applied to mortgages on rental
income dwellings.
704. If repairs, alterations, or additions are contem

plated by the mortgagor, or if the Underwriting Staff determines
that such work is necessary to make the loan acceptable for insur

ance, the Chief Underwriter shall base his findings upon the assump
tion that the work has been satisfactorily completed. Architectural
Inspectors and Valuators, in all cases, give due credit in risk rating
and valuation for such necessary repairs or contemplated improve
ments. The conditions which must be complied with if insurance

is to be granted are stated on the Report of Chief Underwriter, and,
in turn, on the commitment to insure.
705. Where lack of economic soundness is evident but

does not appear to be properly reflected by the normal operation of
the Mortgage Pattern, the Chief Underwriter is authorized to recom
mend a reduction in the principal amount or term of a proposed

UNDERWRITING MANUAL

705-708

mortgage. In such instances he shall use lower loan-value ratios or

lower ratios of life of mortgage to economic life of building. He
need not modify category ratings in these cases.
RATIO OF LOAN TO VALUE

706. The ratio of the mortgage loan to the value of the
property has been used in traditional mortgage lending practice as
the most important and, in some instances, as the sole test for

determining investment quality and risk. Its significance is not
underestimated in the risk rating system of the Federal Housing
Administration . It may be noted that a relatively low rating in this
feature requires considerable compensation in other Mortgage Pattern
features if a high final rating of the category is to be obtained . It
is a basic assumption of the National Housing Act that high percent
age, long term loans are adequately secured when they are made

in good , stable neighborhoods on properties owned by borrowers who
themselves are good risks.
707. The element of safety is increased as the ratio of

loan to value is lowered. This enhances the chance of full recovery
of the money invested in the mortgage if the property is sold in a

forced market. Default is usually preceded by a period of financial
distress of the owner . During this period the property may be al
lowed to deteriorate through lack of proper maintenance. It is, there
fore, self evident that the wider the margin between the amount of
the loan and the value, the less is the chance for loss. A further
advantage of the lower ratio is that should default be threatened , an
owner will be better able to dispose of the property before default,
and thus relieve the lending institution or the Federal Housing
Administration from acquiring the property.

708. This feature is rated according to the ratio of the
amount of the loan to the Federal Housing Administration val

uation of the property. In cases involving leasehold estates, the ratio
is calculated by dividing the sum of the amount of the loan and the
value of the leased fee by the valuation of the property unencumbered

by lease. The following instructions are used in rating this feature :
Place X
If the ratio is

Less than 60 % .
60 % to 64 %

65 % to 69 %
70 % to 74 %

75% to legal limitOver legal limit----

in column

5
4
3
2
1

Reject

Inasmuch as the Mortgage Risk Section rates the borrower either
on the basis of the application or on the basis of the highest amount

RATING OF MORTGAGE PATTERN

708-711

apparently allowed by the valuation and other factors, whichever is
the lower, the feature Ratio of Loan to Value shall be calculated on

the same basis. For this reason reject ratings of this feature will be
recorded only when a ratio in excess of the legal limit is accompanied
by a reject rating of a category other than Rating of Borrower.
RATIO OF TOTAL PAYMENT TO RENTAL VALUE

709. As a feature in the Mortgage Pattern, the Ratio of
Total Payment to Rental Value is only partially analogous to the

foregoing feature, Ratio of Loan to Value . The Ratio of Total Pay
ment to Rental Value introduces another aspect, namely, the ability

of the income of the property itself to pay the total monthly pay
ments as they become due. The ability of the monthly rental to pay

the total monthly payment will not only encourage the owner to
fulfill his obligation, but will better enable him to do so in the
event his financial condition becomes distressed .

A favorable ratio

of the total payment to the rental value will also assist the lending

institution or the Federal Housing Administration in recovering
the investment in the event of acquisition of the property.
710. As the monthly gross rental increasingly exceeds
the total monthly payment, the degree of security increases. By
the same token , as the monthly gross rental becomes insufficient

to meet the total monthly payment, the risk becomes correspondingly
greater. For the purpose of this analysis, the total payment is always
construed to be the total monthly payment which would apply to the
maximum term of loan acceptable to the Federal Housing Adminis

tration as economically sound, rather than the payment applicable
to a shorter term of loan for which application may have been made.
711. Total Payment. The total monthly payment con
sists of all the estimated charges which the mortgagor would pay
each month of the first year, calculated on the maximum term of
loan which the Federal Housing Administration can accept as

economically sound. Regardless of the actual term of the loan under

consideration, the Chief Underwriter determines the total monthly
payment, for the purpose of rating this feature, by assuming the
loan to run for a term equal to the maximum term considered eco
nomically sound, but not to exceed the maximum term legally insur
able. The total monthly payment is composed of the following :
a. Monthly payment of principal and interest
b. Taxes and special assessments

c. Ground rentals (if leasehold )
d. Fire and other hazard insurance

e. Mortgage insurance premium

UNDERWRITING MANUAL

712-716

712. Rental Value. The rental value figure, used in con
nection with the computation of Ratio of Total Payment to Rental
Value is the monthly rental value reported by the Valuator on Re

port of Valuator. The rental value of a property will be computed
on the basis of the typical rental being received for similar properties
in accordance with the instructions contained in Section 13, Methods
of Dwelling Valuation.
, 713 , The Chief Underwriter calculates the ratio of the

$

total monthly payment to the monthly rental value by dividing the
former by the latter to secure a percentage. Having established
this percentage, the feature Ratio of Total Payment to Rental
Value is rated in the Mortgage Pattern according to the following
table :
Place x
in column

If the ratio is

Less than 60 %
60 % to 75 % .
76 % to 92 % .
93 % to 110 % .

111 % to 130 %
Over 130 %

.

4
3
2
1

-- Reject

714. If the ratio of total payment to rental value is more
than 130% , the Chief Underwriter may recommend a commitment
for a smaller loan amount. This has the effect of cutting down the

total payment. However, the rejection point, over 130% , is liberal
and it is seldom that a slight lowering of the loan amount will ap
preciably lower the high ratio. The mere fact that the total monthly
payment is 130% , or slightly less, of the monthly rental value and
results in a rating in the 1 column is not sufficient evidence that the

loan is sound in that respect. If there are other low feature ratings,,
lack of economic soundness may be indicated if the ratio of total
payment to rental value is rated in the 1 column. If the latter rating
is caused by unusual circumstances, and is compensated by strong
ratings of other features, the Chief Underwriter must use his judg
ment in determining whether or not economic soundness is present
and what counter-proposal, if any, shall be made.
715. The point of rejection for this feature has been
placed at a fairly low level, namely, where the ratio of total pay
ment to rental value is more than 130% . It is so placed because

properties of higher value tend to have relatively low rental values.
RATIO OF LIFE OF MORTGAGE TO ECONOMIC LIFE OF BUILDING

716. The relationship expressed by the ratio of the “life”
(that is, the term , in years ) of the mortgage to the estimated remain

ing economic life of the building results in a high or low rating of

RATING OF MORTGAGE PATTERN

716-719

this feature according to the extent to which the remaining economic
life of the building exceeds the life of the mortgage. In rating this

feature, the Chief Underwriter uses the estimate of remaining eco
nomic life recorded on Report of Valuator.
717. The Ratio of Life of Mortgage to Economic Life of

Building is significant because it deals with the extent of the period
within which there is time to recover the mortgage investment. It
recognizes a strong probability, in practically all cases, that the value
and usefulness of properties will decline. The mortgage pattern
should take account of such declines. It might appear axiomatic
that loans for shorter terms are more attractive as investments and

subject to less risk. If this were universally true it would be feasible
to rate the life of a mortgage rather than the ratio of its life to the

remaining economic life of the building. It is not feasible to rate
a mortgage directly in accordance with its life, because the factors
which together increase or decrease risk do not affect risk in the same
direction simultaneously. For example, shortening the life of a
loan reduces risk by reducing the hazards which result from rapid

declines in value. At the same time, shortening the life of a loan
increases the total monthly payment, and thereby increases risk.
However, the ratio of the life of the mortgage to the remaining eco

nomic life of the building is ratable, and changes in the ratio always
affect risk in the same direction. Thus, while the ratio is admittedly
subject to some criticism because the estimation of the economic life
of a building is a matter of considerable conjecture, the use of the
ratio as a factor in the Mortgage Pattern is justified .
718. The ratings shall be made in accordance with the
following instructions:
Place X
If the ratio is

in column

Less than 50 % --

5
4
3
2
1

50 % to 56 % .
57% to 65 %
66 % to 79 %
80 % to 100 %

Over 100 %

Reject

CATEGORY RATINGS

719. The final ratings ascribed to the Property, the Lo
cation , and the Borrower categories are used to establish the ratings

of the last three of the six features in the Mortgage Pattern . The
relative importance of these three categories differs from case to
case. If, in a given case, the Property and the Borrower have re
ceived fairly high ratings and the Location has received a fairly low

rating, the relative importance of the Location category rating is

UNDERWRITING MANUAL

719-721

great. If, in another case, the Property receives a low rating and
the other two categories receive high ratings, the relative importance
of the Property category is greatly increased . If, in still another

case, the three categories receive ratings which are about the same,
there is no great difference in their relative importance. In the last
case, this is true whether the ratings are high or low .
720. In order to reflect the changes in relative impor

tance of the Property, Location, and Borrower categories, the last
three features in the Mortgage Pattern are weighted differently.
The first of these three features, Lowest Category Rating, is the

most heavily weighted and the rating ascribed to it is based on the
rating of the category which has the lowest rating. The second of
the three features, Intermediate Category Rating, is less heavily
weighted and the rating ascribed to it is based on the rating of the
category which has the next to lowest rating. The third of the three
features, Highest Category Rating, is given the smallest weight
and the rating ascribed to it is based on the rating of the category
which has received the highest rating. If the three ratings are ex
actly alike it does not matter how they are arranged for the pur
pose of rating the last three features of the Mortgage Pattern . The
same is true if two are alike, provided the third one is used for the
rating of the first or third feature, depending upon whether it was
rated lower or higher than the other two.
721. In rating the three features, the Chief Underwriter
enters the names of the categories and the ratings ascribed to them on

the grid in the spaces provided. The following table is used in
rating these features :
If category rating is

Place x
in column

80 to 100.
70 to 79 .---

5
4

60 to 69_
55 to 59_
50 to 54 .

3

Under 50

2
1

Reject

RATING OF MORTGAGE PATTERN
722-725
RENTAL INCOME DWELLINGS

Rating of Mortgage Pattern (Rental Income Dwelling )
FEATURE

REJECT

2

1

4

3

5

9

12

16

20

18

12

16

20

32

40

12

15

RATING

Ratio of Loan to Value
Ratio of Debt Service

to Net Income

%

Ratio of Life of Mort
gage to Economic
Life of Building

%
16

Rating of Earning Ex
_pts.

pectancy

16

Rating of Borrower

19

-pts.

TOTAL RATING OF MORTGAGE PATTERN

722. When the property which secures the mortgage is a

rental income dwelling, the grid illustrated above is used to deter
mine the Rating of Mortgage Pattern . The following rules apply
to the rating of the five features in the grid.
723. Ratio of Loan to Value. This feature is rated in

accordance with the instructions contained in paragraphs 706 to 708.
724. Ratio of Debt Service to Net Income. This fea

ture is a direct measure of mortgage risk in rental income dwellings.
It differs considerably from the second feature in the Mortgage
Pattern applied to amenity income dwellings and is relatively much
more important as a determinant of the final index of risk.

In

rental income dwellings, the motives of borrowers are controlled by

the returns actually anticipated from equity investment. Further
more, the marketability of such properties is determined largely by
such a consideration .

725. For the purpose of establishing the rating, the
monthly debt service shall be calculated on the basis of the maximum

term of loan which the Federal Housing Administration can accept
as economically sound. The calculation shall include all the esti
mated charges which the mortgagor would pay each month of the
first year on the insured mortgage, but not including taxes and special
assessments, ground rentals (if leasehold ), and fire and other hazard
insurance. The monthly debt service is composed of the following:

a . Monthly payment on principal and interest
6. Mortgage insurance premium

UNDERWRITING MANUAL

726-730

726. The average monthly net income used to determine
the ratio is the Estimated Net Earnings upon reaching maximum
occupancy reported by the Valuator on FHA Form 2015a . As indi

cated in Section 15, this estimate of net earnings is a figure deter

mined by deducting from the estimated effective gross revenue (after
allowance for vacancies and contingencies ), all operating expenses,
management expenses, taxes and special assessments, ground rent
als (if leasehold ), and fire and hazard insurance. Therefore, net
income is an estimate of the actual returns available for mortgage
debt service.

727. In rating this feature, the Chief Underwriter shall
calculate the ratio of the monthly debt service to the average monthly
net income by dividing the former by the latter to secure a percentage.
Having established this percentage, Ratio of Debt Service to Net In

come will be rated in the Mortgage Pattern according to the following
table :
If the ratio is

Less than 50 %

50 % to 59 %
60 %
70 %
78 %
Over

to
to
to
83

69 % .
77% .
83 % .
% -

Place x
in column

5
4
3
2
1

Reject

728. Ratio of Life of Mortgage to Economic Life of
feature is rated in accordance with the instructions
This
Building.
contained in paragraphs 716 to 718.

729. Rating of Earning Expectancy. This, the most
heavily weighted feature, is rated after the category, Rating of Earn
ing Expectancy, has been rated. The method used to rate this category
is described in Section 12. The following table is used in rating this
feature :
Place x

If the category rating is

in column

80 to 100_ .
70 to 79 .
60 to 69_

55 to 59_

50 to 54 .
Under 50_

4
3
2
1

Reject

730. Rating of Borrower. This feature is rated after

the category, Rating of Borrower, has been rated. The method used
to rate this category is described in Sections 10 and 11. The table

given in Paragraph 729 is then used in the rating of this feature in the
Mortgage Pattern .

RATING . OF MORTGAGE PATTERN

731-733
REJECTIONS AND COUNTER -PROPOSALS

731. The Rating of Mortgage Pattern is made from re
sults already determined, and is therefore a more or less mechanical
process or recapitulation of the risks. If reject ratings of any one of
the features have occurred in one of the risk categories, that category

rating will have been recorded on one of the other report forms as
" Reject ” in accordance with instructions in this Manual. In such cases
the applicable Mortgage Pattern on Report of Chief Underwriter
shall be filled out according to the following example :
RATING OF MORTGAGE PATTERN (Rental- Income Dwelllag)

RATING OP MORTGAGE PATTERN
FEATURE

1 | 2 | 3 | 4 | 5 RATING

xx

REJECT

80 %
Regional Total Paym123 %

Ratlo al Loan to Value

6
10

LI

Ratio of Life of Mtge. to .Eco
MO

1

roperty ...... 69. pts.
Highest Category Rating
Borrower...
) 20.. pte.

10

REJECT

Ratio of Debt Service to Net
Income
Ratio of Life of Mtge. to Eco

IS

Lowest Category
Rating
LOCALION
... Reseat pta.
Intermediate Category Rating

2

FEATURE

1

5 RATING

Ratio of Loan to Value ... %
nomie Life of Bldg. - %
Rating of Earning Expectancy

Reject
10

Rating of Borrower....... pts.

-

1620

pts.

16

13

TOTAL RATING OF MORTGAGE PATTERN Reject

TOTAL RATING OP MORTGAGE PATTERN

RATING OF PROPERTY ......... plo. RATING OF LOCATION ......... pte.

732. If a category rating is less than 50 points, the appli
cable Mortgage Pattern shall be filled out as follows:
RATING OP MORTGAGE PATTERN
FEATURE

REJECT

RATING OF MORTGAGE PATTERN (Rental- Income Dwelling)

1
846 RATING
10 12 18 20
8

le

Ratio of Loan to Value 80 %
Ratio
of Total Paymers to
Rental Value

6

(.Property .... 59pts .
Highest Category Rating
( Borrower.......... 70pts .

1

nomie Life of Bldg. 100 %
Lowest Category Rating

1710D
X

REJSCT

Ratio of Debt Service to Net
Income
----

1

Ratio of Life of Mtge. to Eco
nomic Life of Bldg.

Reject
10
13

RATING

Ratio of Loan to Value ... %

2

Ratio of Life of Mtge. to Eco
( Location ....... 42 pts
Intermediate Category Rating

FEATURE

Rating of Earning Expectancy
--- .. pts.

Rating of Borrower ...... pts.
TOTAL RATING OT MORTOAGE PATTERN

TOTAL RATING OP MORTGAGE PATTERN Reject RATIxo Or PaoPERTY ....... pe RATING OR LOCATION ......pte.

It is intended that the Mortgage Pattern grid shall show a rating
only for each category in which no reject feature ratings occur,
and that the need for rejection in any case shall be made apparent
by entry of the word " Reject " after any category rating which is
less than 50 points. A total is never to be recorded on the Total

Rating line when reject feature ratings or category ratings less
than 50 points occur.

733. In instances in which the Rating of Mortgage Pat
tern, when based on the loan described in the application, is less

than 50 points, Chief Underwriters are required to determine
whether or not a modified loan having (a) a smaller principal
amount and a shorter life, or ( 6 ) simply a smaller principal
amount, will qualify as economically sound. If a counterpro
posal appears feasible, the Chief Underwriter recommends it and
modifies the Rating of Mortgage Pattern to correspond with the

UNDERWRITING MANUAL

733-734

counter -proposal. The alternative proposal should be made for the

largest principal amount and longest life of mortgage which trial
ratings of the Mortgage Pattern show as eligible. Where the Rat
ing of Borrower is affected, the Report of Mortgage Risk Exam

iner is amended. In many cases the counter -proposal requires the
re -rating of all three of the first three features in the Mortgage Pat
tern . In other instances only the first two will be affected . In
cases where no feasible counter-proposal will result in a Rating of
Mortgage Pattern of 50 points or more, the word " Reject ” is entered
on the line provided for the Total Rating of Mortgage Pattern .
734. Following are two examples of correctly filled out

Mortgage Pattern grids. It will be noted that whole numbers only
are recorded on the grid, and all fractions or decimals are dropped.
This practice is to be followed in all instances except that if the
ratio of loan to value is in excess of the legal limit, it shall be com
puted to one decimal place and so recorded. In the first example the
result of examination revealed the following conclusions:
Principal Amount of Loan..

$ 3, 800

FHA Valuation -

$ 5,000
$ 36.08

Total Monthly Payment

Rental Value of Property-

$ 40.00
20 years

Life of Mortgage -----

40 years
73 .

Remaining Economic Life of Building
Rating of Property ----

85 .

Rating of Location -Rating of Borrower ..

55 .
RATING OF MORTGAGE PATTERN
1

REJECT

FEATURE

3

3
12

76 %
90 % TO

Rstio of Loan to Value

Ratio of Total Payment to Rental Valuo

RATING
16

6

X
2

11-14
16

Deter
10

16

6
Cata 60

13-110

1996
1

Ratio of Life of Mortgage to Economic Life of Building 50.% .fore 100%
( Borrower.............55 .. pts. lend to us
Lowest Category Rating

Cata
7

12

17

Intermediate Category Rating ( Property.

73. pte.net

s - se

Highest Category Rating

85
do... pte ly .

27
- 100

12

18

18

70

lo

Location

22

40-49
10

13
106

TOTAL RATING OF MORTGAGE PATTERN

16
62

In the second example the result of examination revealed the follow
ing conclusions:
Principal Amount of Loan ...
FHA

Valuation-

Total Monthly Payment ( 15 years ) .

Total Monthly Payment ( 20 years ).
Rental Value of PropertyLife of Mortgage_

Remaining Economic Life of BuildingRating of Property
Rating of Location -Rating of Borrower ..

$ 2,000

$ 4,000
$ 21. 72
$ 19. 10

$ 37. 50
15 years
45 years
91.
65 .
82 .

RATING OF MORTGAGE PATTERN
734_735
RATING OP MORTGAGE PATTERN
REJECT

FEATURE

RATING
16

Ratio of Loan toValue

20
14

Ratio of TotalPayment to Rental Value

20

50%

50 % om 1885

16

18

10

10

JID
13

33
Ore 100
Ratio of Life ofMortgage to Economic Life of Building
Lowest Category Rating
( Location.........) ....65 . pts. Unter at
82. pls . Un
Intermediate Category Rating (Borrower.
( Property
91. pts.las
Highest Category Rating

5
j41-45

17

22

17
6

10

14

18

110

13

22
16

TOTAL RATING OP MORTGAGE PATTERN

16
90

735. If the ratio of loan to value exceeds the prescribed
legal maximum , and there are no reject feature or category ratings,
the Chief Underwriter recommends a counter -proposal for the largest

principal amount which can be insured. In this connection, reference
is made to Section 2, Underwriting Procedures. This procedure will

preclude rejection of any case solely on account of excessive ratio of
loan to value.

PART II

SECTION 8
RATING OF PROPERTY

CONTENTS
Paragraphs
General Instructions ---

Structural Soundness--Resistance to Elements ..

Resistance to Use--Livability and Functional Plan---Mechanical and Convenience EquipmentNatural Light and Ventilation --

801-811
812-824
825-829

830-832
833-841

Architectural Attractiveness_

842-850
851-853
854-859

Adjustment for Nonconformity.

860-874

Effective February, 1938
Federal Housing Administration

PART II

SECTION 8
RATING OF PROPERTY

GENERAL RATING INSTRUCTIONS

Rating of Property

15

20

6

8

Function

2

4

RATING

10

13

4

la

Resistance to Use
Livability and Functional

5
1113

10

Resistance to Elements

Plan
Mechanical and Convenience
Equipment

4

4

Structural Soundness

3

2

1

REJECT

5

Durability

PHYSICAL SECURITY FEATURES

12

16

6

18

10

8

18

10

12

18

20

20

Natural Light and Ventila
tion

Architectural Attractiveness
Total Rating of Physical Security
12 9

3

10

Adjustment for Nonconformity
TOTAL RATING OF PROPERTY

801. Rating of Property is determined by rating eight

features of risk according to the principles outlined in this section
and in Section 6, Methods of Mortgage Risk Rating. The first
seven features are described as the Physical Security Features and
are so weighted that the Total Rating of Physical Security may be

as high as 100 points. The eighth feature, Adjustment for Noncon
formity, is separately rated and the result deducted from , not added

to, the Total Rating of Physical Security to determine the Total
Rating of Property.
802. The Total Rating of Physical Security, which is
obtained by rating the first seven features, presumes that the sub

ject property is free from any detrimental influence resulting from

UNDERWRITING MANUAL

802-804

nonconformity with typical properties in the immediate neighbor

hood. The Total Rating of Physical Security presumes a hypotheti
cal condition . Because nonconformity definitely affects the market

ability of properties, it is important to compare the subject property
with surrounding properties and make any necessary adjustment in
order to convert the Total Rating of Physical Security into the Rat
ing of Property. Specific instructions for making this adjustment
are in paragraphs 860 to 875 of this section . The Total Rating of
Property represents a measurement of the mortgage risk introduced

by the characteristics of the physical property and by its relation to
its actual environment. The Rating of Property does not include
consideration of those risk factors introduced by the characteristics
of the neighborhood and location. These are included in the Rating
of Location, Section 9.
803. Rating of Physical Security shall be accomplished
by rating separately each of seven features. The seven features have
been weighted on a scale of 100 points in order to retain the relative
importance of each when all are combined to obtain the Total Rating
of Physical Security. Each feature is marked on a scale from 1 to
5, 5 being the highest rating. After analysis of the factors compris
ing a feature, an X mark is placed in the column which is deter

mined to reflect the degree of risk involved. If the X mark is placed
in any column other than Reject, the figure appearing in the marked
square is carried over to the extreme right hand column of the grid.
If the X mark is placed in the Reject column, the word “ Reject ” is
carried over to the extreme right hand column of the grid. One
such rating in any feature will necessitate a recommendation for
rejection of the application for insurance. When the word “ Reject ”
appears in the Rating column, it must also be written in that column
on the Total Rating line. If no such rating appears after any of

the features, the final rating of the category is obtained by adding

the figures in the Rating column. The system is so designed that this
figure will be an indication of the rating on a numerical basis.
804. The seven features which are rated to determine

the Total Rating of Physical Security are listed below with the
weights which have been ascribed to them :
a . Structural Soundness..
6. Resistance to Elements..
c. Resistance to Use

d. Livability and Functional Plan --e. Mechanical and Convenience Equipmentf. Natural Light and Ventilation --9. Architectural Attractiveness_

25
10
5
20
10
10
20

RATING OF PROPERTY

804-807

An eighth feature appears on the grid , but it is not a Physical
Security Feature. It is designated “ Adjustment for Nonconform

ity.” Instructions for rating this eighth feature are given in
paragraphs 860 to 875.
805. The seven features are analyzed from several points

of view . The first three features, namely, Structural Soundness,
Resistance to Elements, and Resistance to Use are studied in terms

of durability. The next three features, namely, Livability and Func
tional Plan, Mechanical and Convenience Equipment, and Natural
Light and Ventilation , are studied in terms of function. The words

“ Durability ” and “ Function ” have been placed at the left edge of

the grid to remind the inspector to assume the proper points of
view . The last feature, Architectural Attractiveness, is studied in
terms of lasting appeal.

806. Invariably, the physical security features are rated
by assuming the conditions which will exist at the time the mortgage
is insured . In connection with existing construction the rating is
based on the property in its present condition unless the borrower
contemplates alterations, additions, and repairs, or unless the Fed
eral Housing Administration requires certain alterations, additions,

and repairs. If alterations and repairs are contemplated or required,
then the rating is based on the conditions which will exist when the

mortgage is insured . No hypothetical conditions may be assumed

unless they are specifically defined in Report of Architectural In
spector, FHA Form No. 2014, or in Report of Valuator, FHA Form
No. 2015. In the case of new construction the submitted drawings
and specifications are analyzed in detail and the rating reflects the
relative degree of excellence or poorness which the property will
exhibit upon completion according to these drawings and specifica
tions. In cases involving either existing or new construction the
rating is based on possibilities and probabilities of what may hap

pen to the structures in the future. The past experience and present
condition with respect to the first seven features in this category

are significant only to the degree to which they indicate the likeli
hood of future difficulty. Surface indications are invaluable clues to
hidden defects or deficiencies.

807. To obtain consistency from case to case and to in
sure uniform analyses of physical security features, it is essential to
identify conditions which form the basis for ratings in the various
columns of the several features. This is accomplished by comparing

subject structures with structures of similar type and size in the
same general area. For this purpose, the words "type and size” re
fer to classification of dwellings, such as a single family, detached,

UNDERWRITING MANUAL

807-808
five room, basementless dwelling containing 1,000 square feet of liv
able area. Price ranges or differences in cost of structures of similar

type and size shall not be used as criteria in the selection of other

structures for comparison purposes. Such ranges or differences in
costs usually reflect differences in quality, condition, effects of age,
and degrees of obsolescence . These factors affect the Rating of
Physical Security and are considered and reflected in the individual

feature ratings. A 5 column, or highest rating, is warranted for
any physical security feature when conditions for the particular
feature are found to be comparable to the best conditions ordinarily
exhibited by structures of the same type and size. A 5 column rating
in any one feature does not demand the acme of perfection but de
notes relative excellence of a reasonably high order considering the
limitations of the size of the structure and its type. It is imperative
to remember that even small structures may possess sufficient excel
lence to warrant 5 column ratings for any or all the physical security

features. For example, in rating Livability and Functional Plan this
will occur when there has been incorporated in the design a high
degree of livability considering the floor area available. Physical
security feature ratings will vary in the entire range between the
Reject column and the 5 column, by the degree of excellence or poor
ness resulting from the actual building practices, functional plan
ning, and esthetic design.

808. In determining whether a reject rating is war
ranted, the inspector must take into account the provisions in estab
lished Property Standards as they affect the individual features by
considering them to be the minimum requirements necessary to
avoid such reject ratings. Those properties that barely comply with
these requirements usually warrant a low rating, and the degree to
which they surpass them will be favorably reflected by higher

column ratings. In view of the fact that the provisions in Prop
erty Standards apply to structures of every type and size, it is recog
nized that for certain of the requirements small structures that barely
comply with the individual requirements may receive 4 or 5 column
feature ratings, while large and more pretentions structures that
just barely comply with the same requirements would receive
low ratings. In cases where a waiver of any Property Stand
ards requirement is recommended because of a technical violation
but the objectives of the particular requirement have been fully
accomplished by means other than those specifically stated, the fea
ture rating shall receive the same consideration as it would have
under ordinary circumstances. Instructions for recording ratings in
such cases are contained in Section 2, Underwriting Procedures. For

RATING OF PROPERTY

808-810

cases involving proposed construction the requirements of both Prop
erty Standards and established Minimum Construction Requirements
shall apply.
809. Experience has indicated, and a national compari
son has demonstrated, that conditions affecting the individual fea

tures that can be considered “ average” or “ typical ” may warrant
ratings in either the 3 or the 4 column, depending upon , (a) the effec
tiveness of local building code requirements and their enforcement,
( 6 ) the caliber of local building customs or practices, and, ( c) the

demands of the market. A structure might possibly create an over
all impression of being “ average " or " typical”, but it must not be
deliberately assumed, by reason of such an impression, that every
feature should be rated in the same column. Rather, the degree to
which conditions affect each particular feature must be recognized
and duly reflected in the feature rating. Further, in rating the fea
tures, personal preferences and prejudices must be subordinated,
except insofar as they are commonly shared by informed persons.

It is not intended to nullify personal judgment, but to obtain disin
terested , uniform analyses of the mortgage security. The inclination
to alter design or to change drawings on the basis of personal tastes
should be avoided and not allowed to influence decisions.

810. The physical conditions prevailing in the structure
directly affect the ratings of a number of the physical security fea

tures and the Total Rating of Physical Security. This is especially
true with regard to the three features relating to structural durabil

ity and to the features, Livability and Functional Plan and Mechan
ical and Convenience Equipment. Poor physical condition will tend
to result in low ratings of these five features. The ratings bear a
direct relationship to the estimate of remaining physical life of the

building. Inspectors are required to give estimates of remaining
physical lives of buildings and it is important to relate these esti
mates to the ratings ascribed to these five features. Thus, if Struc

tural Soundness is given a low rating because of physical deficiencies

of the building, the estimate of the remaining physical life should be
shorter than if a high rating had resulted from the analysis.

Inas

much as the actual remaining physical life of a building is a matter
of considerable conjecture, it is evident that estimates of physical

lives are largely significant only in relation to one another. For
example, an inspector cannot be expected to have any very definite
opinion as to the actual remaining physical life of a building, but he
can have a very significant opinion as to which of several structures
may be expected to have longer or shorter lives. It is suggested ,
therefore, that well-built newly completed buildings be ascribed re

UNDERWRITING MANUAL

810-815

maining physical lives of from 50 to 60 years, and that other build
ings be ascribed lives in relation to these arbitrarily established
lives.

811. In cases where repairs, alterations, or additions are
contemplated by the mortgagor, or where such work is found to be

necessary if reject ratings are to be avoided, the instructions stated
in Section 2, Underwriting Procedures, must be followed in making
the physical security feature ratings in the Rating of Property
category.
STRUCTURAL SOUNDNESS

812. The rating of this feature is an index of the ability
of all structural members, materials, and methods of assembly in
corporated in a structure to withstand the imposed loads with the
minimum acceptable amount of settlement and deflection. Careful
consideration is given to the adequacy of the structural fabric, the
size, quality , and durability of the materials comprising the struc
tural members, the quality and methods of workmanship in the as

semblage, and, finally, the extent to which physical deterioration has
created unsoundness or weakness.

813. The list of questions in subsequent paragraphs
serves to indicate the principal considerations which enter into the
formation of a judgment with regard to a proper rating of this
feature .

814. Foundation.

a . Soil : Is the nature and condition of the soil such as to with

stand imposed loads ?
6. Footings : Do footings possess adequate width and thickness
to distribute properly the weight on the soil ? Are foot
ings of sufficient distance below grade to resist upheaval

by frost ? Has adequate reinforcing been provided where
necessary ?

C. Foundation Walls or Piers : Are foundation walls or piers

adequately designed and do they possess sufficient strength
to carry the imposed loads and resist outside earth pres
sure, movement, and hydrostatic pressure ?
d . Columns and Piers : Are columns and piers of sufficient
size and strength to carry beam loads ?
815. Floors.

a . Basement Slab : Is basement slab designed and reinforced
so as to resist hydrostatic pressure, if any ?
6. Porch and Terrace Slabs : Has adequate reinforcing been
provided to carry the load ?

RATING OF PROPERTY

815-820

c. Beams and Sills : Are beams, wall sills, and plates of ade
quate size and construction, and do they possess sufficient
bearing surface !

d . Joists : Are floor joists of sufficient size and properly spaced
for their span so that there will be no undue deflection ?

Are they adequately bridged and unimpaired by the in
stallation of the mechanical equipment ? Is there suffi
cient bearing area on supports ? Is there adequate sup
port for joists abutting headers ?

e. Openings : Are openings properly framed, trussed, and
headed !

f. Sub - Floors : Is sub -flooring so employed as to provide addi
tional bracing to the structure ?
816. Exterior Walls .

a . Are structural members of sufficient size to carry the im
posed load and properly braced or sheathed to resist wind
pressure ?

6. Are frame walls well tied to masonry ?

c. Have all openings been properly framed and linteled ?
817. Interior Walls and Partitions.

a . Are structural members of adequate size, properly spaced
and braced ?

6. Have all load -bearing openings been properly framed or
trussed and double studded at jambs !

818. Ceilings.
a. Are ceiling joists of adequate size, properly spaced and
bridged ?

6. Is there sufficient bearing area on supports, and is the tie
continuous between outside walls !

819. Roofs.

a. Are main valley and hip rafters of adequate size, properly
tied , and seated so as to carry the roofing material and
resist wind and snow loads ?

b. Is roof properly braced with supports and collar or wind
beams ?

C. Are all rafters unspliced and continuous between bearing
points ?
820. Accessory Buildings. Are foundations, floors,
walls, and roof of such materials and construction as to assure a
physical life for the accessory buildings equal to that of the main
building ?

UNDERWRITING MANUAL

821-825

821. Although a fire- proof building, properly designed
and constructed , deserves the highest rating under Structural Sound
ness, this does not imply that a building of frame or masonry veneer
construction, when properly designed and constructed, could not
possess sufficient quality to warrant the highest rating. The deter
mination is dependent upon whether the methods of assembly, ma
terials used , and workmanship are such as to assure a long life for
the structure.

822. A low or reject rating is warranted in cases in

volving existing construction if defects such as sagged beams, floor
joists, or rafters, excessive settlement, or cracked basement walls are
present in a serious degree. The fact that it has been necessary for
the present or previous owners to install additional piers and beams
in the basement, or to patch cracked basement walls, or to install
additional roof bracing should serve as a warning to the inspector.
It would also indicate that a close analysis should be made of the
structure to discover other hidden faults which may be expected in

the low quality construction thus reflected. For cases involving new
construction, a reject rating is warranted where the construction
does not equal ( or exceed) the established Minimum Construction Re
quirements for such items as are included under Excavation,
Masonry, Footings, Foundations, Exterior Masonry Walls, Chimneys,
Cement Floors, Driveways and Walks, Structural Steel and Iron,
Lumber, Wood Framing, Floors and Roofs, Exterior Walls, Interior
Partitions, and Miscellaneous.
823. Certain regions of the United States are subject to
tornadoes, earthquakes, and other natural hazards, and in these areas
Structural Soundness is rated according to the degree with which

the building was designed and erected in order to minimize the
danger from these special natural hazards.

824. In the final analysis it is necessary to consider the
loads which will be imposed upon the structural fabric by the use
for which it is designed, and to estimate the degree to which it will
be able to withstand these requirements. The cost range of the
structure under analysis should not enter into the consideration of
its structural soundness.
RESISTANCE TO ELEMENTS

825. The rating of this feature reflects the degree of

resistance exhibited by the structure to the deteriorating and
damaging effects produced by the elements. These effects may in

themselves lessen the durability and may render the entire building
or certain portions of it uninhabitable. The inspector shall bear
in mind that the excellence of resistive ability in one material may

RATING OF PROPERTY

825-826

be off -set by poorness in adjacent materials and in such cases the
rating will be adversely affected . Conditions entering into the
rating of this feature are discussed below under three headings,

Resistance to Weather, Resistance to Fire, and Resistance to De
cay, Corrosion, and Insect Hazards. Resistance to special natural
hazards such as earthquakes and tornadoes is primarily a structural
resistance and is considered under the feature Structural Soundness.

The following list of questions serves to indicate the principal con
siderations which enter into the formation of a judgment with re
gard to the proper rating of this feature.
826. Resistance to Weather.

a . Roof :
1. Is the roof correctly pitched and are the slope and
angles of the roof of such a nature as to afford
proper drainage and to avoid " snow pockets” ? Have

crickets or saddles and snow guards been provided
where necessary ?

2. Is roofing material of such quality and condition so as

to resist rain, snow, ice, and sun effectively, and to
withstand high winds in areas where these climatic

conditions occur, and to withstand exposure and
rapid temperature changes without resulting damage ?
3. Are ridges properly protected ?
4. Are the materials and construction of roof decks of such
nature as to withstand the elements ?
b . Sheet Metal :

1. Have ferrous and non - ferrous metals been used in
combination so that contact corrosion will result !

2. Is the material of all valleys of such quality as to
have a life equal to that of the roofing materials ?
3. Are flashing and counter- flashing of proper quality
and workmanship installed where necessary ?
4. Have gutters and down -spouts been provided where

necessary and are they so designed as to dispose of
the water adequately and so constructed as to resist
snow loads ?
C. Walls or Piers :

1. Are foundation walls or piers adequately designed and
constructed to resist penetration of moisture ?
2. Are the principal walls so constructed and in such
condition as to effectively withstand the elements of
the section of the country in which they are erected
and to resist driving rains and rapid freezing and
thawing ?

UNDERWRITING MANUAL

826-829

3. Where more than one type of material is used in prin
cipal walls, are the different materials properly tied
together and has provision been made for the ab
sorption of their different coefficients of expansion
d. Insulation and Weatherproofing :
1. Have the methods of insulation and insulation ma

terials been incorporated in such a way so as to re

sult in adequate comfort and economy of operation ?

and caulking been provided
2. Has weatherstripping
nece
where

ssary ?

3. Have storm doors, storm windows, and vestibules been
provided in regions where climatic conditions war
rant ?

827. Resistance to Fire.

a. Do the materials and structural methods used offer a high
or low degree of fire resistance to both the exterior and
interior construction !

6. Has fire resistance been aided by proper framing around
chimney, by the use of flue tiles, and by adequate fire
stopping ?
828. Resistance to Decay, Corrosion, and Insect
Hazards.

a . Decay and corrosion :

1. In unexcavated portions is there ample circulation of
air around wood or metal members ?

2. Is there adequate provision to exclude surface water ?
3. Are materials subject to decay or corrosion adequately
protected ?
b. Insect Hazards : In regions where termites or borers are

prevalent, have suitable protective measures been provided ,
such as ample circulation of light and air, sufficient clear
ance from grade, and metal shields under all frame bear

ings? Have timbers been impregnated ?
829. A reject rating is warranted in cases involving new
construction where the construction does not equal (or exceed ) the
established Minimum Construction Requirements for such items as
are included under Excavation, Footings, Foundations, Exterior

Masonry Walls, Chimneys, Cement Floors, Driveways, and Walks;
Dampproofing, Lumber, Wood Framing, Exterior Walls, Termite
Prevention, Roof Coverings, Sheet Metal, Stucco, Painting, and
Miscellaneous.

RATING OF PROPERTY

830-831
RESISTANCE TO USE

830. In rating this feature the inspector reflects the de
gree to which the workmanship and the quality and condition of
the materials will withstand the wear and tear to which they will
be subjected through continued use . The inspector must bear in
mind that the expense of maintenance of a dwelling is directly cor
related to the factors considered in rating this feature. Since the

interior of the structure contains the major portion of the wearing
surfaces, the considerations entering into the rating of this feature
are concerned primarily with the interior of the main structure and
of accessory buildings. Considerations must also include the sur
faces of walks, drives, porches, and terraces. The heaviest wear
resulting from use is experienced by flooring, wall and ceiling finish,
doors, sash, trim, and hardware. The inspector must consider
whether or not the material and workmanship , in both the finish and

base of the following items, are of such a quality as to be highly
resistant to the wear to which they will be normally subjected :
a. Floors, Utility Areas :
1. Basement floor

2. Kitchen , pantry and service porch floors
3. Baths and lavatory floors
b. Floors, Living Areas :

1. First, second, and third floors
2. Porch and terrace floors
c . Walls :
1. Exterior walls
2. Interior walls

3. Bathroom and lavatory walls and wainscot
4. Kitchen walls and wainscot
d . Ceilings
e. Millwork :

1. Doors, jambs, and trim
2. Windows, frame, and trim
3. Finish hardware

f. Accessory Buildings :
1. Floors, walls, and ceilings
2. Doors, windows, frames, trim , and hardware
g. Walks and Drives, including base and surface
831. A reject rating is warranted in cases involving new
construction when construction does not equal (or exceed ) the estab
lished Minimum Construction Requirements for such items as are

included under Cement Foors, Driveways, and Walks, Lumber, Wood
Framing, Lathing, Plaster Work , Painting, and Miscellaneous.

UNDERWRITING MANUAL

832-835

832. The materials and workmanship of both plaster
base and plaster must be noted. The best wall finish is no stronger

than its base, and the best painting or wall covering applied to poor
plaster may result in an unsatisfactory wearing surface. The qual
ity of interior painting, tinting, or wall covering must be carefully
considered. Doors and sash, either of wood or metal, that are of
light, flimsy construction will not withstand constant use, and for

this reason willaffect the rating unfavorably. The wearing qualities
possessed by all such items, assuming ordinary maintenance, shall
be weighed against the severity of wear and tear to which they will
be subjected.
LIVABILITY AND FUNCTIONAL PLAN

833. In rating this feature it is necessary to determine
the degree of practical usefulness for residential purposes to the
typical family likely to occupy properties of similar type and size.
If the property has been planned and constructed so that a high
degree of livability and functional efficiency exists, then a high rating
for this feature is warranted .

834. The inspector must determine the degree to which
the layout of the structure is economical, practical, and efficient.
An economical layout is one which presents the greatest proportion
of usable floor area in relation to the gross floor area. An excess of

unusable space makes a house less desirable. For example, if the
hall area is larger than is necessary in view of the uses to which it
will be put, and perhaps because of this the sizes of other rooms in
the house where increased area is desirable have had to be restricted ,
then the layout would to some degree be uneconomical. Again , if
space is provided which is not readily and conveniently usable,
economy is sacrificed because of unwarranted additional cost of con
struction and maintenance together with the attendant increased
labor involved in the occupancy and use of such a structure. It is
recognized that large entrance halls, galleries, and similar spaces are
considered desirable and necessary in dwellings in the higher cost

range. Where such spaces properly serve a functional purpose they
do not indicate inefficiency of plan.
835. The rating of this feature must reflect the func

tional qualities, adequacy of sizes, and efficiency of the individual
The relation of the location of the service or utility portion
of the house to the living quarters also definitely affects the rating
rooms.

of this feature. Lower ratings will be warranted if any of the

following objectionable conditions are present:
a . Sleeping quarters with insufficient privacy
6. Dark or poorly ventilated rooms

RATING OF PROPERTY

835-838

c . Bathrooms not readily accessible, or accessible only through
a major room

d . Kitchen inadequate for or ill-arranged for food storage,
food preparation, and dish washing
e. Insufficient provision for hanging clothes, or for storage
of linens, blankets, and brooms
836. If future occupants are likely to have laundry work
done in the home, the rating will be affected by the relative ade
quacy of the provision for laundry work. This is to be judged , not
merely on the presence or absence of laundry trays and convenience

outlets, but also upon the space available for drying, and access to
outdoor drying.
837. The rating is influenced by the convenience of ar
rangement. The most desirable conditions occur where access from

room to room is according to logical sequence, where there are no
long, dark, or winding corridors, where movements into and out of
the various rooms or units cause the least disturbance, where stair
cases are sufficiently wide, not too steep , and in such locations as to

permit moving of furniture readily. Ratings of this feature will be
favorably affected in the case of houses having rooms of such sizes
and shapes as to accommodate furniture readily in proper grouping
for convenient living. Shape is very important as well as size.

Broken or short wall areas do not permit flexibility in furniture
arrangement. Protruding radiators that are in the way are objec
tionable. Windows should be spaced in relation to internal function
as well as to exterior appearance. The rating of this feature must
reflect the practical quality of the interior layout. This factor will

contribute to the rating, favorably or unfavorably, depending on the
existence or absence of agreeable proportions of the rooms.
838. The plan of improvement of the site is another
factor in livability. Consideration should be given to the suit

ability of the size, shape, and topography of the lot in relation to
the type and size of the dwelling and accessory buildings. Build

ings, walks, plantings, and terracing may be laid out or arranged
on the plot so that either a high degree of livability or an opposite

condition may result. The rating of this feature will be favorably
affected if the general plan of improvement is excellent, and the
resultant effect gives the property a strong appeal for those who
ordinarily would be attracted as purchasers of such property. In

any such case the buildings will be found located upon the site in
the most advantageous and desirable positions. Structures will be

found so placed on the lot as to take the fullest advantage of sun
shine, ventilation, scenic outlook, privacy, and safety. Where high

UNDERWRITING MANUAL

838-840

ratings of this feature are warranted, it is also found that the
grounds have been laid out so that opportunity is afforded for effec
tive landscaping and gardening. Furthermore, in such cases there
exists a high degree of accessibility to garage buildings and other
accessory structures, and the placing of buildings, walks, and drives
does not result in cutting the grounds into small and unusable

areas. A favorable condition is also present if accessory buildings
are so located upon the site as not to create hazardous conditions

affecting the safety of the occupants of the property, and if they are
so placed that the convenience of the occupants is served in the most
advantageous manner. In cases where customary accessory build
ings have not been provided , the rating of this feature will be
influenced by the size and location of the available area of the site
upon which accessory buildings might be erected.
839. The following list of questions will assist in the
proper rating of this feature:

A. Does the arrangement of the plan present an economical
layout in relation to the ratio of usable floor area to gross
area ?

6. Is the separation and relation of living units arranged
to provide ease of circulation and privacy ?
c. Has the separation and relation of service units been con
sidered from a circulation and utility standpoint ?
d. Do the ingress and egress both from living and service
units contribute to livability ?
e. Are rooms of adequate size for their intended purposes?

Are wall spaces of such size and location, and are open
ings and radiators arranged to provide for convenient and
customary furniture placing ?
f. Are there sufficient baths and lavatories for the number of
persons, including servants, likely to occupy the property ?
g. Has the interior been planned to take the fullest possible
advantage of orientation and the facilities offered by the
plot ?
h. Is the plot of suitable size, shape, and topography, and is
the utilization of the plot of such character as to afford
a high degree of livability to the occupants of the prop

erty from the standpoint of service, convenience, and
safety ?
840. If the property under consideration is intended for
more than one family, certain matters are considered in rating this
feature that do not necessarily pertain to single family dwellings.
To be warranted in giving such a building a high rating as to Liva

RATING OF PROPERTY

840-844

bility and Functional Plan the following are pertinent: (a) that
there is separate access to each family unit without undue annoyance
to other families, ( b ) that the plan is so arranged that families do
not look into each other's windows across narrow intervening space,
( c) that adequate venting has been provided to remove objectionable
odors properly and effectively, (d) that provision has been made to
retard sound transmission from one unit to another. If the heating
of such a building is accomplished by means of separate installations,
rather than a common plant, the rating of this feature is favorably
influenced when there is, (a) proper provision for access by each

family to the heating rooms, ( b ) separate fuel storage facilities for
each family unit, and (c) adequate and efficient facilities for fuel
delivery.

841. Reject ratings will be warranted in cases in which
the design fails to equal (or exceed ) Property Standards require

ments for such items as Accessibility, Types of Eligible Dwellings,
Nonresidential Use of Dwellings, Lot Coverage, Dimensions of Front

and Rear Yards, Living Unit, Separation of Living Units, Privacy,
Ceiling Heights, Storage, and Stairways.
MECHANICAL AND CONVENIENCE EQUIPMENT

842. The rating of this feature reflects the degree of
adequacy, durability , and operating economy of the mechanical and
convenience equipment in the subject property to perform the func

tions for which this equipment is designed, considering the number
and type of people likely to occupy property of this class. Analysis

of this feature requires the consideration of three subjects: plumbing
and sewerage, heating, and electric light and power. The second
subject, heating, is construed to include such equipment and systems

as are popularly referred to as air-conditioning systems.
843. Only such items of mechanical and convenience

equipment as are definitely identified as a part of the real property,
either by custom or State law, can be included for consideration. The
definition which governs the identification is given in Section 16,
Methods of Dwelling Cost Estimation.
844. In general, public water supply, public sewerage,
and public utility electric supply systems are preferable to private
systems on the property itself. Consideration must be given to ne

dependability of all supplies and services. Rejection under this fea
ture is mandatory in cases that do not comply with the requirements

of established Property Standards for approval of wells and ap
proval of sewage disposal systems.

UNDERWRITING MANUAL

845–847

845. Items of mechanical equipment for which replace
ment parts and service are readily obtainable will affect the feature
rating favorably because of probable lower maintenance costs. In
new construction, particular attention should be given to any evidence
of the use of antedated, secondhand, or rebuilt equipment. Such
equipment will necessitate a low rating Systems in which equip

ment and fixtures are of poor quality and design, and improperly
installed will show more rapid deterioration and obsolescence and

give rise to frequent damage and heavy repair costs. It is axiomatic
that the rating will be affected by the age and condition of the

equipment. The economical operation and maintenance of mechani
cal and convenience equipment has a direct bearing upon its func
tional qualities.
846. The following list of questions serves to indicate the
principal considerations which enter into the formation of a judg
ment with regard to a proper rating of this feature.
847. Plumbing.
a . Baths and Lavatories : Are fixtures of proper design , mate

rial, and workmanship for this class of structure
trimmings suitable for the class of fixtures ?

Are

Are trim

mings readily accessible and adjustable !
. Service Facilities :

1. Are the plumbing facilities in kitchen, pantry , and

laundry adequate to perform the service required !
2. Are fixtures of proper design, material, and work
manship for this class of structure with trimmings

readily accessible and adjustable ?
c. Supply, Waste, Drains, and Accessories:
1. Are supply pipes properly graded as to size, of dur
able material, good workmanship , and provided
with sufficient conveniently placed stop and drain
valves

2. Are soil, waste, and vent pipes of adequate size, of

durable material, and good workmanship ? Are soil
and waste lines properly trapped and vented ?
3. Is the domestic hot water supply system of proper

size, kind, design , and workmanship to combine
adequate service with economy, and is the storage
tank properly installed and insulated ?
4. Are the cellar, area, and roof water drains of sufficient
size, and properly designed and installed so as to func
tion properly and without excessive maintenance ?

RATING OF PROPERTY

847-850

5. Is there an ample supply of pure water, preferably
from public, or municipal utility source ?
6. Has adequate provision been made for the disposal of
sewage, preferably by public or municipal systems?
848. Heating .

a. Heating plant, including air -conditioning systems:
1. Is the plant of ample size, design, and construction
to operate conveniently, economically, and efficiently

under all conditions, and is the furnace insulated ?
2. Are the pipes or ducts properly pitched , sized, of
good material and workmanship, and insulated
against heat losses ?
3. Is the type of heating plant and is the fuel used suit
able to the class of dwelling ?

6. Radiators and Registers :
1. Are the radiators or registers of sufficient size and

properly placed so that they most effectively dis
tribute the heat and air throughout the various
rooms ?

2. Are the radiators or registers effectively designed , of
good material and workmanship, and properly
valved and controlled ?

849. Electric Light and Power.
a . Supply and Accessories :

1. Are the feeders, switches, and panels of sufficient size
to fulfill the requirements to which they are put,
without the overloading of circuit or switch capaci
ties, and do they conform to the Underwriters' Code
and local ordinances ?

2. Are power circuits provided where needed, and sep
arated from light circuits ?

3. Is there an adequate and dependable supply of electric
energy available, preferably from public utilities?
6. Fixtures and Outlets : Is there a sufficient number of fix

tures and outlets to distribute illumination properly and
are fixtures of suitable design and construction ?

850. In order to avoid a reject rating all properties must
equal (or exceed ) the provisions of established Property Standards
for such items as Compliance With Laws, Plumbing Fixtures, Water
Supply, Approval of Wells, Cisterns, Sewage Disposal, Sewage Dis
posal Systems, Approval of Sewage Disposal Systems, Heating, and

UNDERWRITING MANUAL

850–853

Electric Wiring. In addition, for cases involving new construction
a reject rating is warranted where the construction does not equal
(or exceed ) the established Minimum Construction Requirements for

such items as are included under Plumbing, Heating, and Electrical
Work .
NATURAL LIGHT AND VENTILATION

851. The rating of this feature is an index of the degree
and adequacy of natural light and ventilation provided for the vari
ous rooms of a dwelling under ordinary conditions. Orientation of
the structure and proper orientation of the individual rooms to
obtain maximum benefit from sunlight and exposure contribute to
sustained marketability. Therefore, if the plan is such that the
principal rooms have the most desirable exposure with respect to
sunlight and prevailing winds, a favorable influence upon the rating
results. The rating will be adversely affected if in northern regions,
a sun porch is placed on the shaded side of the building, or if in

regions subject to extreme heat, a living portion is not shielded from
the sun during the hotter part of the day. Unsatisfactory orienta

tion in the case of proposed new structures can frequently be cor
rected by the reversal or rearrangement of the plan. The rating will
be adversely affected if accessory and adjoining buildings are in too
close proximity to the main structure, or if a kitchen is so poorly
lighted and ventilated as to impair its usefulness, convenience, and
comfort.

852. The following items are considered in ascribing the
rating :

a. The ratio of glass area to floor area
6. Location of openings with respect to size and shape of room

c. Reduction in light due to obstructions such as other build
ings and shaded porches

d . Orientation of the building upon the site
e. Cross ventilation in the individual rooms, particularly
bedrooms

f. Double exposure in principal rooms
g. Natural light and ventilation of stairways, corridors, and
halls

h. Mechanical ventilating equipment to remove odors from
service area
į. Proximity to lot lines and adjoining buildings
j. Relation of accessory buildings to principal structure
853. Reject ratings will be warranted in cases in which
Property Standard requirements are not equalled (or exceeded ) for
such items as are covered under Lot Coverage, Dimensions of Front,

RATING OF PROPERTY

853-856

Rear, and Side Yards, Dimensions of Courts, Windows, Ventilation
of Bathrooms and Water Closet Compartments, Ventilation of Base
ment, Laundry, and Utility Rooms, Ceiling Heights, and Basement
Rooms.
ARCHITECTURAL ATTRACTIVENESS

854. In rating this feature, the inspector must be guided
by "taste”. However, he must disregard, insofar as it is humanly
possible, his prejudices and preferences where they are not in sub
stantial agreement with the evident trends of likes and dislikes of
the market. The inspector shall consider attractiveness in relation
to the property as a whole and to the exterior and interior charac

teristics of the buildings. Mortgage risk is presumed to be lessened
in those instances in which architectural treatment may be expected
to remain attractive to the market for sustained periods of time.
Acceptance of architectural styles may be transient. Simplicity, pro

portion, and character are qualities which are permanently attractive.
855. The general impression created by the entire prop

erty is of primary importance. The degree to which there is unity
is a first consideration. The highest rating is warranted when the
architectural treatment of site, planting, and buildings comprise a
harmonious entity. Such combinations of improvements and land
attain the maximum degree of desirability possible from the stand
point of design. In such cases the structures are most effectively and

pleasingly accommodated by the width, depth, or area possessed by
the sites upon which they are erected, and topography has been

permitted to contribute to the agreeable impression which is created
when the property is viewed in its entirety.
856. Accessory buildings impair or contribute to the
degree of unity attained . Unless they are planned as integral parts
of the design and ensemble of the house and grounds, a condition
will result which will tend to cause a reduction in the rating of this
feature. Garages and other accessory buildings are too often con
ceived as afterthoughts without the proper regard for the resulting
effect. The planting upon the site may either be carefully laid out
in an attractive arrangement, or it may be placed upon the site with
out proper consideration for usefulness of the entire plot of ground.

Planting should also be considered with reference, (a) to the measure
in which it serves the purpose of forming a desirable and harmonious

setting for the buildings, ( b ) to the measure in which it permits the
occupants of the buildings to secure the maximum enjoyment possible
from the use of the lot, and, (c) to the measure in which it succeeds

in screening out and protecting the property from unsightly objects
and surroundings.

UNDERWRITING MANUAL

857-859

857. It is necessary in making a rating of Architectural
Attractiveness to give consideration to architectural style. Attention

must be given to the relative excellence or poorness of the particular
design and to the refinements, or lack of them , incorporated in the
subject property. The architectural attractiveness of the interior
should be viewed with consideration of pleasing proportions of
rooms, materials and textures of walls and floors, and the design of

important details such as mantels, staircases, and woodwork. No
consideration should be given to the degree to which the style is in
conformity with the architectural styles prevailing in the neighbor
hood. If nonconformity with styles in the surrounding environment
is of such a character that it increases mortgage risk, it is taken into
account in the feature Adjustment for Nonconformity.
858. A structure of the so -called " shirt- front ", or one

sided treatment design , calls for a low rating of this feature be
cause the remaining side walls of the building give it an unattrac

tive exterior appearance. Architectural designs that are considered
freakish, or those characterized as hybrids, should be penalized in
this feature rating. To receive the better ratings, all design motifs
should be in good taste, have a utility basis, or add structural value
and attractiveness to the general scheme. An elaborate use of motif
and detail, the inclusion of an unnecessary variety of materials, and

straining for the picturesque cannot increase the rating. Use of
false effects of roofing, false half -timber work, or the unusual han
dling or combination of materials, or materials inappropriately used
in the particular case involved , usually affect the rating of this
feature adversely.

859. In assigning a final rating to this feature, the
inspector shall consider the subject property on its merits and in

the same manner as individuals of reasonable tastes, likely to be
come interested in the property as tenants or owners, will view it.
The following questions will aid in determining the proper rating
of this feature :

a. Do the elevations express frankly the plan contained
therein or is the design of a freakish nature straining for
the picturesque !

b. In whatever style the building has been designed, does it
express, to a reasonable degree, refinement and proper

interpretation of that style, or does the design indulge
in the use of superfluous ornament or an improper use of
materials as they relate to each other ?
c. Is the fenestration arranged so as to result in a pleasing
effect !

RATING OF PROPERTY

859-862

d. Are room proportions pleasing? Are interior details so
designed as to be appropriate and attractive ?
e. Is the entire ensemble, including the arrangement of build
ings and the plot plan, attractive ?
f. Do the accessory buildings tie in to the composition of the
entire project ?
g. Has the entire project a pleasing appeal to the typical
1

potential purchaser ?
ADJUSTMENT FOR NONCONFORMITY

860. The last feature of the Rating of Property category
is designated “ Adjustment for Nonconformity ". It is rated in the
same manner as are the other features in the risk rating system .
However, it will be noted that the weights in the columns in the
rating grid for this feature are in reverse order.

Thus, in the 1

column the weight is 12, while in the 5 column it is zero. A 5 column

rating indicates either that nonconformity is not present at all, or
if present, it does not affect adversely the desirability or marketabil
ity of the property. The feature rating is always deducted from the
Total Rating of Physical Security, thereby accomplishing whatever
adjustment is necessary because of adverse effects attributable to
conditions of nonconformity. The Reject column is used in cases in
volving such extreme nonconformity that the property would be
practically unmarketable. In the event the X mark appears in the
Reject column, the word “ Reject ” is written in the Rating column,
and also on the Total Rating of Property line.

861. The Rating of Physical Security does not consider
the relationship of the subject property to its immediate environ
ment, but is based on the hypothetical assumption that the physical
improvements are appropriate for the site and the neighborhood.
Where an unsuitable property -neighborhood relationship exists, mar
ketability is to some degree affected and mortgage risk is increased .
Factors that restrict marketability because of nonconformity are
considered in the feature Adjustment for Nonconformity so that all

elements of mortgage risk attributable to physical improvements
will be reflected in the Total Rating of Property.

862. A residential property of good physical character
istics may not necessarily be good security for a mortgage loan , even
though situated in a good location. It may be extremely unmarket
able if it is not in conformity with the desires and needs of those who
would ordinarily want to occupy or purchase properties in the

neighborhood. It may be that such a property would be entirely
appropriate at another location , but decidedly out of favor at its

UNDERWRITING MANUAL

862–866

actual location. It may be displeasing when viewed in relation to

its surroundings; it may be too costly for the typical purchaser to
own ; or it may not conform in other respects to the use which would
be most marketable.

863. Many kinds of nonconformity adversely affect the

marketability of properties. Mere lack of similarity of physical
properties, however, may not necessarily restrict marketability.
Factors other than similarity must be considered in determining the
effect of property -neighborhood relationships on marketability.
Such other factors include a study of the characteristics, needs,
desires, and financial capacities of the neighborhood occupants and
those likely to be attracted to the location . The degree of market

ability depends upon the extent to which the particular property

under analysis is adaptable to such needs and desires.
864. It is apparent that the ease with which a residential

property can be marketed depends largely upon the degree of appro
priateness of the property to its location . A study of the neigh
borhood and the attitude of its present and prospective occupants
provides an acceptable basis upon which to determine degrees of

appropriateness. These factors are clues as to the nature of the pre
dominating market for dwellings in the neighborhood. By observing
the extent and nature of the departure from that which is appropriate

for the location, it is possible to draw conclusions as to the effect on
mortgage risk.
865. The various ways in which building improvements
may deviate from that which is appropriate are discussed under the
following headings:
a. Suitability of use-type
6. Appropriateness of functional characteristics
c . Harmony of design

d. Relation of expense of ownership to family income levels
866. Suitability of Use -Type. The term use-type, as
applied here, refers to the use for which a property is designed, such
as single family, two family, multiple family, and nonresidential.
In some neighborhoods the suitable use - type is governed by zoning

ordinances, deed restrictions, or both . However, in some neighbor
hoods no such controls of land utilization exist. In many neighbor
hoods the appropriate use -type is clearly evident upon an inspection
of the neighborhood because of the predominance of a single use
type. Frequently, however, neighborhoods are very heterogeneous,
and in such cases several different use-types may be found to be
suitable.

RATING OF PROPERTY

867-871

867. It is plain that the marketability of a single family
residence will be limited if it is located in a neighborhood of multiple

family buildings. The erection of a multiple family dwelling in a
single family area , on the other hand, will usually adversely affect
the desirability of nearby residences. If a transition to multiple
family use is in process, the multiple family dwelling may not be
restricted in marketability.
868. Appropriateness of Functional Characteris
tics. The term " functional characteristics ” refers to the pattern of

living facilities provided in a dwelling. It relates to the number of
rooms, the arrangement and sizes of rooms, and the plot arrange
ment. Usually well defined standards are observable with regard to
these characteristics in individual neighborhoods.
869. Considerable difficulty might be experienced in the
effort to market a twelve room dwelling in a neighborhood of five or
six room dwellings simply because the greater number of rooms may
be ordinarily useless to the typical purchaser.

870. The arrangement and sizes of rooms frequently

conform to certain definite preferences in individual neighborhoods.
For example, in some districts it may be evident that the families

prefer residences having six large rooms: a living room , dining
room , kitchen , three upstairs bedrooms, and two bathrooms. In such
a neighborhood a two story residence with only two bedrooms and
one bath, or a residence with all rooms on one floor may be inap
propriate, hence of limited marketability. A building with rooms
that are too small might be similarly restricted in marketability.
871. The characteristics of the lot, insofar as they affect
livability, are considered a part of the functional pattern of the

property. The advantages of the side yards, and the front and rear

yards, shouldconform in desirability with the conditions found to
be typical and appropriate in the neighborhood . Nonconformity is
frequently evidenced by the placement of the house upon the site.
Where general building lines are recognized, any deviation from
the accustomed or accepted practice should be carefully considered

to determine the resultant effect upon desirability. If the site of a
residence is substantially smaller than the size found to be desirable
in a certain neighborhood - for example thirty feet wide where the

customarywidth is fifty feet - marketability may be seriously re
stricted . Similar effects on marketability may result in some cases
where the shape or topography of a particular lot makes the dwelling
less desirable than those that are typical of the area .

UNDERWRITING MANUAL

872-874

872. Harmony of Design . — The degree of conformity
of the design of a structure with other structures in the immediate
neighborhood is not important except insofar as it fails to blend
harmoniously with them . There may be a considerable variety of

designs of residences in a neighborhood and yet each dwelling may
present a pleasing appearance when viewed in relation to its sur
roundings. On the other hand, a building may be without any archi
tectural faults and yet clash so violently with neighboring prop

erties that marketability may be seriously restricted . For example,
if a two story Colonial residence were erected in a neighborhood
characterized by one story Spanish bungalows, it is probable that
this property would be difficult to sell, irrespective of the excellence
of its individual design. In cases involving structures which de
part from the conventional insofar as design is concerned, a more

pleasing appearance may be created if they are erected in a group
and not mixed with buildings of conventional architecture. Appro
priateness may well be questioned, in the absence of any effective
demand for such properties, in the particular community where
they are erected or proposed .

873. Relation of Expense of Ownership to Family In
come Levels. - Families of similar financial means generally choose
places of residence in similar neighborhoods. Because of this tend
ency a residential property must be of such character that the ex
pense of owning or renting it is in proper relation to the incomes

of families for whom the location is a suitable place of residence,
A home that is too costly to purchase and maintain will not suit

the requirements of the typical family, and would therefore have
limited marketability.
874. In many residential developments there are restric
tions against the erection of structures below a certain minimum
cost or size. This provides some control over the minimum cost
range of buildings but does not prohibit the building of homes
which are overimprovements. Determination of the cost range which

is proper in a given case will depend upon the costs of structures in
the district and the income range of present and prospective occu

pants. The range of family incomes is the more significant of these
two criteria. The cost of existing properties may not be a reliable
indication of the costs which are most suitable for the market . This
condition is sometimes encountered in new developments where build
ers start their operations with houses that are too costly, and after

experiencing delay in selling, are forced to build for purchasers of
smaller incomes.

PART II
SECTION 9

RATING OF LOCATION

CONTENTS
Paragraphs

901-909

General Rating Instructions.
Definitions----

903

904908

Basic Principles of Rating
Analysis of Neighborhoods.

909
910-912
913-931
917-921
922-931
932-940

Established Ratings of Locations -

Relative Economic Stability --Economic Background Rating
Rating of the Feature_--

Protection from Adverse Influences..
Freedom from Special Hazards----

941–948

Adequacy of Civic, Social, and Commercial Centers..

Adequacy of Transportation-Sufficiency of Utilities and ConveniencesLevel of Taxes and Special Assessments .
Appeal------

949-953
954960
961-963
964-967
968-974

Special Considerations in Rating Undeveloped Subdivisions and Other
975-986
987

Sparsely Built Areas.Summary of Significant Considerations.

Effective February, 1938

Federal Housing Administration .

PART II

SECTION 9
RATING OF LOCATION

GENERAL RATING INSTRUCTIONS

Rating of Location
1

REJECT

FEATURE

2

1

5

4

3

RATING

Relative Economic Stability
12

16

20

Protection from Adverse Influ
ences
12

13

2

13

Freedom from Special Hazards
5

Adequacy of Civic, Social, and
Commercial Centers
10

Adequacy of Transportation
3

Sufficiency of Utilities and Con
veniences

Level of Taxes and Special Assess
ments
6

10

Appeal
TOTAL RATING OF LOCATION

901. Rating of Location shall be accomplished by rating
separately each of eight features according to the principles outlined
in this section and Section 6, Methods of Mortgage Risk Rating.
The eight features have been weighted on a scale of 100 points in
order to retain the relative importance of each when all are com
bined to obtain the Total Rating of Location. Each feature is
marked on a scale of from 1 to 5, 5 being the highest rating. After
analysis of the factors comprising a feature, an X mark is placed in
the column which is determined to reflect the degree of risk involved .

If the X mark is placed in any column other than the Reject column,

UNDERWRITING MANUAL

901-903

the figure appearing in the marked square is carried over to the ex
treme right hand column of the grid. If the X mark is placed in the
Reject column, the word " Reject” is written in the extreme right hand
column of the grid. One such rating in any feature will necessitate
a recommendation for rejection of the application for insurance. If
the word " Reject” appears in the Rating column, it must also be
written in that column on the Total Rating line. If no such rating

appears after any of the features, the finalrating of the category is
obtained by adding the figures in the Rating column. The system
is so designed that this figure will be an expression of the rating on a
numerical basis.

902. The eight features, together with the weights as
signed to them , are listed below :
6. Protection from Adverse Influences_

c. Freedom from Special Hazards.--d. Adequacy of Civic, Social, and Commercial Centers-

e. Adequacy of Transportation f. Sufficiency of Utilities and Conveniences_.
g. Level of Taxes and Special Assessments.

h. Appeal------

( 40 )

aőar o
orse

a. Relative Economic Stability-

20

5
10
5
5
10

903. Definitions. The following definitions are used :
a. Location is defined as the actual site of a property viewed
in terms of relationship with its immediate neighborhood
and general economic background.
b. Rating of Location is defined as the process of determin
ing the degree of mortgage risk attributable to location .

Rating of Location also refers to the numerical index of
risk which results from the process.

c. Established Rating of Location is defined as the rating of

a selected location which is used as a basis of compari
son in connection with the rating of other locations in the

same outlined neighborhood.
d . Neighborhood is defined as a single area composed of loca
tions separated only by publicly used land, the residential
portions of which exhibit a degree of homogeneity. In
general, a neighborhood is available for, or improved with,
dwellings of more or less similar character, age, and
quality.

e. Outlined Neighborhood is defined as a neighborhood in
which the approximate borders have been established
for the purpose of indexing and classifying Location and
Valuation Data, Real Estate Market Data, and Established
Ratings of Locations.

RATING OF LOCATION

903-904

f. Immediate Neighborhood is defined as an area surrounding
a location and embracing the most direct influences from
which the significant characteristics of the location are

determined . It is generally smaller in area than an Out
lined Neighborhood.
g. Economic Background Area is defined as an area within

which the conditions of industry, trade, labor, and living
that is, the economic and social life of a community of
people are predominantly subject to the same influences.
It may be small, as in the case of a village, or large, as

in the case of a city together with its entire environing
metropolitan area.
904. Basic Principles of Rating. The rating assigned

to the first feature of the Location category, Relative Economic

Stability, is an estimate of the probable continuing marketability
of the subject property, attributable to its site, as affected by the
financial capacities and financial attitudes of owners, occupants,
and prospective purchasers, and as related to similar estimates of all
residential properties in the Economic Background Area, irrespective
of competitive characteristics. The rating of all features of the

Location category, except the feature Relative Economic Stability,
is determined by comparing the subject location with all other com
petitive locations in the Economic Background Area, through the
mediums of Established Ratings of Locations. Competitive loca
tions are construed as locations which are appropriate for residen
tial structures having price ranges similar to that which is deter
mined as typical in the immediate neighborhood of the subject loca
tion. The price range of an appropriate residential property at the
subject location , and at its competitive locations, is indicated by the
price range of typical properties in their respective immediate
neighborhoods. In general, comparisons should be restricted to a

price range which does not differ more than the limits of the prices
of properties which the typical prospective buyer with specific needs
would consider for purchase. Similarity of price range does not
provide a basis for such comparisons if certain racial aspects render
the locations actually noncompetitive. Residential structures which
оссиру the site of the subject location and its competitive locations

are of no concern in rating Location , except as they participate in
the neighborhood influences affecting such locations. The price of
a residential property at the subject location should not be used to

determine the price range of competitive residential properties, un
less it is representative of the typical price range of the immediate
neighborhood. Under similar environing influences a vacant site
would have the same rating as an improved site.

UNDERWRITING MANUAL

905-908

905. The competitive basis of rating is the only method
to be used in rating all features, other than Relative Economic Sta

bility. If the number of competing neighborhoods in an Economic
Background Area are insufficient to provide adequate comparisons,
an additional neighborhood will be assumed by providing arbitrary

requirements for a 5 column rating of each feature, made up from
the desires and requirements of the market. The actual conditions
at the subject location are then rated by comparison with these arbi
trary requirements. The arbitrary requirements established may be
regarded as the conditions surrounding a “best” location, even though

such a location does not actually exist. If this is done, the rating
of conditions at the subject location by comparison with such a
" best " location becomes in itself a competitive area basis of rating.
In general, such arbitrary requirements representing adequacy and

sufficiency should not be used unless the Economic Background Area
affords less than three or four competitive neighborhoods.
906. The primary purpose of the Rating of Location is
to determine the degree of mortgage risk involved because of the
location of a property at a specific site. The rating is based on a

prediction of the risks likely to be experienced at such location dur
ing a period of approximately the next twenty to twenty -five years.
This point of view makes necessary the study and consideration of

not only what is present at the time of inspection, but also a de
termination of the future trend in the neighborhood and Economic
Background Area for at least the coming twenty to twenty - five
years. In this connection, data pertaining to the ownership of

property, data pertaining to population, community and neighbor
hood characteristics, and data relating to city growth conditions and
the market for real estate will prove of inestimable value.
907. The scope of operations of the Federal Housing
Administration necessitates the application of Rating of Location

techniques under widely diverse conditions. A given set of physical
environing conditions which serve to obtain a certain Rating of
Location in one case might obtain a different Rating of Location in

another case. In the first case the trend might be favorable; in the
second case it might be less favorable or even unfavorable. Because
mortgage risk lies in the future, the rating of mortgage risk should
always be a measurement reflecting probable future trends.
908. As a general rule, the attitude of the market re
flects the degree of acceptability of prevailing conditions, providing
the market is reasonably cognizant of its needs. However, accepta
bility and tolerance are not synonymous. In an Economic Back
ground Area it is necessary to distinguish between conditions which
are acceptable in one case and tolerated in another. Mere tolerance

RATING OF LOCATION

9084909

may warrant a low rating of any feature, even to the point of rejec

tion, unless it is evident that better conditions will not be provided.
There are many areas which have great charm , where planning has
been well executed , and the surroundings present, to a marked degree,

a harmonious picture of beauty and comfortable living. If proper
ties in such areas possess ready marketability, that is, if there is a
sufficiently large number of financially capable, prospective buyers for
the properties, and if this market is expected to continue and the
financial capacity of buyers is expected to remain the same or in
crease, then a high Rating of Location is warranted . Mere beauty
and charm , however, are not sufficient to make a satisfactory area,
but if these attributes are combined with the other factors which,

together, sustain a high degree of marketability, a high Rating of
Location is warranted .

909. Analysis of Neighborhoods. Certain generally
accepted principles should control judgment when analyses of
neighborhoods or locations are made. Among the principles are the
following :

a. Homogeneous development of properties in a neighborhood
tends to reduce mortgage risk. Areas which contain
structures of about the same age are usually better mort

gage lending areas than those in which a variety of age
groups is present.
6. Areas in which development has been accomplished in ac
cordance with accepted principles of good housing are apt
to prove much more stable than those areas where little

thought or attention has been paid to the requirements for
light and air, lot coverage, and controlled similarity of
types of structures.

c. The Valuator is confronted with different problems in
rating new and old locations. If development has been
completed and there are few vacant lots, a satisfactory
measurement of mortgage risk is usually less difficult
to determine than if the location being rated is in

a sparsely developed area. The latter usually requires a
more thorough study of the future before a significant
rating can be made. There is in progress a definite de
centralization of housing which will probably continue
the building up of suburban neighborhoods. If the loca
tion under consideration does not lie in a path of city

growth , and there is apt to be a lapse of a number of
years before the neighborhood is well built up, a much
lower rating will be indicated than in the case of a loca
tion which lies in a path of city growth with every pros

UNDERWRITING MANUAL

909

pect that the neighborhood will be built up in a compara
tively short time. The present city pattern is the product
of the action , in the past, of the competition of uses for
sites and the historical succession of those uses. City
growth is directional. The directions which it takes are
the consequence of favorable market attitudes toward
selected areas.

These in turn result from the relative

advantages of different locations with respect to civic,

social, cultural, and natural facilities. The actual phys
ical expansion of cities at border locations is frequently
characterized by speculative activity. Interior locations,
and border locations in less favored directions have a

tendency to exhibit a gradual decline in quality. Neigh
borhoods not in the paths of city growth usually lack
marketability and tend to deteriorate. There appears to
be an inevitable process of infiltration by lower class
occupancy into such districts. There is either a more

intensiveuse of land for residential purposes, or a change
of use to commercial and industrial purposes. Neighbor
hoods in favorable geographic positions in relation to city

growth frequently enjoy a fairly rapid rate of absorption
of newly constructed dwellings. Such neighborhoods
may be remarkably stable if the absorption of new land
into use is controlled and orderly. The income and social

characteristics of future occupants will usually be of such

a character that a suitable environment for mortgage lend
ing activities is in evidence . On the other hand, neigh
borhoods in the paths of city growth may be unstable if
the absorption of new land is characterized by imprudent
land speculation, overextension in real estate purchases,
and overdevelopment.
d. Cities grow along communication and travel routes, and
the growth of cities is influenced by topographical condi
tions, zoning restrictions, legislative policies, and popula
tion increases. Newer residential districts are products

of city expansion, and both new and old residential dis
tricts undergo a change in quality which is directly
related to the changing types of people who come succes
sively into occupancy. The trend of neighborhood sta
bility usually lies in the same direction as the trend of

social quality of the neighborhood. As families rise
above the economic and social status of their neighbors,

they desire to move to better districts. The city pattern
then becomes the result of the action of the competition

RATING OF LOCATION

909
of uses for sites and the historical succession of those

uses. Valuators must be aware of the phenomena of city
growth and the conditions and characteristics of neigh
borhood trends in order that the probable future degree
of mortgage risk surrounding a location may be accurately
reflected .

e. The mere presence of established , financially capable owners
in neighborhoods embracing both old and new structures
does not assure a high degree of continuing market
ability, even though the same type of persons apparently
provide a strong market for properties in such areas.

Such neighborhoods will suffer greatly within the next
twenty years if they are not considered reasonably desir
able by the younger families upon whom future market
ability depends. A location with harmonious surround
ings will not decline at the same rate as will a location
in a neighborhood containing old structures mixed with
new . Older properties in a neighborhood have a tendency
to accelerate the rate of transition to lower class occu

pancy. Good planning and uninterrupted development

tend to create continuing desirability of neighborhoods.
The past has demonstrated that neighborhoods or subdivi
sions which were laid out many years ago in accordance

with well executed planning to develop beauty and charm
have continued in high favor, while other neighborhoods
just as well located have suffered by reason of the absence
of good planning.
f. Neighborhoods tend to decline in investment quality.
Sometimes an exception is an undeveloped or partially
developed new neighborhood . If such areas are favorably
situated, attractive to new purchasers constituting the
market, adequately protected from adverse influences,
and definitely planned in accordance with accepted good
housing practice, they will frequently improve for a
period.
g. The stage of development of a neighborhood is an impor
tant factor. It cannot be presumed , however, that a
neighborhood 15% , 50% , or 75 % developed represents

any specific degree of mortgage risk when generalization
is attempted. The stability of such an area may be lim
ited at the start. Later it may progress to a point where
definite evidence is available to indicate the probable
future character of the neighborhood . In other words,

the character of the neighborhood will then have been

UNDERWRITING MANUAL

909-911

established. At this stage, a higher Rating of Location
may be justified as a result of certainty which was lacking
in the less advanced stage of development.
ESTABLISHED RATINGS OF LOCATIONS

910. Valuation Sections are required to make Estab
lished Ratings of Locations. They contribute to speed in the process
ing of cases and ultimately lead to economy and consistency. The
availability of Established Ratings of Locations also improves the
effectiveness of preliminary examination. Established Ratings of
Locations should be made for locations which are the most typical,

or characteristic, of sites in the neighborhood, and for locations which
are of the types most frequently encountered in the business of the

Administration. Where several price ranges of properties occur in
the same neighborhood, several Established Ratings of Locations
should be made and the most appropriate one for comparison should
be selected when processing a case . Established Ratings of Locations
are made available to Valuators so that when a case involving a prop

erty situated within the boundaries of an Outlined Neighborhood is
being processed, the Valuator will have an Established Rating of Lo
cation available for guidance. The Valuator proceeds to the estab
lished location, familiarizes himself with it, and then proceeds to the
location under analysis. By ascertaining the conditions present at
the subject location and comparing them , feature by feature, with
those which determined the Established Rating of Location, he will
be able to rate the subject location accurately and without delay. It

is quite improbable that any one location in a neighborhood will rate
higher than all other locations within the same Outlined Neighbor
hood for all features in the grid. If the subject location differs in
quality from the rating ascribed to any feature of the Established

Rating of Location , the Valuator should reflect such difference in the
rating of the subject location . The Chief Valuator designates or
numbers each Established Rating of Location with appropriate num
bers or symbols in accordance with the instructions in Section 18,
Compilation and Recordation of Data .

911. To make Established Ratings of Locations, it is
necessary that the Economic Background Rating of the area be com
pleted in accordance with the procedure described in this section.

This provides the maximum weight for the first feature, Relative
Economic Stability. Having determined the Economic Background

Rating for the area, the first step in making Established Ratings of
Locations is to determine ineligible or caution areas. The central
downtown area can usually be outlined and considered as ineligible.
However, such downtown reject areas must be outlined with the great

RATING OF LOCATION

911-912

est care in order to avoid unfair decisions in connection with applica
tions for mortgage insurance covering properties which lie within
such borders. Central reject areas include slum and blighted areas, as

well as the central business and commercial sections of the city. The
second step is the outlining of neighborhoods for the purpose of
indexing and classifying the Established Ratings of Locations. Ad

joining areas having properties of similar age and quality are in
cluded in one Outlined Neighborhood. In some instances, this treat

ment permits the inclusionof a considerable expanse of territory in
an Outlined Neighborhood. It is not necessary that all locations
within the neighborhood boundary exhibit similar degrees of mort
gage risk . Wide variations in total ratings will appear when indi

vidual cases are handled. When Established Ratings of Locations
in an Outlined Neighborhood have been completed , the Valuator
accomplishes the rating of all other locations in the Outlined Neigh
borhood by comparison with the most comparable Established Rat
ing of Location.

912. An Outlined Neighborhood is not intended to em
brace all of the influences which are considered in rating a location .
Some conditions in an Outlined Neighborhood may have little or no
influence upon the subject location, while other conditions with re
spect to significant influences may lie well outside the Outlined
Neighborhood . For example, the immediate neighborhood of a loca
tion , as referred to in rating Relative Economic Stability, is gen
erally an area of less proportions than the Outlined Neighborhood.
However, some influences which affect such immediate neighbor
hoods may emanate from a much larger area than the Outlined
Neighborhood. Obviously, many locations will lie along the
boundaries of Outlined Neighborhoods. The influences affecting
these and other locations are not altered by the presence of arbitrary
boundaries of Outlined Neighborhoods. The purpose of outlining

neighborhoods is to provide adequate and appropriate means of
indexing and classifying Valuation and Location Rating Data, Real
Estate Market Data, and Established Ratings of Locations. The next
step is to rate the first feature on the Established Rating of Location
form , Relative Economic Stability. This is done in accordance with
the basic principles of rating set forth in paragraphs 904 to 909, and
the specific rating principles in paragraphs 913 to 931. The favorable
and unfavorable factors, and the reason for ascribing the rating in
dicated must be fully set forth on the Established Rating of Location
form . The next step is to rate the remaining features in accordance
with the basic principles of rating set forth in paragraphs 904 to
909, and the specific principles as shown in paragraphs 932 to 986.
The favorable and unfavorable factors and the reasons for the rating

UNDERWRITING MANUAL

912

ESTABLISHED RATING
OF LOCATION NO . 2 A

TYDIGALANCOME. $ 2,500
TYPICALLORICE $ 6,000

OUTLINED NEIGHBORHOOD NO.1 .

ESTABLISHED RATING

SUBYECT LOCATION
TYPICAL INCOME $ 1,800
TYPICALIPRICE $ 3,000

OF LOCATION NOTA

TYPICAL INCOME,$ 2006
TYPICAL PRICE $ 4.000

A
OUTLINED NEIGHBORHOOD NO 22

SUBJECT LOCATIONS ,

TYPICAL INCOMES 500
TYPICAL PRICE 6,600
ESTABLISHED RATING

OF LOCATION NOZIB
TYPICAL INCOMES SOO

TYPICAL PRICE $ 5,000
SUBJECT LOCATION

TYPICAL WWCOME $ 1,800
TYPICALWRICE $ 4.000
This
ESTABLISHED RATING
OF LOCATION NO.2B

TYPICAL INCOME $ 2,500
TYPICAL ORICE $ 5,000

SUBSECT LOCATION
TYPICAL INCOME $ 2,300
TYPICAL PRICE $ 5,000

41
ZESTABLISHED RATING
OF LOCATION NO. 3A
TYPICAL INCOME $ 1,800

TYPICAL PRICE $ 4,000
ESTABLISHED RATING

OUTLINED NEIGHBORHOOD NO 3 .

OF LOCATION . NO. 2C .
TYPICAL INCOME $ 2,000

SUBJECT LOCATION

TYPICAL ORICE $ 4,000

TYPICAL INCOME $ 4800 ,
TXPICAL PRICE $ 4,00din

AL

RATING OF LOCATION

912-915

assigned must be fully indicated on the Established Rating of Loca
tion form for each of these features. The Established Rating of

Location form is completed by furnishing appropriate answers to all
questions contained thereon with respect to neighborhood location,

size, and influences. Upon completion of Established Ratings of
Location for an area , the ratings ascribed each feature in connection

with all Established Ratings of Location in the same price range
should be reviewed , compared and adjusted as necessary. This com
parison is made in the ratings of all location features except Rela

tive Economic Stability. This review and adjustment process will
afford a proper qualitative analysis of the respective degree of risk
indicated by individual feature ratings.
RELATIVE ECONOMIC STABILITY

913. In rating this feature the Valuator expresses the
extent to which owners and occupants of properties in the immediate

neighborhood of a location may be expected to participate in and
enjoy those employment and income advantages attributable to the
entire Economic Background Area. Within such an area , neighbor

hoods will reflect these benefits in varying degrees. The feature is an

expression of the security of the position of the families in the im
mediate neighborhood in which the location is situated, in relation
to the security of the families in the immediate neighborhoods of all
other locations in the Economic Background Area .

914. Two sets of elements are reflected in rating this
feature.

They are :

a. The general economic background, including opportunities
for employment and trends of industrial, commercial, and
other activities which affect the risk in all dwelling mort

gages located in the Economic Background Area.

b. The relationship between the general economic background
and the immediate neighborhood under consideration.
This relationship involves the extent to which owners and
occupants of properties in the immediate neighborhood of
the subject location may be expected to share in and enjoy
the advantages attributable to residence in the Economic
Background Area.

915. These two sets of elements cannot be treated jointly.
The first is the concern of the Chief Valuator. It is necessary for
him to establish for each Economic Background Area the maximum

possible rating which may be ascribed to the feature, Relative Eco
nomic Stability, in accordance with the instructions in paragraphs
917 to 921. This rating may not exceed 40 points in any case and is

UNDERWRITING MANUAL

915

scaled downward for different areas in accordance with the Chief

Valuator's Economic Background Rating. When the Chief Valuator
makes an Economic Background Rating, his conclusion includes the
weights applicable to each of the five rating columns. For example,
if he finds it necessary to rate an Economic Background Area with
a maximum possible weight of 30 points, then he has established the

following table of weights for the first feature :
In the 1 Column.

6
12
18
24
30

In the 2 Column ..
In the 3 Column

In the 4 Column ..
In the 5 Column ..

points
points
points
points
points

If he finds it necessary to establish the maximum possible weight at
15 points, then the following table of weights is applied to the first
feature :
3 points
6 points
9 points

In the 1 Column .
In the 2 Column ..

In the 3 Column
In the 4 Column_
In the 5 Column

12 points

15 points

The following table may be used for ready reference. It indicates
the individual columnar weights for ratings from 10 to 40.
Column
S

1

2

4

6

Column

44

8

5

10

1

5

3

4

10

16

21

26
27

2

4

7

9

11

5

11

16

22

2

5

7

10

12

6

11

17

22

28

3

5

8

10

13

6

12

17

23

29

3

6

8

11

14

6

12

18

24

30

3

6

9

12

31

3

6

10

3

7

10

4

7

4

8

4

15

6

12

19

25

13

16

6

13

19

26

32

14

17

7

13

20

26

33

11

14

18

7

14

20

27

34

11

15

19

7

14

21

28

35

8

12

16

20

7

14

22

29

36

4

8

13

17

21

7

15

22

30

4

9

13

18

22

8

15

23

30

5

9

14

18

23

8

16

23

31

39

5

10

15

19

24

8

16

24

32

40

5

10

15

20

25

38

RATING OF LOCATION

916-919

916. The other set of elements, the general relation

ship between the economic background and the location under con
sideration, is the concern of the Valuator who renders the Report
of Valuator on the case. It is necessary for him to form a judg
ment with respect to the degree to which the particular location
and its immediate neighborhood receive the benefits of the economic
background. This judgment is formed in accordance with the in
structions below , in paragraphs 922 to 931, and is recorded by an
X mark in one of the spaces opposite the first feature on the rating
grid .
917. Economic Background Rating. A single Eco
nomic Background Rating is established for each Economic Back
ground Area. The Chief Valuator shall delineate areas for the pur

pose of establishing Economic Background Ratings, and he is re
quired to make certain that all Valuators know the established limits
of the areas in which they work. In some cases, twin cities will be
treated jointly and but one rating ascribed . In virtually all cases ,
suburban communities will be included in the same Economic Back

ground Area and accorded the same rating as the city to which they
are suburban. On the other hand, many satellite cities may be
ascribed ratings independent of the one given to the major city near
which they are located .
918. It is advisable to express the Economic Back
ground Rating in terms of the weight ascribed for the 5 column.
The highest rating ascribed to any area in the United States is 40
points. In no instance, however, is an Economic Background Rating
of less than 10 points in the 5 column permitted . To establish these

ratings, the Economic Background Rating Form , FHA Form No.
2096 ,is provided for the use of Chief Valuators. Its use will insure,
to a major degree, uniform treatment of all areas. This form is not
inserted in the case binders. It is used solely as an aid to the Chief
Valuator in determining the Economic Background Rating for use
in connection with all cases in the area to which the rating applies.
Chief Valuators are not permitted to allow their conclusions to be
come known to borrowers, mortgagees, the public, or others than the
Director and members of the Underwriting Staff.
919. In making an Economic Background Rating, the

Chief Valuator forms an opinion of the probable future stability and
sufficiency of the industrial, commercial, and other economic activities
in the Economic Background Area. In arriving at his opinion , he
considers the factors involved in terms of sources and amounts of

family incomes which support investment in residential real estate .

These elements are viewed in terms of their sufficiency, diversity,
and probable future stability,

UNDERWRITING MANUAL

920-923

920. The effect of the economic background upon the
risk involved in mortgages has been recognized by mortgage lenders.
Some lenders have excluded entire cities from their lists of accept

Others have limited their activities to cities beyond
definite population sizes and have favored selected locations within
such accepted cities. It is not the policy of the Federal Housing
able areas.

Administration to exclude entire cities and towns from the benefits

of mutual mortgage insurance. However, it may be that within
certain communities where present day and expected future stability
is exceedingly low, only certain favored locations which surpass the
general average of the town or community may prove acceptable for
insurance. The rating ascribed shall apply to all locations situated
in the area rated.

From time to time Chief Valuators will find it

necessary to revise their Economic Background Ratings to keep

abreast of changing conditions. Such revision does not, of course ,
affect cases already processed .
921. The Economic Background Rating gives consid
eration only to the underlying factors that affect the population of
the entire area . It does not show how the various income groups
are distributed throughout the area or what neighborhoods are good
or bad from the standpoint of mortgage risk . It cannot be taken
as a substitute for the analysis of specific locations. It must be
recognized that even in areas having the most stable economic back
grounds, there are sections which do not derive any great benefit
from their location in such areas. Specific instructions covering

the process of establishing Economic Background Ratings are given
in Section 18, Compilation and Recordation of Data.
922. Rating of the Feature. The Valuator must ascer
tain the extent or limits of the area included in the Economic Back

ground Rating in order to rate this feature properly. These limits
are established by the Chief Valuator according to the principles
described above. The following instructions for the rating of the

feature, Relative Economic Stability, apply to practically all cases
processed by the Underwriting Staff.

Occasionally, however, it

may be necessary to consider unusual cases such as those involving
resort properties. In such cases, the rating of this feature should
reflect the group attitude of owners of such properties, with respect
to continuing ownership and retirement of mortgage indebtedness.
923. The basis of rating the feature, Relative Economic
Stability, is a comparison of the group income characteristics of

the present and prospective occupants of properties in the immedi
ate neighborhood of the location under investigation with the group
income characteristics of present and prospective occupants of prop
erties near all other locations within the Economic Background Area.

RATING OF LOCATION

923-925

In this respect it differs from the method of rating the remaining
seven features of the grid . This is necessary because the rating of

this feature reflects the degree to which the occupants of properties
in the vicinity of the location participate in the general advantages
attributed to the Economic Background Area. The competitive
area basis of rating would fail to produce a satisfactory analysis
of income characteristics. For this reason , when rating Relative

Economic Stability, comparison is made with all other neighbor
hoods, both competitive and noncompetitive.
924. Stability of Family Incomes. The group income
characteristics of the occupants of properties in the immediate

neighborhood of the location under consideration are analyzed from
the points of view of their sufficiency and stability with respect to
both sources and amounts of income received . It is necessåry to
devise a method whereby those income characteristics can be ana

lyzed. An examination of the income characteristics of employed
persons, with particular reference to the probable continuance of
employment and incomes, suggests a method which can be readily
adopted for the use of Valuators.
925. At the bottom of the employment scale, a large per

centage of the employed population of a city is found working in
the capacity of laborers. A member of this group has little or no
individual skill, because any one person can usually perform the
work as well as any other. Physical endurance is the primary requi

site of this employed group. The next group encountered above
the laborers in the employment field includes the semi-skilled me
chanics and lower - grade clerks. The members of this group exhibit
some individuality, because they have demonstrated through knowl
edge or ability a degree of superiority over laborers. Further up the
employment scale are encountered mechanics and office workers. The
capacity of members of this group is apparent, because they have

shown the ability to rise to a point above the large groups below
them . Next in the scale are found the foremen, chief clerks, and

others of like standing in the employment world . These people usu

ally have well established incomes. Above this group are the junior
executives. It is considered that this group presents, for the purpose
of determining mortgage risk , the best income characteristics in the
entire employment field. The usefulness, versatility, and ability of
this group have been firmly established . Should they lose their pres
ent employment, it is usually possible for them to find ready employ
ment in a similar line of activity. At least this group possesses
the characteristics which would provide them with the ability to find
ready employment if there are sufficient sources from which employ
ment may be secured. Should it become necessary for members of

UNDERWRITING MANUAL

925–928

this group to seek employment in lower strata of the employment
scale, they can readily replace those below them by reason of their
demonstrated superior ability and usefulness. At the top of the em
ployment scale is found the senior executive group . Experience has
demonstrated that although their leadership is most firmly estab
lished, the stability of incomes is not as great as that evidenced in

the junior executive class. Opportunities for employment in similar
capacities are usually limited . While employment is always avail
able in the various strata of the employment scale below them , the
incomes derived from such employment will usually prove inade
quate to maintain their present standard of living and the retire
ment of mortgage indebtedness on expensive properties. It should
be understood that while the senior executive group will, in most
instances, rate below the junior executive group , only in exceptional
cases will the former rate below the 3 column.

926. It is necessary for the Valuator to determine the

character of work performed by occupants of properties in the im
mediate neighborhood of the location under investigation. With the
employment charactertistics of occupants determined, the income
levels are indicated. Where the income level of a neighborhood in
cludes rental returns from duplex houses and other residential units

within the same area, neighborhood influences will be accelerated in
proportion to the degree in which the income level results from such
rentals.

927. Sufficiency of Family Incomes. Such considera
tions as the standard of living established by the various income

groups and the financial outlay necessary to maintain that standard,
signs of extravagance in living, and indications that neighborhood
occupants as a group have bought too expensive properties, will have
a direct effect on the rating to be ascribed . Where it is observed

that any group of occupants tends to live in an extravagant manner
or where there is undue optimism in the purchase of dwellings, the
column rating ascribed will be below that which the employment
group might indicate . In the event the condition is so serious that
probability of successful retirement of mortgage indebtedness is
absent, the rating will be in the Reject column.
928. It is recognized that the immediate neighborhoods
of many locations will show a considerable spread in the income

levels of occupants. It is usually possible to determine the typical
income level of occupants, and it should be used as the basis of
rating. The rating ascribed may be affected only to a slight degree

by the income characteristics of those occupants not typical of the
neighborhood occupancy .

RATING OF LOCATION

929-931

929. Social Characteristics of Neighborhood Occupants.

While the rating of this feature is based upon the group income
characteristics of the occupant group at the immediate neighborhood

of a location, other considerations, such as the varying social charac
teristics of neighborhood occupants, including the group attitude
toward obligations and living standards, are warranted and will be
reflected to some degree in the rating. By social characteristics are
meant the moral qualities, the habits, the abilities and the social,

educational and cultural backgrounds of the people residing in the
immediate neighborhood .

930. Stage and Trend of Neighborhood Development.

In newer neighborhoods, consideration should be given to (a) the
physical need or shortage of homes of the type and in the price class

contemplated , (6 ) whether the need originates with a financially
capable group of purchasers, and (c) whether the sales prices and
values approximate cost of completed properties. In older, built up
neighborhoods the principal consideration will be given to the pres
ence of a ready, financially capable market for the homes which exist
in the neighborhood , at their current value levels.
931. Probability of Forced Sales and Foreclosures. It
is logical to anticipate a change in the class of occupancy in the
neighborhood if the financial condition of the residents is such that
forced sales and foreclosures may become numerous. Properties
must remain desirable to their present owners if a satisfactory lend

ing experience is to be expected. A change in class of occupancy is
frequently accompanied by a decline in the values and seriously
affects the continued desirability of the properties to their original
owners. Mortgage risk is greater in such neighborhoods. As an
index of Relative Economic Stability an unfavorable foreclosure
experience in a neighborhood is of limited significance if it was
caused by conditions which no longer exist, or if the experience was
typical of the entire Economic Background Area . The probability
of future foreclosures and forced sales, however, may be influenced
by factors which are latent in the present situation. For example,
there is greater risk of foreclosure in residential areas where mort
gages represent a high ratio of loans to values, than in an area where
the average mortgage indebtedness is a low percentage of values.
The added burden of interest and amortization payments on the

larger loans may be such that during trying times foreclosure be
comes almost inevitable. For this reason when properties in a

neighborhood are heavily mortgaged, an element of instability may

UNDERWRITING MANUAL

931-934

be introduced . The Valuator should give consideration to the rela
tive amount of mortgage indebtedness in the neighborhood as com

pared to other neighborhoods, which may be measured , for the pur
pose of rating, in terms of average ratio of loans to current values.

The probable future rate of foreclosure, insofar as it is likely to be
caused by unwise control of expenditure, is of utmost importance.
PROTECTION FROM ADVERSE INFLUENCES

932. This feature has a total weight of 20 points, which
indicates it is one of the most important features in the Rating of
Location . Protection from Adverse Influences is concerned with

more than zoning and deed restrictions. These are of great impor
tance, but they do not represent all of the protection which is or may
be afforded a location. Where little or no protection is provided from
adverse influences, the Valuator must not hesitate to make a reject
rating of this feature.

933. Zoning. Protection in the form of zoning restric
tions is becoming more general. One of the best artificial means of

providing protection from adverse influences is through the medium
of appropriate and well drawn zoning ordinances. If the provisions
of an ordinance have been well worded and drawn from a thorough

knowledge of existing and probable future conditions in the city,
and if the ordinance receives the backing of public approval, an ex
cellent basis for protection from adverse influences exists. If an
ordinance has been drawn with little or no real understanding of its
purpose, or without a desire to promote an orderly city growth , or

if it lacks public approval, the chances are that it will offer little
protection from adverse influences. Even when an ordinance is
ably executed, investigation must be made to determine whether
infractions of the zoning law are permitted. If the law may be

changed readily, or if the provisions themselves are not strictly en

forced, such conditions cannot be expected to afford much protection
from adverse influences. Greater importance is attached to zoning
protection in and near large metropolitan centers, than in places
having smaller populations and less rapid rates of growth . Absence
of zoning may be a proper basis for rejection in the former case ,
but would not necessarily cause rejection in the latter case .
934. Restrictive Covenants. Deed restrictions are apt to

prove more effective than a zoning ordinance in providing protec
tion from adverse influences.

Where the same deed restrictions

apply over a broad area and where the restrictions relate to types of
structures, use to which improvements may be put, and occupancy,
better protection is afforded . Where adjacent lots or blocks possess

RATING OF LOCATION

934-936

altogether different restrictions, especially for type and use of struc
tures and occupancy , the effect of such restrictions is minimized. A
location lying in the path of business expansion is often unprotected
from the business encroachment even though deed restrictions for res
idential use may be present. It must be realized that deed restric
tions, to be effective, must be enforced. In this respect they are like
zoning ordinances. If there is a probability of voiding the deed
restrictions through inadequate enforcement of their provisions, the
restrictions themselves offer little or no protection from adverse

influences. In other words, if a property is so situated that its logical
use is other than for residential purposes, it will very likely be put
to its highest and best use in the course of time, even though it is
restricted to residential use .

935. Natural Physical Protection . The geographical
position of a location may afford reliable protection from adverse
influences. If a location lies in the middle of an area well developed
with a uniform type of residential properties, and if the location is
away from main arteries which would logically be used for business
purposes, probability of a change in type, use, or occupancy of prop

erties at this location is remote. The degree of immunity offered to
a location because of its geographical position within the city is to

be considered . Natural or artificially established barriers will prove
effective in protecting a neighborhood and the locations within it
from adverse influences. Usually the protection from adverse in
fluences afforded by these means includes prevention of the infiltra
tion of business and industrial uses, lower class occupancy, and in
harmonious racial groups. A location close to a public park or area
of similar nature is usually well protected from infiltration of busi
ness and lower social occupancy coming from that direction. Hills

and ravines and other peculiarities of topography often make en
croachment of inharmonious uses so difficult that protection is af
forded . A high speed traffic artery or a wide street parkway may
prevent the expansion of inharmonious uses to a location on the

opposite side of the street. However, if a high speed traffic artery

passes directly through a desirable neighborhood area with similar
development on each side of the artery, the noise and attendant
danger constitute an adverse influence, rather than a protection.

The same holds true for the presence of railroads, elevated or surface
lines, and other means of transportation.
936. Surrounding Homogeneous Neighborhood. When
a neighborhood has been solidly developed in accordance with ac
cepted good housing practices, such a development alone usually con
stitutes good protection from adverse influences. But many solidly

UNDERWRITING MANUAL

936-939

developed neighborhood areas present conditions which are far dif

ferent from that which is regarded as good housing practice. Little
protection is offered to such a neighborhood because of the prob
ability that new and more attractive competing neighborhoods may

be developed. The solidly built up neighborhood where good hous
ing has not been provided is readily subject to change in occupancy.
Narrow streets, excessive lot coverage, inadequate light and air, and
poor circulation within the neighborhood area , as well as the inter

mixture of types, price levels, and a general absence of architectural
attractiveness in dwellings, represent adverse influences in themselves.
937. Quality of Neighboring Development. The quality

of dwelling construction is significant, inasmuch as unsubstantial,
flimsy construction is subject to rapid deterioration which hastens

the lowering of class of occupancy. The same result may be expected
for locations whose properties present freakish architectural designs.

The rating will be adversely affected if the neighboring development
consists of old, obsolete dwellings.

The presence of overimprove

ment or underimprovement in the neighborhood constitutes a condi
tion which may adversely affect location ratings. Areas surround
ing a location are investigated to determine whether incompatible
racial and social groups are present, for the purpose of making a
prediction regarding the probability of the location being invaded

by such groups. If a neighborhood is to retain stability, it is neces
sary that properties shall continue to be occupied by the same social
and racial classes. A change in social or racial occupancy generally
contributes to instability and a decline in values.

938. Ribbon Developments. The same principles apply
when rating locations on ribbon developments along highways. Such
locations tend to attract uses which are often considered , from a resi

dential standpoint, as nuisances. Therefore, the prospect of lessened
desirability of such locations for residential use directly affects mort
gage risk.

However, where the likelihood of such nuisances is remote

or where prospective purchasers for residential use are tolerant of
present or prospective nuisances, reject ratings of this feature are not
warranted .

939. Nuisances. Nuisances already present in a neigh
borhood affect mortgage risk in two ways. The first is the direct

effect on the appeal of the neighborhood and this is taken into account
when rating the feature, Appeal. The second is the indirect effect
on mortgage risk in that the nuisances may accelerate change to a
lower grade of occupancy.

The latter condition is considered when

rating Protection from Adverse Influences. The effect of a nuisance
varies according to the type of neighborhood occupants and their
degree of tolerance of the condition.

RATING OF LOCATION

940_944

940. If a nuisance has already had its effect, that is, if
the class of occupancy has already changed and no further change
appears probable because of the nuisance, the rating of Protection

from Adverse Influences is not affected. On the other hand, if the
nuisance is likely to make the occupants dissatisfied with the loca
tion, the rating of this feature will reflect the condition. In either

case , the rating of the feature, Appeal, will be affected if market
ability to present class of occupants is impaired.
FREEDOM FROM SPECIAL HAZARDS

941. Special hazards refer directly to conditions which
have an influence on the personal safety and health of the occupants
in a given neighborhood, as compared with similar conditions sur
rounding all competitive locations.
942. Topography. Special hazards are frequently found

to result from the peculiar topography of a location or its neigh
borhood. Streets with a heavy grade, ravines, abrupt changes in

contour of land, soil erosion, and hillside locations may reflect special
hazards of varying degrees. The topography of some cities is
such that low land will be developed for residential purposes largely
because such ground is located close to centers of employment or

the downtown area of the city. These areas may be subjected to
intense summer heat, poor circulation of air, periodic fogs, and , in
some instances, floods.
943. Subsidence. The danger of subsidence is a special
hazard which will seldom be encountered except in mining areas.
In such areas a consideration of the extent of mining operations, the

condition and character of the subsurface formations, the depth of
mining operations, and the location of existing shafts and tunnels is

necessary to determine whether the danger is imminent, slightly
probable, or negligible. In those areas where the danger of sub
sidence is not determinable in the course of a routine examination,
reject ratings will be warranted unless complete and satisfactory
evidence can be furnished the Chief Valuator that the damage from
such danger would be negligible.

944. Earthquake, Tornado or Hurricane Hazard. There
are many types of windstorms, each of which represents some degree
of hazard under certain conditions. In a neighborhood of poorly
constructed homes more damage may result from flying debris
than from the force of the wind alone. When this condition is ap

parent it should be properly reflected in the rating. In general, the
above principle will apply to the hazards associated with the prob
abilities of earthquakes.

UNDERWRITING MANUAL

945–950

945. Flood Hazard .

In many cities certain low areas

are subject to periodic floods. Frequently the result of flood waters
in a city is nothing more than a temporary inconvenience, but some
times floods are attended by serious property damage and great
danger to personal safety. It is the relative freedom from such
hazards which is to be rated in this feature.

946. Traffic Hazard. Coincidental with the accelerating
rate of traffic accidents is the increasing favoritism for home
sites in the more protected areas. This trend results from an effort
to escape the hazards of high speed traffic thoroughfares or the
hazards of principal streets where traffic is not necessarily fast, but
heavy and dangerous. Rating of this feature cannot approach rea
sonable accuracy unless full cognizance is given to this type of
hazard .

947. Fire and Explosion Hazards. Frequency of occur
rences is not necessary to establish hazards. They are real as long
as the elements of danger exist, even though the related occurrences

never transpire. This viewpoint is essential to understand fully the
hazards of fire and explosion. The presence of commercial or indus

trial activity dealing with the storage or manufacture of volatile or
explosive mixtures, and conditions which indicate even a remote
probability of conflagration are examples of this type of hazard.
948. Hazards to Health . Some influences considered in

rating the feature, Protection from Adverse Influences, and some
conditions considered in rating the feature, Appeal, are likewise con

sidered in rating Freedom from Special Hazards if they affect the
personal safety and health of neighborhood occupants. Some of

these influences and conditions are smoke, fog, chemical fumes, ex
haust gases, stagnant ponds or marshes, poor surface drainage, and
excessive heat or dampness.
ADEQUACY OF CIVIC, SOCIAL , AND COMMERCIAL CENTERS

949. For a neighborhood to remain stable and retain
desirability for the same class of occupancy, it is necessary for it to

be adequately served by grade and high schools, neighborhood shop
ping centers, churches, theatres, parks, playgrounds, community
halls, libraries, and colleges. In some instances many of these are
available to the residents at points within the neighborhood , while
in other instances some, or even all, of them may be situated beyond
the boundaries of the neighborhood.

950. Only in a few instances will all the kinds of facili
ties entering into the consideration of this feature be present. A
favorable rating is made when it is considered that those present
provide adequate means for convenient and pleasant living with

RATING OF LOCATION

950-952

suitable provision for cultural development. The older residential
areas within a city will usually have available more of these facili
ties than the newer neighborhoods. The centers making for con
venience in living and cultural benefit usually follow rather than
precede the building up of any residential area. However, those new
neighborhoods which are better served by conveniences will usually
develop and maintain a character more favorable to stability than
those in which they are lacking. Areas occupied by low - income

groups will ordinarily require easier access to civic, social, and com
mercial centers than the areas occupied by residents of higher in

come levels. The rating should express the sufficiency, quality, and
availability of these facilities as related to the requirements of the

social class of occupancy, and the effect resulting from comparison
of similar facilities at competitive locations.

951. Quality and Accessibility of Schools. When con
sidering the question of schools, distances to the schools should be
related to the public or private means of transportation available
from the location to the schools. The social class of the parents of

children at the school will in many instances have a direct bearing.
Thus, physical surroundings of a neighborhood area may be favor
able and conducive to enjoyable, pleasant living in its location . How
ever, if the children of people living in such an area are compelled
to attend school where the majority or a considerable number of
the pupils represent a far lower level of society or an incompatible
racial element, the neighborhood under consideration will prove far
less stable and desirable than if this condition did not exist.

Fre

quently, upon payment of a fee, children in such an area could attend
another school with pupils of their same social class. However,
desirability of the neighborhood , when compared with competitive
locations, might be adversely affected by the additional expense . In
many instances where a school has earned a prestige through the

quality of instruction and adequacy of facilities, it will be found
that such attributes will be an element in maintaining the desir

ability of the entire area comprising the school district. In cases
where schools are not immediately present, consideration is given to
convenience and cost of required transportation.
952. Quality and Accessibility of Shopping Centers and
Amusements. The central downtown, commercial, financial and the

atrical district serves, in some measure, all inhabitants of an Eco
nomic Background Area . Therefore, the only consideration given
in this feature to the downtown district is its relative distance

and availability to competitive locations. Neighborhood shopping
centers are an essential part of community life, in all except the
smaller towns. The benefits they afford to the occupants of a given

UNDERWRITING MANUAL
952-955

location are measured by their presence , quality, adequacy, avail
ability, and the relationship with similar benefits afforded competi

tive locations. While the presence of neighborhood stores may be
essential to the convenience of occupants of a low -income area, the
mere existence of such elements near a location occupied by people
of high incomes would be a destroying influence, rather than a favor

able asset. However, it is desirable for the higher income level area
to have these shopping centers and other facilities easily available,
although it is undesirable for the dwelling locations to be situated
adjacent to such centers.

953. Quality and Accessibility of Churches, Clubs, and
Recreation Centers.

Similar considerations are to be given to the

presence, quality, and distance to churches, clubs, and recreation
centers. For certain types of neighborhoods, means of recreation
are essential, whereas in others they represent merely a passive
contribution to general welfare. For locations in cities which are
devoted in part or as a whole to the tourist or resort business, almost

the entire basis for stability is represented by the means provided
for recreation and amusement. Ready access to neighborhood
churches, theaters. public and private golf courses, and park and
playground areas is always desirable .
ADEQUACY OF TRANSPORTATION

954. Ready access to places of employment, main shop
ping districts, and other neighborhoods within the city is a requisite
of neighborhood stability. Transportation itself is not rated, but
rather the adequacy of transportation for the type of residents oc
cupying the location. The rating is made by comparing the ade
quacy of transportation afforded competing locations occupied by
inhabitants of similar income levels. The highest rating is given to
those locations where services and schedules are the best and where

costs are the lowest. The following deals principally with cities
which, because of their size, require the facilities provided by public

transportation systems. The underlying principles remain the same
for smaller communities which do not have these systems.

In the

smaller communities considerations must revolve around the char

acter of the streets and sidewalks, and the distance from the location

to the civic, social, and commercial centers.
955. Diversity of Available Services. In many cases a

single transportation line may furnish entirely adequate facilities for
the area it serves. However, better service is often afforded , espe

cially with respect to the frequency of service, when two or more
means of transportation are available. Therefore, the diversification

of available services is usually a significant factor in determining

RATING OF LOCATION

955–959

the relative adequacy of competitive locations with respect to trans
portation facilities.
956. Quality and Frequency of Services. The quality of
transportation in general, and especially the quality of its man
agement, equipment, and service, will be reflected in the ratings of

this feature. Frequency of service is another important factor in
determining Adequacy of Transportation . Long delays occasioned
by waiting for a car or bus, and overcrowded conditions resulting
from infrequent service will adversely affect the rating if such incon
veniences are absent at competitive locations. The permanence of

the common carrier providing the transportation is considered, and
where there is a probability of discontinuance of service, as the result
of unprofitable operation, a low rating is warranted . Contemplated

transportation facilities never justify as much weight as facilities
which are actually available.
957. Cost of Service.

The fares charged by common

carriers are of no concern if the rates, whether high or low , are the
same for all sections of the area served . Relative cost at competi

tive locations is the only proper basis of determining the competi
tive position of a location as reflected by the transportation cost

factor relationship. Cost of transportation can be reasonably de
termined only by considering the transportation requirements of
all members of the family, and of such servants as may be employed
by them . Families of the low -income group require public trans

portation facilities except in small communities where such facili
ties are neither provided nor essential. These families also require
cheaper transportation than do the families of higher income groups.
Reliance upon private automobiles makes it possible for families, ex
cept in the low -income group, to occupy suburban areas which are
not served by public transportation facilities, without appreciable
effect upon their transportation requirements. In such cases, if com
petitive locations are served by public transportation facilities, the
transportation cost differential will adversely affect the rating of

locations dependent upon private automobile transportation alone.
958. Distance from Location to Service. The mere
presence of public transportation facilities within the neighborhood
of a location does not indicate adequate facilities. The distance be
tween the location and the boarding point of the public transporta
tion line may cause great inconvenience, especially in bad weather,
or it may introduce certain hazards resulting from intervening
traffic crossings. It may also appreciably increase the time required
to reach the destination of travel from the subject location.
959. Time Required to Destinations.

The time con

sumed in travel on public transportation lines is of much greater

UNDERWRITING MANUAL

959–961

importance than the distance covered . Therefore, the relative ade
quacy of transportation afforded competitive locations will be influ

enced by distance only when adjustment, if applicable, is made to
reflect the time element. In small communities where public trans
portation facilities are not available, distance becomes the important

factor . In measuring time, consideration must be given to delays
resulting from necessary transfers.
960. Condition of Streets and Roads. Where transpor

tation is wholly or partially dependent upon the use of private
automobiles or buses, the relative adequacy of such means will be in
fluenced by the character and conditions of streets and roads.

Con

sideration must also be given to any unfavorable topographical and

climatic conditions which would require, for example, the crossing
of steep hills, especially during seasons of bad weather .
SUFFICIENCY OF UTILITIES AND CONVENIENCES

961. Presence of Required Utilities. Marketability of
residential properties and, likewise, mortgage risk are affected by
the presence or absence of such services as police and fire protection ,
telephone service, gas, electricity, water supply, storm sewerage, sani
tary sewerage, garbage disposal, street lighting, street paving, side
walks, and curbs. The rating should reflect, with respect to these
utilities, the comparative advantages or disadvantages of the loca
tion under consideration with all competitive locations within the

Economic Background Area. Also, it should reflect the degree to
which the present utilities and conveniences fill the needs and de

sires of both the present occupants and the prospective purchasers

in the neighborhood of the subject location. Utility requirements
will vary with differences in the social and financial class of people
occupying the area . In most instances, community water which is
pure and under sufficient pressure is considered a definite require
ment. In other communities, individual water supplies will prove

adequate for some of the locations. Thus it is necessary to interpret
the present and expected future desires of the market when rating

this feature. It may generally be assumed that the prospective mar
ket will be composed of the same class. However, if a neighborhood
is changing in occupancy , the needs and desires of the lower class

which will eventually prove to be the occupants of the neighborhood
shall be taken into consideration. Consideration should be given to
the probability of additional utilities and conveniences being in
stalled . The rating under such circumstances cannot be as high as
it would be if the additional utilities and conveniences were already
present at the location. Until the service is in actual existence and

RATING OF LOCATION

961-967

available, there is always some doubt regarding its ultimate
installation.

962. Quality of Utilities. Utilities may be present in an
entirely satisfactory measure and still fail to meet requirements
if the quality of such utilities is substandard. Examples of utilities
and conveniences which offer restricted benefits due to poor quality
are : (a) streets in bad repair, ( 6 ) fire protection dependent upon
inadequate equipment, (c ) gas service of insufficient pressure, and

(d) electrical service which is frequently interrupted.
963. Cost of Services. Cost is another element which
must be considered , together with presence and quality of utilities
and services. Cost is only considered when it produces advantages
or disadvantages of the location being rated as determined by com
parison with other competitive locations.
LEVEL OF TAXES AND SPECIAL ASSESSMENTS

964. The rating of this feature reflects the effect which
taxes and special assessments may have on the desirability of the
location for home ownership. Therefore, it is necessary to deter
mine the total amount required for taxes and special assessments.
This amount is compared with the amount required for taxes and

special assessments in connection with properties of similar value in
competing areas.

965. Relationship of Tax Burden with Competitive Lo
cations. The only concern in rating this feature is to determine the

relative advantages or disadvantages of the tax level at the sub
ject location in comparison with other competitive locations within
the area . It is well known that the basis for assessment, and often
the tax rate itself varies for different areas within a city. Where
specific locations are receiving preferential treatment in this regard ,
and where it is estimated that such condition will continue, a high
rating of this feature is in order, regardless of the reasons for the
condition.

966. Inasmuch as the extent of the general tax burden in
the city as a whole is not considered in the rating of this feature,
it should be observed that it is proper to give certain locations a
high rating even though the city has a relatively high tax level.
Thus, in an Economic Background Area, it is possible to have loca
tions which warrant a 5 column rating even though the tax rate
may be 3% , providing this is the lowest rate in the Economic Back
ground Area.

967. Nature, Cost, and Duration of Special Assessments.
If special assessments exist, or if they are in immediate prospect,
the Valuator should consider the length of time such assessments

UNDERWRITING MANUAL

967–970

may continue, as well as the total payment required . Even though
special assessment payments may be required for only a few years,

they should be given consideration in the rating. A few years
of high special assessments may seriously affect marketability and

desirability for home ownership.

Special care must be taken in

cases where special assessments are in the nature of ad valorem taxes.
In such cases, each individual property is security for an entire bond
issue and cannot be freed from the special assessment lien until the
bond issue has been entirely retired . Low ratings of this feature
must be given in all such cases, and if the special assessment bur
dens are excessive, reject ratings may be warranted.
APPEAL

968. The factors affecting this feature are natural phy

sical charm and beauty of surroundings, geographical position of
location , appearance of street layout, harmonious character of build
ings, social attractiveness of environment, and freedom from nui
sances. In rating Appeal, consideration is not given to factors in
cluded in other features in the Rating of Location , except as spe

cifically discussed under the features, Protection from Adverse In
fluences and Freedom from Special Hazards. Appeal is purely
relative and is to be measured by the attitude of the income group
or the social class which constitutes the market for properties near

the location under consideration .

Thus, it will be possible for a

neighborhood in a low price range to possess as high an appeal for
its prospective market as a neighborhood in a high price range.
Appeal is measured by a comparison between competing areas of
the same price range where the market is made up of the same income
groups.

969. Natural Physical Charm and Beauty of Location .
In general, mortgage risk is minimized if locations and their sur
roundings are physically attractive. For example, the market for
high priced properties may prefer certain distinctive characteristics

such as rolling topography, pleasing landscaping, wooded lots, and
presence of brooks. However, the mere presence of these character

istics is not ratable, but the comparison between characteristics found
in competing locations is the basis for rating. It may be that lower
priced locations do not have such attributes.

On the other hand ,

such locations may possess physical charm principally because of
well kept homes, grounds and streets. Therefore, it is equally pos
sible to obtain high ratings for this feature in lower priced locations.

970. Geographical Position of Location . The geograph
ical position of the location may have a distinct bearing upon the

RATING OF LOCATION

970-974

rating of this feature. Broad vistas, pleasing views, and climatic
advantages resulting from geographical position are factors which

will tend to attract people to a location. Appeal will be adversely
affected , however, if the approach is through an unsightly area .
971. Layout and Plan of Neighborhood. Attractive
street layouts which are suitable to the character of improvements
and which preserve the natural charm of the land are elements of

appeal. Areas so laid out have a tendency to remain desirable to
present owners and to command the continued interest of prospective
purchasers.

972. Architectural Attractiveness of Buildings. The
appeal of a location is strengthened if the buildings in the immediate
neighborhood are attractive as a group and harmonize with each

other and with their physical surroundings. Neighborhoods may be
encountered in which the predominant architectural design is inap

propriate to the community. A location under this influence lacks a
degree of the appeal attributable to other locations in more har

monious environments. A pleasing variety that results in harmoni
ously blended properties is greatly to be desired and should result in

a high rating of this feature. Variety does not mean an incongruous
mixture resulting in unpleasing contrasts. It has been demonstrated
that pleasing variety for neighborhoods and entire developments can

be successfully accomplished even in areas designed for modest
homes .

973. Social Attractiveness. Satisfaction , contentment,

and comfort result from association with persons of similar social
attributes. Families enjoy social relationships with other families

whose education , abilities, mode of living, and racial characteristics
are similar to their own. Appeal which is attributable to significant
social influences is frequently indicated by the relationship of com
petitive locations to the paths of city growth . Locations which lie
in a path of city growth generally indicate the presence of certain
strong elements of appeal which in themselves have influenced the

direction of residential development. Appeal is, however, purely
relative and is to be measured by the attitude of the income group or

the social class which constitutes the market for properties near the
location under consideration .

974. Nuisances. Billboards, service stations, offensive
noises and odors, unsightly properties, and stables may be examples
of nuisances which are objectionable to neighborhood occupants and

which adversely affect appeal and should be recognized in the rating
of this feature .

UNDERWRITING MANUAL

975–978

SPECIAL CONSIDERATIONS IN RATING UNDEVELOPED SUBDIVISIONS
AND OTHER SPARSELY BUILT AREAS

975. The instructions and principles for developed neigh

borhoods set forth in the foregoing paragraphs apply equally to un
developed or other sparsely built areas. When judging the latter, it
is essential to look into the future and forecast the environment that

will likely be created because of the existence of certain conditions in
combination with certain assumptions. Special consideration is given
various features when rating such locations. These special considera
tions are outlined in succeeding paragraphs.
976. Successful new areas are recognized as the best mort

gage lending areas. To be successful, a new or partially developed
area must reach a stage of being substantially built up within a

period of a very few years. Due to the fact that most outlying resi
dential areas will be developed as a result of the decentralization

movement rather than as a result of population increases, the eco
nomic background of the community assumes great importance, since
those communities which will experience a prosperous future will
decentralize and build new residential areas much faster than those

for which a less advantageous future is forecast.
977. Since assumptions in combination with certain
known conditions constitute the basis for rating, new and partially
developed locations require low ratings; that is, satisfactory areas
receive a passing but not a high rating. As the character of these
areas is established , subsequent ratings will reflect the new existing
conditions. The character of the area becomes evident when a con

siderable percentage of lots have been improved, or when a satis
factory concentration of dwellings is present. The wave system of
development — or concentration of improvement and building activity
in one portion of the subdivision until it is established, before start
ing activity in an adjoining section — is an orderly procedure which
may greatly reduce mortgage risk. Such a program assures struc
tures of the same age, and if development is halted for any reason ,
the close grouping of homes will not decrease neighborhood and loca
tion stability .

978. In the early stages of development, most locations

in undeveloped subdivisions will not warrant ratings sufficiently high
to qualify for mortgage insurance unless the ratings are predicated
upon compliance with certain conditions designed to assure satis

factory standards of the subdivision. Ratings will usually be predi
cated upon such conditions as installation of streets and utilities,
restrictive covenants applying to all lots in the subdivision, liquida
tion of delinquencies in taxes or mortgage debt, and, in some cases, the
construction and sale of a specific number of additional homes. The

RATING OF LOCATION

978-980

latter predication is made only if additional sales of new homes are
necessary to establish the character of a neighborhood. If such
predications are made, they are set forth as conditions on the Re
port of Chief Underwriter, FHA Form No. 2017, and subsequently
on the commitment.

979. Relative Economic Stability. In rating this fea
ture,
both
class
basis

the Valuator considers the combined income characteristics of
occupants and persons constituting the market for the price
of improvements contemplated. Since an assumption is the
for rating, high ratings are seldom justified.
980 (1). Protection from Adverse Influences. The
Valuator should realize that the need for protection from adverse

influences is greater in an undeveloped or partially developed area
than in any other type of neighborhood. Generally, a high rat
ing should be given only where adequate and properly enforced zon
ing regulations exist or where effective restrictive covenants are

recorded against the entire tract, since these provide the surest pro
tection against undesirable encroachment and inharmonious use . To
be most effective, deed restrictions should be imposed upon all land
in the immediate environment of the subject location.
980 (2). Carefully compiled and fully enforced zoning
regulations are effective because they not only exercise control over
the subject property, but also over the surrounding area. However,
they are seldom complete enough within themselves to assure a homo
geneous and harmonious neighborhood.
980 (3). Recorded restrictive covenants should strengthen

and supplement zoning ordinances and to be really effective should
include the provisions listed below . The restrictions should be re

corded with the plat, or imposed as a blanket encumbrance against
all lots in the subdivision, and should run for a period of at least
twenty -five to thirty years. Recommended restrictions should in
clude provision for the following :
a. Allocation of definite areas for specific uses such as single

or two-family houses, apartments, and business structures
6. The placement of buildings so they will have adequate light
and air with assurance of a space of at least ten feet
between buildings
c. Prohibition of the resubdivision of lots

d. Prohibition of the erection of more than one dwelling per
lot

e. Control of the design of all buildings, by requiring their

approval by a qualified committee, and by appropriate
cost limitations or minimum square foot ground floor areas

UNDERWRITING MANUAL
980

f. Prohibition of nuisances or undesirable buildings such as
stables, pig pens, temporary dwellings, and high fences

g. Prohibition of the occupancy of properties except by the
race for which they are intended

h. Appropriate provisions for enforcement
980 (4). The fact that zoning regulations and restric
tive covenants exist does not necessarily mean that a high rating

is warranted. The type of use permitted by such regulations should
be carefully analyzed. Frequently areas are zoned and restricted
in a manner that would encourage land use which would greatly
decrease its desirability for residential purposes. The protection
provided should be appropriate to the best use of the land.
980 (5). Some areas in which there are no zoning regu
lations or restrictions may be considered properly protected because
of the favorable topography or geographical position of the land.
The natural protection afforded in such instances might be sufficient
to warrant a good rating.
980 (6). Additional protection and stability are afforded
by city or county plans and subdivision regulations that are offi
cially recognized and enforced. Such plans will protect residential

streets against becoming noisy, high speed traffic arteries; will estab
lish barriers between residential properties and industrial or railroad
properties; and will assure that the growth of the city will be

orderly and harmonious. To be favorably considered for mortgage
insurance, any undeveloped subdivision falling within the jurisdic
tion of a city, county, or regional plan shall conform to such plan
and regulations. These regulations are sometimes evaded through
the sale of property by metes and bounds. When a subdivision is
sold in this way the plot plan can be changed at the wish of the

developer. For this reason, it is highly preferable that a subdivision
be sold from a recorded plat.

980 (7). A partially developed area that remains long in
that condition represents, in itself, an adverse influence which will
make the area undesirable for mortgage lending. Complete reliance
should not be placed on deed restrictions and zoning in such areas.
Other factors which will assure early development of the area must
be considered to weigh fully the protection afforded against stagna
tion, slow or unhealthy growth . Among the factors which tend to
offer such protection are the following:
a . Situation of development in the path of city growth

6. Contemplated use of land for best purposes, considering
such.conditions as topography, character of land, and sit
uation of area

RATING OF LOCATION
980–984

c. The need and demand for properties of the price class
contemplated

d . Combined cost of lot and improvements approximating
selling prices and values of completed properties

e. Development planned in accordance with accepted stand
ards of good housing
f. A financially capable developer who enjoys the confidence
of the market

981. Freedom from Special Hazards. Considerations
under this feature include the degree to which dangers to personal
safety are nullified.

982 (1). Adequacy of Civic, Social, and Commercial
Centers. These elements of comfortable living usually follow rather

than precede development. Those centers serving the city or section
in which the development is situated should be readily available to
its occupants. Schools should be appropriate to the needs of the new
community and they should not be attended in large numbers by

inharmonious racial groups. Employment centers, preferably diver
sified in nature, should be at a convenient distance.
982 (2). The development which bases its sales program

almost solely upon lower cost land in order to compensate for its

inaccessibility to community and cultural centers, will seldom prove
successful, especially if the sales appeal is to the low - income group .
983 (1). Adequacy of Transportation. It is necessary
to determine the degree in which transportation facilities will meet
the requirements and desires of the prospective purchasers of homes
in the new area and compare the standing of the area to com

peting areas. In a development for the low-income group , an in
crease of a few cents in the cost of transportation may seriously
affect the marketability of otherwise desirable properties. Reliance
upon private automobiles alone cannot be considered adequate trans
portation for any except the higher income groups, and even in

these groups suitable public transportation facilitiesgreatly increase
the desirability of the area .

983 (2). At times, transportation facilities to outlying
new areas will be planned, though not installed. In such instances a
low rating is required until the transportation is physically present.
A rejection is indicated unless adequate facilities are definitely
assured even though planned and anticipated.
984 (1). Sufficiency of Utilities and Conveniences. In
all cases there must be appropriate and necessary utilities and street
improvements installed, or definite assurance given that such fa
cilities will be furnished.

Due to climate and local custom and

UNDERWRITING MANUAL

984

conditions, street improvements and utilities that might be consid
ered satisfactory in one section of the country may be undesirable in
another. No hard and fast rules can be drawn covering the type of
improvements. However, the streets should be graded and prop
erly surfaced.

984 (2) . If the water is furnished by a private organiza

tion rather than from public mains, the financial standing of the
water company should be carefully investigated. It has been a

practice insome localities for developers to increase the water rates
after all the lots have been sold, thereby forcing the lot owners to
purchase the system at an exorbitant price. In many cases it is
advisable to deed the lot owners an interest in the private water
system with appropriate provisions for operation and maintenance .
There must always be definite assurance of an adequate supply of
pure water at reasonable cost.

984 (3). Water supply from wells is seldom satisfactory.
The danger of pollution is always great. Little or no fire protection
is provided , and the cost of the construction of the well and of

installing the necessary pumping system is usually as great or greater
than the per lot cost of water mains. With very few exceptions, and
only when the lots are generous in size, and when the supply and
purity of the water have been certified as satisfactory by the local or
state health authorities, should water supply from individual wells
be considered satisfactory, and only under exceptional circumstances
should a high rating be given. In judging the adequacy of a water

system , the size of the mains, assured supply, and pressure must be
considered .

984 (4). There must be means of disposing of domes

tic sewage in a sanitary and unobjectionable manner which meets the
approval of the local and state health authorities. If public sewer
mains are not installed or readily available, approved individual

septic tanks may be used . If the soil is heavy and the drainage is
poor, septic tanks or cesspools may become a real hazard . If the cost
of extending the city sewers is no greater per lot than the cost of a
properly designed septic tank and tile disposal field, the extension
of the sewer line is greatly to be preferred.

984 (5). An excellent gauge of the appropriateness and
the quality of utilities and street improvements is the standards
established for dedication and acceptance by the municipality. If
the utilities and street improvements are dedicated to, and accepted
by, the city, township or county, the responsibility for maintenance is
transferred from the property owners and there is assurance that

the construction is appropriate to the climate and needs.

RATING OF LOCATION
985-986

985 (1). Level of Taxes and Special Assessments. The
tax and assessment burden to which properties in an area are liable
exerts a tremendous influence on the future of any residential area .

In the case of an undeveloped area it will be necessary for the
Valuator to determine what the approximate burden will be. He

should ascertain whether the improvements are to be put in by the
developer and included in the lot price, or whether their cost will be
paid by yearly assessments. In either case , he should reduce this
expense to a front- foot cost basis for purposes of comparison. In

most communities complete street improvements and utilities range
in cost from $ 7 to $15 per front foot. When the improvement costs
are greatly in excess of these figures, heavy delinquencies in purchase
contracts or in assessments may usually be expected. The cost of
these improvements will not always decrease with the cost of the con

templated dwelling, since with small lots and increased density of
population better traffic facilities are needed and larger sewer and
water mains must be installed. Consequently, cases will frequently
be found where the front -foot improvement costs for high priced
homes is considerably less than the cost of such improvements for a
low income group with small lots.

985 (2 ). In the case of a partially developed area, the

Valuator should investigate the number of delinquencies in purchase
contracts and in assessments. When a disproportionate number of
owners are found to be in arrears, it should be considered a danger

sign and he should govern the rating accordingly.
985 (3) . Some State tax moratorium plans provide an
excellent medium for recasting accumulative burdens from overdue
tax and assessment payments. The security offered by such plans
as well as the lowering of the taxes payable should be considered
when encountered .

985 (4). If too expensive improvements are installed in
an area or an uneconomical layout has been designed , the tax and
assessment burden will prove heavy. The Valuator will compute
the entire tax and assessment payment required for the typical prop
erty in any new area and will make his rating by comparing this
payment with that required for typical properties in competing
areas .

986 (1) . Appeal. In rating the appeal of an undevel
oped or other sparsely built area , the effect which the contemplated
program of development will have on the attractiveness of the area
will be considered together with existing conditions.

UNDERWRITING MANUAL

986-987

986 (2). In addition to the regular considerations under

Appeal, special attention should be given to the following factors :
a. Have care and intelligence been used in planning the street
and lot layout ?
6. Has consideration been given to the topography and to
natural features ?

c. Have efforts been made to save the trees and to beautify
the landscape ?

d . Does sponsorship contribute to appeal?
SUMMARY OF SIGNIFICANT CONSIDERATIONS

987. The following classification summarizes the prin
cipal considerations involved in the rating of each feature of the

Location category :
Relative Economic Stability

Stability of Family Incomes
Sufficiency of Family Incomes

Social Characteristics of Neighborhood Occupants
Stage and Trend of Neighborhood Development
Probability of Forced Sales and Foreclosures
Protection from Adverse Influences

Zoning
Restrictive Covenants

Natural Physical Protection

Surrounding Homogeneous Neighborhood
Quality of Neighboring Development
Ribbon Developments
Nuisances

Freedom from Special Hazards
Topography
Subsidence

Earthquake, Tornado or Hurricane Hazard
Flood Hazard
Traffic Hazard

Fire and Explosion Hazards
Hazards to Health

Adequacy of Civic, Social, and Commercial Centers
Quality and Accessibility of Schools
Quality and Accessibility of Shopping Centers and Amusements
Quality and Accessibility of Churches, Clubs, and Recreation
Centers

Adequacy of Transportation
Diversity of Available Services

Quality and Frequency of Services
Cost of Service
Distance from Location to Service
Time Required to Destinations
Condition of Streets and Roads

RATING OF LOCATION

987

Sufficiency of Utilities and Conveniences
Presence of Required Utilities
Quality of Utilities
Cost of Services

Level of Taxes and Special Assessments
Relationship of Tax Burden with Competitive Locations
Nature , Cost, and Duration of Special Assessments
Appeal

Natural Physical Charm and Beauty of Location

Geographical Position of Location
Layout and Plan of Neighborhood
Architectural Attractiveness of Buildings
Social Attractiveness

Nuisances

PART II

SECTION 10
RATING OF BORROWER

CONTENTS
Paragraphs

General Rating Instructions ..

1001-1010

Social and Economic Characteristics Motivation in Relation to Transaction ..

1011-1018

Employability and Earning Stability
Relation of Obligations to Transaction.
Relation of Income to Transaction -

1038-1049
1050-1057
1058-1066

Co-makers, Co -signers, Endorsers, and Guarantors_

1067–1069

1019_1037

Effective February, 1938
Federal Housing Administration

PART II
SECTION 10

RATING OF BORROWER

GENERAL RATING INSTRUCTIONS

REJECT

FEATURE

2

1

3

4

RATING

12

15

a

Attitudes

Rating of Borrower

Social and Economic Charac

teristics
10

15

20

25

8

12

16

20

12

15

20

25

Motivation in Relation to
Employability and Earning
Stability
3

3

Pay
to
Ability

Transaction

6

19

Relation of Obligations to
Transaction
10

15

Relation of Income to Trans
action

TOTAL RATING OF BORROWER

1001. The following instructions apply to all cases in

which the borrower is an individual except those individuals and part
nerships engaged in the production of new dwellings for sale, the sale
of existing dwellings, or otherwise conducting the business of real
estate. The rating grid for the Rating of Borrower appears on the
Report of Mortgage Risk Examiner ( Individual Borrower ), FHA
Form No. 2016 , and contains five features. It is illustrated above.
1002. Rating of Borrower shall be accomplished by rat
ing separately each of five features. The five features have been
weighted on a scale of 100 points in order to retain the relative
importance of each when all are combined to obtain the Total Rating
of Borrower. Each feature is marked on a scale from 1 to 5, 5 being

the highest rating. After analysis of the factors comprising a
feature, an X mark is placed in the column which is determined to
reflect the degree of risk involved. If the X mark is placed in any
column other than the Reject column the figure appearing in the
marked square is carried over to the extreme right hand column of the

UNDERWRITING MANUAL
1002-1005

grid. If the X mark is placed in the Reject column, the word “ Reject”
is carried over to the extreme right hand column of the grid. One

such rating in any feature will necessitate a recommendation for
rejection of the application for insurance. When the word “ Reject ”
appears in the Rating column, it must also be written in that column
on the Total Rating line. If no such rating appears after any of the
features, the final rating of the category is obtained by adding the
figures in the Rating column. The system is so designed that this
figure will be an indication of the rating on a numerical basis.
1003. Mortgage risk is vitally affected by the borrower .
In recognition of this fact, the National Housing Act requires that
a mortgage, to be eligible for insurance, must " contain complete
amortization provisions
requiring periodic payments by the
mortgagor not in excess of his reasonable ability to pay as deter
mined by the Administrator. " Therefore, analysis of all credit

factors is a necessary part of the risk rating system . This is inter
preted to mean that the practice of attempting to make acceptable

an otherwise ineligible note or bond by requiring co -signers and
co -makers, not closely related to the borrower, is to be discouraged.
Furthermore, the quality and value of real estate security cannot

compensate to any great degree for the lack of a satisfactory
borrower.

1004. Complete information on the borrower must be

assembled. In making the Rating of Borrower, the Mortgage Risk
Examiner may have the following data available :

a. The Mortgagors' Statement accompanying the Mortgagee's
Application for Insurance

6. Experience of mortgage lending institutions that have held,
or are holding, mortgages on properties owned by the

borrower, including the property described in the appli
cation

c. Remarks in the Report of Valuator
d. Results of inquiry directed to references
e. Factual Data Reports on the borrower from credit report
ing agencies
f. Commercial Report from a commercial agency on employers
and corporations, partnerships, or individual enterprises
from which the borrower derives a substantial portion of
his income

g . Other pertinent information
1005. If it is deemed advisable to direct inquiry to any

reference, definite information should be requested with the under
standing that the information will be held strictly confidential. Defi

RATING OF BORROWER

1005-1010

nite questions should be asked in an attempt to clear up apparent
discrepancies that may have appeared in information already ob
tained . This may be accomplished by letter or otherwise. Form

letters are provided for use in making typical inquiries and shall be
used where applicable. Verbal information shall be reduced to writ
ten form and recorded with other accumulated factual data .

1006. The procedure used to secure Factual Data Re
ports from credit reporting agencies is described in Section 2, Under
writing Procedures. The Chief Mortgage Risk Examiner has author
ity, in all cases in which he considers it necessary or advisable, to
obtain Factual Data Reports from any credit reporting agency
approved by the Underwriting Division , Washington , D. C., and

assigned to service the Insuring Office. A standard form of report
is used . Commercial credit reports from an approved agency are
also available to all Insuring Offices.

1007. The information in the Mortgagors' Statement
should be compared with information from all other sources . Par

ticular attention should be given to checking the reported income,
related responsibilities, and the outstanding obligations of the bor

rower. Should any serious discrepancy appear in the information
derived from the various sources, it must be explained or reconciled
before the Rating of Borrower is completed.
1008. The rating of the borrower is neither a mechanical
compilation of facts and figures, a perfunctory analysis, nor an

expression of a casual conclusion or judgment. It involves careful
study. A very definite responsibility rests on the Mortgage Risk
Examiner not to draw hasty or poorly supported conclusions. The
information which he uses must come from reliable sources and

should be complete. He must always be careful to see that his deci
sions are well founded and do justice to borrowers as well as to the
Federal Housing Administration . Cases in which the borrowers'
characteristics, circumstances, and prospects are such that insurance

of their mortgages should be declined shall be handled with certainty
and decisiveness.

1009. The five features and their weights are as follows:
a . Social and Economic Characteristics .

0. Motivation in Relation to Transaction .
mployability and Ea ing Stability
d . Relation of Obligations to Transaction.
e . Relation of Income to Transaction .-- .

15
25
20
15
25

1010. The five features are classified into two groups

according to the point of view used in rating them . The two groups

are “ Attitudes ” and “ Ability to Pay ." The first two features, Social
and Economic Characteristics and Motivation in Relation to Trans

.

UNDERWRITING MANUAL
1010_1013

action , are considered from the point of view of Attitudes. The

word “ Attitudes" is placed in the extreme left margin space on the
grid to remind the Mortgage Risk Examiner to consider these fea
tures in terms of Attitudes. The other three features, Employ
ability and Earning Stability, Relation of Obligations to Transac

tion, and Relation of Income to Transaction, are considered from the
point of view of Ability to Pay. The words " Ability to Pay" are
placed in the extreme left margin space on the grid to remind the
Mortgage Risk Examiner to consider these features in terms of

Ability to Pay. The first feature, Social and Economic Charac
teristics, reflects the inherent attitudes of the borrower. The second
feature, Motivation in Relation to Transaction , reflects the relation
ship of the borrower's attitudes to the mortgage transaction. The

third feature, Employability and Earning Stability, reflects the
degree to which the borrower is able to establish and maintain income.
The fourth feature, Relation of Obligations to Transaction, reflects
the characteristics of the borrower's obligations in relation to the con
templated mortgage obligation. The fifth feature, Relation of
Income to Transaction, reflects the anticipated relationship between
the borrower's financial prospects and the mortgage transaction ,
SOCIAL AND ECONOMIC CHARACTERISTICS

1011. The rating of this feature is based upon an anal
ysis of the borrower in his social and economic relationships, independ
ent of the mortgage transaction , and is determined by analyzing fac
tors such as character, family life and relationships, associates,
maturity, attitude toward obligations, and ability to manage affairs.
1012. Character. Character is defined as the sum of the

traits and habits that constitute a person's mental and moral being.

Although the elements of character in their fullest significance are
too deeply rooted to distinguish with complete accuracy , it is reason
able and practicable to assume that in most cases a borrower's char
acter is evidenced in the reputation he has established . A borrower's

reputation over a considerable period of time is usually indicative of
his thoughts, actions, and degree of moral stability. His habits
and conduct are generally a good indication of his moral standards
and ethical principles. Reliance cannot be placed upon character
until complete and definite information on reputation has been
secured .

1013. Family Life and Relationships. The borrower's
immediate family life and relationships usually denote the degree

of his general stability. Harmonious home life is a significant fac
tor in the desire for maintaining a home. The family that pursues

RATING OF BORROWER

1013-1016

the accepted moral and economically sound courses in its everyday
life presents the best mortgage risk. Disregard of moral responsi

bilities and failure to guard against excessive expenditures endanger
family unity. The presence of discord discourages the assumption
of continuing responsibilities. Unsatisfactory domestic relationships
should be readily discernible because they are usually facts of gen
eral knowledge.
1014. Associates.

The characteristics of a borrower

are also indicated by the type of persons with whom he associates.
Individuals who have interests, habits, and ethical codes in common

usually associate with each other. This makes it possible to draw
certain conclusions by obtaining information regarding the people

with whom the borrower constantly associates. It is probable, in
most cases, that more significant inforination is obtained by con

sidering the character and type of people with whom the borrower
associates socially, rather than those with whom he is associated
in business activities. However, the latter group must not be
ignored . The important consideration is the type of people who are
voluntarily selected as associates, rather than those with whom the
borrower is thrown into association by circumstances other than
choice. The highest rating could hardly be ascribed in cases where
the borrower's chosen associates are other than substantial, law abid
ing, sober-acting, sane-thinking people of acceptable ethical
standards.

1015. Maturity. Consideration should be given to the
borrower's maturity, for the reason that maturity contributes to

stability. It is not implied that a young borrower necessarily lacks
stability of character or purpose , but age should lend maturity of
judgment to a borrower. Distinction should be made between bor
rowers with established characteristics and borrowers whose char
acteristics remain to be established.

1016. Attitude toward Obligations. This important
factor reflects the borrower's performance with respect to the pay
ment of his financial obligations. A review of the borrower's past

record in the discharge of such obligations will be a clue to his
future attitude in the assumption and payment of obligations. The
borrower's paying record may indicate that he attaches varying

degrees of importance to different types of obligations. Such an
attitude does not depict a full sense of responsibility. The borrower
with the best attitude not only attaches importance to the payment
of debts incurred for merchandise or services for which there is

recurring necessity, but also to the liquidation of debts incurred for
merchandise or services for which there is only an intermittent need

UNDERWRITING MANUAL

1016-1020

or desire. With regard to mortgage loans, it is usually found that

borrowers with domestic responsibilities are more dependable than
those without such responsibilities. The borrower's attitude toward
his obligations is duly influenced by the degree of cooperation that
he receives from the members of his immediate family.
1017. The condition of the borrower's obligations is an

indication of his attitude toward them . Past litigations should dis
close his control over, and the degree of his adherence to his con
tractual obligations. A lack of management in his affairs may have
resulted in suits, judgments, or even bankruptcy. Such a situation
may divulge an improper attitude of the borrower, or may reveal
mitigating circumstances by reason of forces beyond his control.
The attitude of the borrower should be not only one of willingness

but also of eagerness to comply with any agreement or contract to
which he is a party in order to warrant the highest rating of this
feature. While other social and economic characteristics of the bor

rower may contribute to a high rating of this feature, the rating will
be lower in proportion to the degree of irregularity with which he
meets his obligations. The borrower's attitude toward his obliga

tions may be sufficiently careless or irresponsible to warrant a reject
rating of this feature.

1018. Ability to Manage Affairs. This factor requires

an analysis of the borrower's characteristics with respect to his attitude
in the control of his affairs, particularly those with an economic

significance. The borrower with a sense of balance will guard against
assuming responsibilities that do not enhance his own or his family's
opportunities with a full measure of compensation. He will also main
tain a position that will permit some adjustment or adaptation to
unforseen exigencies. He will save, plan , budget his income, and gov
ern his conduct in other activities in

manner that will allow him to

adjust, adapt, or arrange his affairs.
MOTIVATION IN RELATION TO TRANSACTION

1019. The rating of this feature is based upon the an
alysis of the motives which prompt the borrower to enter into the

mortgage transaction and is determined by analyzing factors such as
cash investment, motives for borrowing, and importance of the prop
erty to the borrower.
1020. Cash Investment.

Cash investment is the amount

represented by the difference between the purchase price of the prop
erty and all encumbrances secured by such property. Cash invest
ment is a directly contributing element to motivation . Experience
has shown that a man will make strenuous effort to preserve the asset

RATING OF BORROWER

1020_1025

in proportion to the amount of cash invested in the property. The
greater the cash investment, the greater is the incentive that motivates

the borrower to faithful performance in the transaction. The cash
investment should be sufficient to indicate that the borrower will

have a continuing motive to keep the mortgage in good standing
until maturity. Therefore, it shall be determined that the borrower

is in a position, in addition to undertaking the mortgage obligation,
to establish a bona fide cash investment in order to create and encour
age an attitude toward the mortgage obligation which will justify
the presumption that he will make every effort to discharge the debt.
1021. The minimum requirements for cash investment or
its equivalent are contained in Section 5, Minimum Eligibility Re

quirements. Although the cash investment eligibility requirement
applies only to transactions in connection with recent purchases, it
is a fact that the greater the cash investment, the greater is the
motivating influence throughout the life of the loan .
1022. The cash investment requirement is not a minimum
eligibility requirement when the borrower is (a) placing a mortgage
on property owned continuously for a period of time sufficiently long
to establish the fact that the proposed mortgage is not a part of the
purchase consideration, (b) refunding a mortgage on such property,
or (c ) placing or refunding a mortgage on property acquired by
outright gift, inheritance, or bequest.
1023. Cash investment may be represented by equivalents
in the form of commodities, investments, chattels, labor, or services.
The equivalent value of commodities, investments and chattels should
be determined by the cost or market value of the equity therein ,
whichever is the lesser amount. The equivalent value of labor or
services should be determined at prevailing rates. Cases involving
he equivalent of cash investment require the most careful investiga

tion to ascertain the validity of such representation.
1024. In cases of repossession of title, the equity that

may have been established prior to foreclosure shall be deemed as
lost and shall not be accepted in lieu of the required cash investment
or portion thereof, but shall be subjected to the cash investment
requirement as previously outlined with respect to initial purchases.
1025. In rating this feature, it is necessary to take into
consideration the presence and amount of cash investment. This
feature, as influenced by this factor, should reflect a more favorable
rating as the invested equity is in greater amount. Where the bor
rower is unable or unwilling to make a cash investment sufficient for
economic soundness the case shall be rejected under this feature. In

every case, the required cash investment must equal or exceed the

UNDERWRITING MANUAL

1025_1030

minimum requirement prescribed in Section 5, Minimum Eligibility
Requirements.

1026. Motives for Borrowing. Where the proceeds of
the mortgage will be soundly used , it may be presumed that the
borrower will maintain a better attitude toward the obligation than

he would if the proceeds are used unsoundly. Generally, the re
financing of existing liens, the purchase of a home, or the financing
of desirable property improvements may be regarded as sound

motives. Therefunding of obligations, prudently incurred, is also a
sound motive. On the other hand, use of the proceeds for specula
tion, pleasure trips, or other purposes which gratify transitory de
sires, may generally be regarded as unsound motives.

1027. The basis of the analysis is not the precise use

of the loan proceeds but, rather, the justification for the proposed
use. Thus, indebtedness incurred for business, travel, or education
may or may not evidence prudent judgment. The underlying cir
cumstances should be regarded in the light of their effect on moti
vation in the mortgage transaction. Generally, mortgage loans made
because of illness, debts, or unemployment are economically unsound.
There may be conditions, however, that obviate this general rule.
For instance, an illness in the family may entail an appreciable out
lay of funds beyond the borrower's immediate ability to meet, but
not beyond his ability to meet over an extended period of time.
Again, while the use of mortgage proceeds for the purchase of a
home is generally sound, the allocation of funds to such purpose
is unsound if the home is excessively priced, cheaply constructed ,
poorly located , or too costly in relation to income.
1028. The application frequently reveals the intended
use of the proceeds of the loan . Where this information is not

revealed, a reasonable attempt should be made to ascertain the
intended use of the money.
1029. Importance of Property to Borrower. This
factor indicates the degree of the sacrifice the borrower will make in
order to retain the property. The borrower's motivation in this
respect should be analyzed from the aspects of owner occupancy , of
an investment, and of speculation. Motives of a borrower who
occupies the property are more significant than the motives of an
investor, and still more so than the motives of a speculator.
1030. The importance of the property to the owner occu

pant is significant in many phases. Foremost in this respect is the
fact that most borrowers will subject themselves to more sacrifices
in the maintenance of a home than in any other obligation . A home
is an investment that involves more than dollars and cents. It has

sentimental attachments that cannot be entirely measured with

RATING OF BORROWER

1030_1035

money. Such attachments are too numerous to mention completely
but, for illustration, the property may be the family homestead.

It

may be the property representing the borrower's first investment.
The architecture and design may have a particular appeal. The
advantages offered in the location of the property may include his

torical significance, early associations, proximity of relatives or
friends, desirable social environment, or accessibility to daily neces
sities and conveniences.

1031. The borrower derives a measure of prestige from
home ownership that often enhances his position or that of his family
in the business and social worlds.

1032. The borrower who acquires property for occu
pancy in a location inhabited by a class or race of people that may

impair his interest in the property — and thereby affect his motiva
tion - should be ascribed a lower rating in this feature to reflect the

diminishing importance of the property to the borrower. Diminish
ing importance from this source may reduce motivation to a degree
justifying rejection of the borrower in this feature. A borrower who
has continued to live under similar conditions may not be subject to
as great a penalty in the rating of this feature, because some motiva

tion may be evidenced .

1033. The advantages or disadvantages presented by a
comparison between the expenses incident to homeownership and the
cost of rent for similar accommodations are another element in the

consideration of this factor. A borrower may be inclined to strain
his ability to meet the expenses attendant with home ownership to
a greater degree than he would in paying rent for comparable

quarters. However, there is an expense limit for him beyond which
the importance of the property will diminish .
1034. The same concepts as outlined in the preceding

paragraph are the governing considerations of the importance of
the property to the borrower in the comparison of price and value.
A property purchased at a “ bargain ” price creates free equity for
the purchaser. It is natural that equity acquired without cash outlay
lends an additional interest to the borrower in the property. The
trend of increased value will likewise reflect greater importance to
the borrower .

1035. A distinction should be made between full time

and part time occupancy in analyzing the degree of importance the
property holds for the borrower. It is reasonable to presuppose that
the borrower will attach more importance and undergo greater sacri
fice for a home used as a permanent residence than he will for a tem
porary shelter used only during certain periods of the year. The per
manent home is essentially a necessity, while the seasonal or part

UNDERWRITING MANUAL

1035-1040

time residence would be relinquished if both dwellings became too
great a financial burden to the borrower.

1036. A borrower who owns a property as an invest
ment to be tenanted by someone other than himself will attach
importance to it only so long as it affords or promises to afford him a

net return . The borrower's position should be carefully analyzed in
order to determine from his annual income whether he can afford

to own the property and whether the contemplated mortgage obliga
tion will absorb his income to an extent that will adversely affect his
motivation .

1037. There will be occasions when the borrower applies

for a mortgage loan on a property primarily intended for sale. The
borrower may even reside in the property but such occupancy does
not have the same elements of motivation attendant with permanent

occupancy. His motive will be greatly influenced by marketing
possibilities and trend of value.
EMPLOYABILITY AND EARNING STABILITY

1038. The rating of this feature is based upon an anal
ysis of the borrower's ability to establish and maintain stability of
income. Emphasis is placed on the future continuity of income and
not on the amount of his income. It is rated by analyzing factors

such as versatility, personality, employment, occupational impair
ment, reemployment possibilities, reserves and contributions, age,
and health .

1039. Versatility. This factor requires an analysis of

the attributes that qualify the borrower for employment. Versatility
is a desirable quality. A degree of versatility in a borrower may be
developed by education and training. It may enhance and enlarge
his opportunities, because it enables him to compete on more favorable
terms, not only in his own line of work but in other fields of endeavor.
A certain measure of versatility may be necessary in borrowers

whose line of employment evidences the hazards of occupational im
pairment or indicates a decline through declining economic necessity.
A borrower may have little or no education and still qualify for
employment, but education or training usually lends greater assurance

of employment, and a higher education or training develops greater
adaptability of his talents to the possibilities for advancement.
1040. Knowledge derived from either education or train

ing, or both, when practicably applied, is an essential contribution
to earning stability. The borrower must be able to adapt himself
to the opportunities for which his education and training have fitted
him in order to apply his knowledge to its best use. This does not
mean that the borrower must necessarily have an advanced education

RATING OF BORROWER

1040_1044

to qualify as proficient in his chosen line of endeavor, or in any
other work in which he evidences inherent aptitude.
1041. Personality. A borrower's ability to become and
remain employed is in a measure dependent upon his personality.
Personality is reflected in the borrower's poise, speech, tact, appear
ance, courtesy, sincerity, and alertness. These are the qualities that
make for agreeable association between employer and employee, and
enhance the borrower's potentialities for continued employment and
promotion.

1042. Employment. An analysis of this factor is im
perative in order to estimate, with the greatest possible accuracy, the
borrower's earning stability. A borrower's earning ability depends
upon the exercise of his mental faculties, the use of his hands, the em
ployment of his funds, or a combination of these mediums. It is neces

sary to study the borrower's past employment record because it will

indicate his probable future performance. This record will disclose,
through experience and evidences of advancement or retrogression,
the extent of the ambitions, application, and steadiness which, when
translated into earnings, reveal the degree of regularity of income
and earning stability. It will divulge his natural ability and the

likelihood of his progress and advancement with his present em
ployer. The future possibilities of the borrower with his employer
involve two considerations. The first deals with the inherent poten
tialities of the borrower for advancement, and the second relates to
the stability of the employer. Even though a borrower possesses a
full measure of natural ability, his employer's progress may not be
sufficiently satisfactory to indicate a continued need for the bor
rower's services, or to offer opportunities for advancement to the
borrower .

1043. Occupational Impairment. There are types of
employment which present hazards to the borrower's earning sta

bility. Such types include (a) artistic careers subject to rapid de
cline in popular favor, ( b ) occupations in which skill or facility be

comes gradually impaired, (c) lines of endeavor in which gradual
occupational impairment results from the occupation itself, and (d)
occupations in which greater than the normal probabilities of acci
dental disability are apparent. In analyzing this factor, major con
sideration must be given to the probable rather than the possible

development of the impairment to employment continuity.
1044. Reemployment possibilities. The demand for
the borrower's services and his ability to compete with others
employed in similar lines of endeavor, or other lines in which he
shows sufficient aptitude to receive adequate compensation, are direct
measurements of mortgage risk . Two borrowers of similar ages and

UNDERWRITING MANUAL

1044-1048

incomes may be totally unlike in temperament and pursuits, thereby
constituting entirely different mortgage risks. The one may seek
and know how to grasp opportunities and advantages, while the
other is content with his situation. Furthermore, the one may be

following a vocation for which a reasonable future need can be
anticipated. The other may be trained in highly specialized duties

in a limited field where it would be difficult for him to obtain employ
ment if, for any reason, his present position should terminate.
1045. This factor also has particular significance in
cases where the borrower is engaged in employment of a temporary
nature. Temporary employment may be that in which the employ
er's purpose or his use of the borrower's services are limited as to
duration of time. In such cases, however, due recognition shall be
given to the borrower's versatility and consequent ability to turn his
efforts to similar or other lines of employment which have aspects
of permanence.
1046. Reserves and Contributions.

Income can also

be derived from the employment of reserve funds which the borrower
has accumulated . In analyzing this factor, principal consideration

should be directed to the reserves which produce income, because it
is the production of income that contributes to the borrower's eligi
bility with respect to his ability to pay. The sources and soundness
of such reserves are subject to the same careful analysis as income
derived from other sources. Net income derived from other assets

against which there are fixed charges shall be considered unstable in
comparison with income derived from comparable assets which are in
the form of fixed investments, such as unpledged bonds or mortgages.
The analysis of assets assumes major importance in cases where
assets must furnish income, in whole or in part, for the liqui
dation of obligations. In such cases these assets shall be analyzed
as to their degree of stability, amount, and liquidity. The presence of
reserves does not necessarily result in a high rating of this feature, nor
does their absence necessarily cause a low rating.

1047. A borrower's earning stability may be supple
mented by contributions. They are subject to the same analyses as
other types of income, and their soundness must be considered in
connection with earning stability. Unless contributions evidence
reasonable continuity, they cannot be regarded as any part of the bor
rower's earnings.
1048. Age. Age is significant in rating this feature
only to the degree that it has affected or will probably affect the
borrower's employability and consequent earning stability. While
the young borrower may not have established evidence of complete
training and experience during his initial period of employment,

RATING OF BORROWER
1048–1052

youth may be regarded as an asset rather than a liability. A bor
rower in advanced years, however, may have passed the height of
his proficiency to the extent that the demand for his services has
diminished. Such cases would not necessarily constitute a reject
rating, but they should not receive the highest rating unless the bor
rower, through the employability of funds, has sufficient earning
stability.
1049. Health. The health of the borrower is significant
only in so far as it will affect the borrower's future employment. A
temporary illness or minor disability may not threaten his employ
ment sufficiently to reflect in the rating. However, a borrower whose
employability has been interrupted by a grave illness might justify

a reject rating of this feature unless satisfactory evidence of his
return to good health is submitted .
RELATION OF OBLIGATIONS TO TRANSACTION

1050. The rating of this feature is based upon an anal
ysis of the characteristics of the borrower's obligations and their
relation to the contemplated mortgage transaction , and is determined
by analyzing factors such as nature of obligations and effect of obliga
tions on financial capacity. The rating of this feature will be low
where other ascertained obligations will precede the proposed mort

gagepayments in the family budget. On the other hand, if the pro
posed mortgage payments will be accompanied in the budget only by
the bare necessities of food and clothing, the rating will be high .
Where the mortgage payments do not exceed rent payments which

the mortgagor would be forced to pay for ordinary shelter, the rat
ing shall reflect the relatively favorable position of the mortgage
payments.

1051. Nature of Obligations. This factor requires an
analysis of the nature of the borrower's obligations, to determine
their relative significance without undue emphasis on financial

amounts. For purposes of analysis, a borrower's obligations may be
classified as those pertaining to his family and those not directly
connected with family matters. These obligations comprise those
already incurred and those that may recur or be continued into the
future. In order to determine their relative significance, the nature
of the obligations shall be analyzed in detail.
1052. The principal obligations of any borrower are

those attendant with family responsibilities, and these obligations
shall be analyzed in the light of the necessities and other benefits
which the borrower and his family require to maintain their stand
ard of living. Obligations for necessities should be considered in

the light of the costs involved in maintaining a required standard of

living. For example, an automobile may be considered a necessity

UNDERWRITING MANUAL

1052–1054

for one man, and more or less a luxury for another. Likewise, an
obligation involved in the purchase and maintenance of an auto

mobile may or may not be considered an obligation arising from
purchase and ownership of a necessity. For example, if the auto
mobile is classified as a luxury, it may be reasonable to assume that
the automobile will be sacrificed when conditions demand.

This

assumption should be considered in relation to the social and eco

nomic characteristics of the borrower . Cognizance shall be taken

of the judgment the borrower exercises in determining the economic
benefits derived from his expenditures. It is quite natural that the
typical borrower will incur obligations through home ownership
because of increased desires attributable to his pride of ownership.
However, such obligations should always bear a relative measure of

compensation and encourage the maintenance of an adjustable bal
ance in his economic situation . Because of unpredictable circum
stances, the future obligations incident to the borrower's family
are not at any time readily determinable. However, conditions

surrounding the borrower, by virtue of his environment and ambi
tions, permit reasonable inference as to their probable course in the
future. This likewise holds true with respect to obligations that do
not pertain directly to the family. The very nature of these obliga
tions should permit an analysis of the possibilities of fluctuations.
Certain obligations may be easily determined to be of a temporary
nature, or to hold probabilities of continuance or recurrence in a
greater or lesser degree.

A borrower who evidences sufficient initia

tive to adapt his budget of expenditures to meet his necessities is

deserving of a high rating in this feature.
1053. The Administrative Rules require that the bor
rower must establish that after the mortgage offered for insurance
has been recorded , the mortgaged property will be free and clear of
all liens other than such mortgage, and that there will not be out
standing any other unpaid obligation contracted in connection with
the mortgage transaction or the purchase of the mortgaged property ,

except obligations which are secured by property or collateral owned
by the borrower independently of the mortgaged property.

Viola

tions of this rule require reject ratings of this feature.
1054. When the purchase price of the property involved
in the mortgage transaction exceeds the value, the cash investment

required will exceed the real equity. The excessive purchase price
in such an instance will usually require a larger cash investment
than anticipated by the borrower and particular attention should be

directed to any probable secondary indebtedness contracted , or likely
to be contracted , in connection with the acquisition of the property
covered by the contemplated mortgage. If the larger cash invest

RATING OF BORROWER

1054-1058

ment requires the assumption of an additional obligation incurred

by a loan based on collateral owned by the borrower independently
of the mortgaged property, such a loan shall require an analysis

embodying not only the nature and effect of the obligation, but also
the quality of the pledged collateral. If the Mortgagors' Statement
indicates that the transaction cannot be closed without violation of

the Administrative Rule, the subject application shall be rejected
under this feature.

1055. Continuing obligations of a contingent nature
should be analyzed as to the probabilities of their remaining remote
or becoming actual liabilities. While it is the responsibility of the
Mortgage Risk Examiner to avoid the acceptance of borrowers whose
contingent liability will probably cause default, it is not to be pre
sumed that all contingent liabilities necessarily will become direct
liabilities.

1056. It may be presumed that the borrower will adjust
his accustomed standards of living to a reasonable extent, and
thereby correspondingly reduce his expenses. However, such adjust
ments will have their limitations because of the average man's incli

nation to raise, rather than lower his scale of living. The analysis
should reveal the degree of sacrifice and subordination that the bor
rower, if necessary , will make to maintain the contemplated mortgage
obligation in good standing.
1057. Effect of Obligations on Capacity. This factor

requires an analysis of the effect of the borrower's obligations
analyzed as to their nature and amounts on his earning capacity
and stability and, therefore, on the transaction . Obligations in
curred for the purpose of acquiring income- producing or income
increasing assets indicate a more favorable condition than obligations
incurred solely for transitory purposes. The character and certainty

of the income produced or increased affect the rating. Furthermore,
provisions made for the retirement of such obligations is one indi
cation of the effect of the obligation on capacity. An incidental
consideration is involved in the question of whether the borrower
received full value in the form of a sound asset for which he created

the obligation.
RELATION OF INCOME TO TRANSACTION

1058. The rating of this feature is based upon an anal
ysis of the ability of the borrower's income to pay the contemplated
mortgage obligation. Analysis shall include consideration of such
factors as ratio of property value to annual income, and ratio of
total monthly payment to income. These ratios shall be considered

UNDERWRITING MANUAL

1058-1061

in the light of the conclusions already formed when rating the fea

tures, Employability and Earning Stability and Relation of Obli
gations to Transaction .

1059. Ratio of Property Value to Annual Income.
The maximum value of residential property which the borrower can

reasonably afford to own or purchase with his annual income shall
be determined . If the value of the owned or purchased property is
not properly related to the borrower's income, a substantial risk is in
volved in the making of a mortgage loan to him. In such a case,

a reject rating of this feature will be warranted . Because the most
favorable ratio of property value to annual income in one case
may be substantially different from the most favorable ratio in

another case , its influence on the rating of this feature cannot
be ascertained mechanically. Such rules as the one that a man should
not undertake to purchase a property when the value exceeds two
or two and one -half times his yearly income, cannot be applied
blindly. An excessive ratio usually forces upon the borrower a
standard of living out of proportion to his annual income. Further
consideration must be given to the expense of owning and maintain

ing a larger and more expensive property than his earning capacity
would ordinarily justify.

1060. Ratio of Total Monthly Payment to Income.
This ratio reveals the degree to which the monthly mortgage payment
absorbs monthly income, and therefore reveals the proportion of
that income available for other living expenses and obligations. In

turn , consideration is given to other living expenses and obliga
tions, such as number of children and other dependents, the bor
rower's scale of living, cost of home maintenance, and payments re

quired by other obligations. In general, the more burdensome ratios
result in lower ratings.

1061. As in the factor, Ratio of Property Value to

Annual Income, no definite zone limits can be prescribed within
which the ratio of total monthly payment to income must fall. The
influence it will have on determining the rating of this feature

cannot be ascertained mechanically. Examples cited in the follow
ing paragraphs must not be interpreted as prescribing positive rules
for the making of ratings, for they are intended to serve merely as
guides in rating this feature. It is obvious that a favorable ratio

between monthly mortgage obligation and income for one borrower
may be an unfavorable ratio for another. Although the two bor
rowers may have the same amount of monthly incomes and monthly
mortgage obligations, a lower feature rating may result in one case
than in the other because of a wide difference in the nature of their

family responsibilities and other obligations.

RATING OF BORROWER

1062-1063

1062. Generally speaking, as family incomes are found
to be in lower brackets, progressively higher percentages of the
family income will be devoted to paying for the cost of shelter, but
the actual amounts in dollars and cents would be correspondingly
lower. This is a fact which must be carefully considered in each
individual case in order to determine accurately how much the
borrower can afford to pay monthly on the mortgage obligation in
his circumstances and with his financial resources . If, in the judg
$ 1000

RN

TE

S
EA

AL

NU

900

AVERAGE ANNUAL RENT

AN

NT

RE

H

RT

IES

CIT

- NO

800

700

AL

NU

600

AN

RN
TE
N
L
S
R
A
A
E
R
IES ES
NT AL ST T
12
NHTE
RAENNU- WE REN & OCUET
C2IT ITI
-S
C

500

400

300

200

100

$ 1000

2000

3000

AVERAGE

4000

5000

ANNUAL

6000

7000

INCOME

ment of the Mortgage Risk Examiner, the monthly payment will
not allow a sufficient remainder of income for other necessities and

responsibilities, it will be obvious that the borrower is attempting
to maintain or purchase a property that is too expensive for him

and not within his ability to pay. In such a case, a reject rating
of this feature is warranted.

1063. The accompanying chart, which shows the average
annual rent paid at a given annual income, has been computed from
data obtained throughout the United States by the Division of Eco

nomics and Statistics of the Federal Housing Administration. The

UNDERWRITING MANUAL

1063–1068

shaded space between the upper and lower lines drawn across the face
of the chart shows the range of annual average rent paid at a given

income by the individuals included in the investigations. Across the
shaded space a line desiganted “ Northeastern Cities ”, another line
designated “Western and Central Cities”, and still another line des
ignated “ Southeastern Cities ” show the mean, or average, annual rent
paid at a given income by families in the several areas. Thus a wage
earner with an income of $ 2,500 a year pays, typically, an annual rent
in the range between $ 295 and $ 545. The average rent paid by fami
lies with the same earning capacity was estimated to be about $ 425
in the northeastern cities, $ 380 in the western and central cities, and
$360 in the southeastern cities. These averages are the most frequent
amounts and should be used as the principal guide in applying the
data .

1064. This chart is to be used as a guide by the Mort

gage Risk Examiner whose further duty is to determine the differ
ence of rental range existing between local areas and the region and
nation as a whole. In order to derive the greatest benefit from the
chart, the Mortgage Risk Examiner should use it as a starting point

to help him establish with reasonable assurance the prevailing ratios
between annual rent and annual income in local communities.

1065. Cases will be found which fall outside the range

of the ratio prevailing in the local community. Such cases require
close scrutiny in order to ascertain whether the ratio between income
and cost of shelter is so hazardous as to make the borrower an unac
ceptable risk for insurance.
1066. This feature reflects the final judgment of the

Mortgage Risk Examiner in determining the ability of the bor

rower's income to discharge the mortgage obligation, and shall reflect
a rating comparable to the relationships thatexist between the bor
rower's available income and the mortgage transaction.
CO -MAKERS, CO -SIGNERS, ENDORSERS, AND GUARANTORS

1067. In some cases the title of the real property in
volved will be vested in several individuals. In such instances it is

necessary for all the parties owning an interest in the real property
to execute the note, bond, or other evidence of debt. In cases of this
nature, all such parties shall be considered separately, but rated as
one borrower .

1068. Except in remote instances of unusual merit as

determined by the Mortgage Risk Examiner, acceptance of co -makers,
co -signers, endorsers, and guarantors other than those closely related
to the borrower shall be discouraged. The eligibility of a mortgage
loan may rest to a degree upon the motives, financial responsibilities,

RATING OF BORROWER

1068–1069

and interests of co -makers, co -signers, endorsers, or guarantors who
do not have a title interest in the real estate involved in the applica
tion for mortgage insurance in the following cases :
a . Where property is in the name of either the husband or

wife, but not both , and both sign the credit instrument,
their joint income and credit character shall be considered
in the rating of the borrower. This would not be true,

however, if the husband or wife were legally separated.
6. Where a son or daughter of legal age signs the credit in
strument with the parent or parents, weight may be given
to the amount of income such a son or daughter can and
will contribute. At the discretion of the Mortgage Risk

Examiner, this will also be permitted in cases involving
close relatives where it is assured that their own interest

in the obligation is sincere and dependable.
1069. Under no circumstances should co -makers, co

signers, endorsers, and guarantors be required to have a vested interest
in the ownership of the mortgaged property when such requirements
would compromise the probable dower right of a husband or wife, or
jeopardize probable inheritances.

PART II

SECTION 11

RATING OF COMMERCIAL BORROWER

CONTENTS

General Rating Instructions_-Organization and Competence of Management -

Paragraphs
1101-1110
1111-1120

Motivation in Relation to Transaction Financial Condition

1121-1127
1128-1143

Prospective Earning Capacity and Stability

1144-1151

Effective February, 1938
Federal Housing Administration

PART II
SECTION 11
RATING OF COMMERCIAL BORROWER

GENERAL RATING INSTRUCTIONS

Rating of Commercial Borrower
FEATURE

1

REJECT

2

4

3

RATING

19

12

15

18

12

16

20

12

18

24

30

21

28

35

Organization and Competence of
Management
4

Motivation in Relation to Trans
action
6

Financial Condition
7

Prospective Earning Capacity and
Stability
TOTAL RATING OF COMMERCIAL BORROWER

1101. The principles and procedure outlined herein are

applicable to cases involving corporations regardless of type of busi
ness, and individuals or partnerships engaging in the production of
new dwellings for sale, or in the sale of existing dwellings, or other
wise conducting the business of real estate. In this classification are

operative builders, real estate developers and operators, mortgage
lending institutions, and owners of real estate in quantity, as distin
guished from individuals who hold properties for their own occupancy,
or long term investment. References made to the commercial bor
rower will likewise apply to all corporate and individual operative
builder borrowers. The rating grid for the Rating of Commercial
Borrower appears on the Report of Mortgage Risk Examiner (Com
mercial Borrower) , FHA Form No. 2016a, and contains four features.
It is illustrated above .

1102. Rating of Commercial Borrower shall be accom
plished by rating separately each of four features. The four

features have been weighted on a scale of 100 points in order to retain

UNDERWRITING MANUAL

1102–1104

the relative importance of each when all are combined to obtain the
Total Rating of Commercial Borrower. Each feature is marked on a

scale from 1 to 5, 5 being the highest rating. After analysis of the
factors comprising a feature, an X mark is placed in the column
which is determined to reflect the degree of risk involved.

If the X

mark is placed in any column other than Reject the figure appearing
in the marked square is carried over to the extreme right hand column
of the grid. If the X mark is placed in the Reject column, the word

“ Reject” is carried over to the extreme right hand column of the
grid. One such rating in any feature will necessitate a recommenda
tion for rejection of the application for insurance. When the word

“ Reject ” appears in the Rating column, it must also be written in
that column on the Total Rating line. If no such rating appears
after any of the features, the final rating of the category is obtained
by adding the figures in the Rating column. The system is so de
signed that this figure will be an indication of the rating on a
numerical basis.

1103. Complete information on the commercial borrower

must be assembled. In making the Rating of Commercial Borrower,
the Mortgage Risk Examiner may have the following data available :

a. The borrower's latest balance sheet and operating statement
attached to the Mortgagee's Application for Insurance
b. Experience of mortgage lending institutions that have held,

or are holding mortgages on properties owned by the bor
rower, including the property described in the application
c. Remarks in the Report of Valuator

d . Results of inquiry directed to references
e. Mercantile commercial report on the business
f. Factual Data Reports on principals
g. Other pertinent data
1104. The Mortgage Risk Examiner may request the
applicant or the approved mortgagee to furnish documents, state
ments , reports, articles of incorporation, by-laws, or other detailed
書

information that will enable him to complete the rating. He should
secure additional pertinent information from all available sources.
The information secured may include an explanation or elaboration
of items appearing in the financial statement, operating statement,
statement of business experience, record and history of the corpora

tion, list of officers and directors, and, particularly if the borrower
is an operative builder, information relative to the technical knowl

edge and actual experience, executive ability, and general training of
the individual or individuals comprising the management. Verbal
information shall be reduced to written form and recorded with other
accumulated factual data,

RATING OF COMMERCIAL BORROWER

1105-1111

1105. The procedure used to secure credit reports from
approved agencies is described in Section 2, Underwriting Pro

cedures. The Chief Mortgage Risk Examiner has authority, in all
cases in which he considers it necessary or advisable, to obtain com
mercial reports on the commercial borrower and parent or subsidiary

corporations, and Factual Data Reports on the principals from
credit reporting agencies approved by the Underwriting Division ,
Washington, D. C., and assigned to service the territory.
1106. The Rating of Commercial Borrower requires

careful study of the responsibility and judgment of the principal
owners and the experience, integrity, ability, and management of the
business displayed by the officers. It must be recognized that the
security and success of a concern is comparable to these same elements.
in the individuals controlling its ownership and operations.
1107. In rating a commercial borrower, corporations and
individuals whose signatures appear as co -signers, endorsers, or guar

antors of the note, bond, or other evidence of debt are considered
separately for the purpose of determining sufficiency of financial
ability. However, all parties to the obligation are rated as one
borrower.
1108. To be considered and rated with the commercial

borrower, it is not required that each individual whose signature
appears as co -signer, endorser, or guarantor of the note, bond , or
other evidence of debt, have a legal interest in the real property to
be mortgaged. However, the Administrative Rules require that the
signatures of all parties who hold the legal title shall appear as
makers of such note, bond, or other evidence of debt.
1109. The features and their weights are as follows :
8. Motivation in Relation to Transaction ---

15
20

c . Financial Condition...

30

d. Prospective Earning Capacity and Stability-

35

a. Organization and Competence of Management.-

1110. The first feature, Organization and Competence of

Management, requires a study of the anticipated probability of effici
ent management, based on evidences in the past record. The second
feature, Motivation in Relation to Transaction, reflects the borrow

er's attitude toward the mortgage transaction . The third feature,
Financial Condition, reflects an analysis of assets, liabilities, income
and expenses. The fourth feature, Prospective Earning Capacity and

Stability, requires a study of the borrower's financial prospects.
ORGANIZATION AND COMPETENCE OF MANAGEMENT

1111. The rating of this feature is based upon an an

alysis of the past performance of the commercial borrower in order

UNDERWRITING MANUAL

1111-1114

to predict the probabilities in its future performance and is deter
mined by analyzing factors such as organization and history, charac
teristics of principals, reputation, and attitude toward obligations.

1112. Organization and History. A review of the ar
ticles of incorporation and by-laws will disclose the purpose of opera
tion, terms, and conditions under which the management has been
conducting the affairs of the borrower. An analysis of the author

ized, subscribed, and paid in capital will further reveal the financial
advantages or handicaps under which the management has been op
erating. A knowledge of the period of time in active busi
ness may not be of essential importance in connection with ascer

taining the degree of competence indicated by the present manage
ment. It is more important to know the period of time that the
borrower has been operating under the present management. The
longer the period of time, the greater will be the possibilities for

accuracy in determining the degree of competence and success of the
present management.

In the case of a commercial borrower which

has succeeded a private enterprise of the principals under the present
management, investigation should cover the operations since the
installation of the present management.

1113. Characteristics of Principals. This factor is of

vital importance in the rating of this feature because the success or
failure of a concern depends, in a large measure, on the individuals
who control and manage its affairs. An analysis should be made of
the social and economic characteristics of the majority owners, direc

tors, and officers. A further consideration of analysis is the experi

ence of the officers who participate in the active management of the
business, since the degree to which operations have been successful in
the past years will definitely reflect the influence of the individuals
who have been managing its program .
1114. The majority owners in control of the funds are

empowered with the regulation of activities through the management.
They will, either directly or through representatives, dictate the

policies and determine the allocation of profits. Their judgment
will influence the course of the business enterprise. Therefore, an
analysis of their business sagacity in the exercise of such power is

of utmost importance. Major stockholders with long range judg
ment may sacrifice immediate personal gains in the interest of their
corporate pursuits. If actively engaged in the business they should
be thoroughly competent to manage it. If not actively engaged in
the business, the degree of judgment exhibited in selecting a manage
ment for the business will be revealed by analysis. Imprudent prin
cipals have been known to transgress on the possibilities of good

management by exhausting the assets of the business to a point

RATING OF COMMERCIAL BORROWER

1114-1118

where it does not possess adequate funds for normal transactions.
Such practice may, in a very short time, result in insolvency. Many
concerns fail to succeed because they are left to run themselves and,

through lack of proper attention by the active principals, sound
policies are ineffectively executed.
1115. Business concerns, in many instances, are domin
nated by one individual . This condition is very prevalent in the
case of operative builders. In such instances the invested capital
is derived principally from the individual's personal funds. The
business policy is a reflection of his judgment and experience. The
achievements of the concern are largely dependent upon his personal

direction. In organizations of this type the significance of the prin
cipal's age cannot be ignored because of the uncertainty of succession .
The life of the firm may depend extensively on the ability of the
principal to give personal attention and financial support to the
business.

1116. In an analysis of the operative builder borrower,
consideration of his past record usually reveals the degree of ability,
foresight, integrity, and progress that can be anticipated in future
operations.

As is the case in other fields of endeavor and enter

prise, an operative builder's knowledge of his business, properly

applied, will take him a long way in the right direction and should
be a contributing influence for favorable consideration.
1117. Reputation. The security and success of a busi
ness are a reflection of the same elements in the individuals behind

its ownership and management. Its reputation will be patterned
largely after the personal reputations of its principals. Therefore,
conclusions on the commercial reputation cannot be reached without
a knowledge of the individual reputations maintained by its prin

cipals, particularly those in the management of its activities.
1118. Attitude toward Obligations. An excellent in

dication for determining the commercial borrower's probable atti
tude toward the payment of the contemplated mortgage debt is its
manner of executing contractual obligations with creditors. While
this cannot be accepted as complete evidence in the determination
of mortgage risk, it is a direct clue to the borrower's probable paying

performance. Therefore, careful consideration should be given to
the business record in discharging obligations. Does the company
meet its accounts and notes payable according to terms, or is there
evidence that its management assumes a careless attitude toward

debts ? Is the management argumentative and arbitrary in demand
ing discounts to which it is not justly entitled ? Is it necessary for
creditors to enter suit against the concern and reduce their accounts

to judgments in order to secure payments of acknowledged indebted

UNDERWRITING MANUAL

1118-1123

ness ! Is dealing with the company a constant source of irritation
and litigation ? Has the concern ever voluntarily declared itself
insolvent or been forced involuntarily through the bankruptcy courts
by its creditors prior or subsequent to the assumption of its affairs
by the present management? On the other hand, is it a desirable
concern with which to do business ?

1119. In cases where it is required that principals of the
concern join with the commercial borrower as co -signer, endorser,
or guarantor on the note, bond , or other evidence of debt of the

mortgage obligation , a thorough analysis of the attitude such prin
cipals maintain toward their personal obligations shall be made.
1120. Competent management does not require that pay
ments of obligations be made before the net due dates unless com
pensating discounts make such payments profitable. Therefore, the
prompt payment of debts on the net due dates generally contributes
to a favorable rating of this feature. Irrespective, however, of the
borrower's desirability manifested in other factors of this feature,
the rating of the feature will be lower in proportion to the delay

with which the management meets obligations. The management's
attitude may be sufficiently indifferent to justify a reject rating of
this feature.
MOTIVATION IN RELATION TO TRANSACTION

1121. The rating of this feature is based upon an analy
sis of the motives which actuate the commercial borrower to enter

into the mortgage transaction . This feature is rated by analyzing
such factors as cash investment, motives for borrowing, and im
portance of the property to the borrower .
1122. Cash Investment. For the same reasons stated in

Section 10, Rating of Borrower, the cash investment of the com
mercial borrower in the subject property is a contributing element
to motivation. Cash investment applies with the same force to the
commercial borrower as to the individual borrower. The minimum

requirements for cash investment or its equivalent are contained in
Section 5 of this Manual, Minimum Eligibility Requirements.
1123. Motives for Borrowing. The purposes for which
the proceeds of the mortgage loan are to be used will also be a con
tributing element in determining the soundness of the borrower's
motives. Generally, the refinancing of unpaid balances on existing
liens, home development for the benefit of employees, property im
provements, and initial financing to facilitate purchase or sale of
homes may be regarded as sound motives. On the other hand, use
of the proceeds for speculation, acquisition of permanent additional

RATING OF COMMERCIAL BORROWER
1123-1129

working capital, or discharge of unrelated business obligations may
be regarded generally as unsound motives.
1124. Analysis of the proposed use of the proceeds of the
transaction is made in the light of its effect on motivation . Fre
quently the motive of commercial borrowers, other than operative

builders, is the development of homes for the benefit of employees.
Behind this purpose are usually benefits which the employer will
share, in part, with the employee. In general, the motives behind
such transactions may be considered sound .
1125. The operative builder's principal purpose in se
loan is, quite naturally, to facilitate the financing
a
mortgage
curing
and sale of his merchandise. Therefore, his motivation to keep the
loan in good standing is primarily the expectation of a profit and
of the recovery of his cash investment in the mortgaged property.
1126. Importance of Property to Borrower. This
factor indicates to what extent the commercial borrower will endure

sacrifices in retaining the property. The borrower's motivation in
this respect should be analyzed from the point of view of invest

ment and speculation. In either case cognizance should be taken of
the possibilities of profitable return . It is necessary to ascertain the
importance that the commercial borrower attaches to the property
offered as security. Has it been received reluctantly for the pay
ment of a debt, or has it been acquired for a logical purpose ? Does
it promise profit in money or other benefits !
1127. Dwellings held or acquired for speculation have
little importance to the commercial borrower other than the market

ing possibilities for profit. Frequently, motivation to repay the
mortgage debt diminishes when possibilities for profit disappear.
This may not be true where the borrower is confining such sales to
selected employees.
FINANCIAL CONDITION

1128. The rating of this feature is based upon an analy

sis of the source , character, amount, and distribution of funds and
is determined by analyzing such factors as adequacy of operating
funds, balance sheet, operating statement, and ability to discharge
obligations.
1129. Adequacy of Operating Funds. A business must
have capital in order to operate. At its inception the acquisition
of capital is accomplished through the medium of capital stock
subscriptions. The investment of the owners should be secured and
protected by adequate assets. In the normal course of active enter
prise liabilities are incurred. Therefore, the availability of adequate
operating or working funds is necessary to meet these liabilities.

UNDERWRITING MANUAL

1129–1133

A sound enterprise should be able to provide operating funds from
earnings derived from its ordinary operations. An absence of profit
shall require a close analysis of the commercial borrower's justifica
tion in securing operating funds from other sources and of the effect
that such procedure will have on its future financial position . A
temporary cessation of profits may be explainable, and may justify
the procurement of operating funds from some other source . A con
tinued absence of profit will ultimately result in insolvency.
1130. Sources, other than profits, from which funds can

be obtained include proprietary interests, chattel notes and mort
gages, unsecured loans, hypothecation or sale of assets, expansion
of capital investment, and contributions. Because a company may
convert such assets into cash , an analysis of the value and liquidity of
such assets is made in order to determine the adequacy of operating
funds. Further, the effect of such conversion on the capital struc
ture is included in the analysis.
1131. The operative builder's major problem is to dis
pose of his properties readily in order to obtain funds for his con
tinued activities. It is an all important matter to him to effect a.

quick turnover of completed dwellings because his operating funds.
may be restricted until he can make satisfactory disposition of them .
Unless he has substantial capital he will not be able to hold the

properties in his portfolio of investments.

His business will be

retarded or may be even suspended until he can recover his invest
ment in unsold properties.
1132. Balance Sheet. The balance sheet is an analysis.
of facts regarding the net worth and financial position of a business.
Detailed instructions in the analysis of a balance sheet are not
attempted in this text . It is the responsibility of the Mortgage
Risk Examiner to be able to analyze a balance sheet intelligently .
1133. Desirable ratios between various types of assets

and liabilities have a widely diversified significance in different kinds
of enterprise. Some ratios are pertinent and some may be disre
garded, depending upon the nature of the line of business. Among

the ratios most commonly used are the following:
a . Quick assets to current liabilities

. Current assets to current liabilities
c. Sales to receivables
d. Sales to inventory
e. Sales to net worth

f. Sales to fixed assets
g. Net worth to fixed assets
h . Net worth to current liabilities

i. Net worth to total liabilities

RATING OF COMMERCIAL BORROWER

1134-1139

1134. Business difficulties really fall into three main
classes, (a) insufficient net profit, ( b ) improper division of net profit
between stockholders and the company, and (c) improper use of
profit retained by the company. The first condition is the most

serious and is self explanatory. In this connection, it is important
to ascertain the cause for insufficient profit as well as the fact that
insufficiency exists. The third condition , which is the next most

serious, may lead to a situation wherein there are insufficient current
assets to meet obligations, irrespective of excellent profit. The sec

ond condition is not as prevalent as the other two but occurs with
enough frequency to require attention . A comparison of balance
sheet summaries over a period of time will assist in discovering such
weaknesses.

1135. In the assets listed on the balance sheet, items such
as patents and good will may have an indeterminable value for credit

purposes. Assets or liabilities, which are too inclusive or obscure,

should require qualitative explanations from the borrower.
1136. Ordinarily, the operative builder's assets reveal
only limited liquidity in cash or readily convertible holdings, because
the major portion of his worth is invested in the building program .
The operative builder borrower cannot be expected to show sufficient
financial strength to carry an unsold or unrented house indefinitely
after completion , but he should be expected to demonstrate ability
to carry a completed project for a reasonable period of time. The
possibility of rental should be considered.
1137. A comparison of statements over a reasonable

previous period of time will indicate the trend of the borrower's
financial position. This review should be accepted as some indica
tion of future performance.
1138. Evidences on the balance sheet will contribute

heavily to the rating of this feature. A high rating cannot be
ascribed to the commercial borrower unless all pertinent ratios be

tween certain assets and liabilities are favorable, and unless the net
worth is intact and shows promise of improvement. A lower rating
will be given in proportion to those business hazards which are ap
parent in the balance sheet. A reject rating is warranted when
the borrower's financial responsibility to undertake the contemplated
mortgage loan is unsatisfactory.

1139. Operating Statement. This statement, commonly
known as the Profit and Loss Statement, is an itemized summary of
the items of income and expense during a specific period of time. It
reveals the accumulation of profits or losses from business activi
ties. In brief, it shows whether the business has been making or

losing money. Analysis of a series of operating statements will

UNDERWRITING MANUAL
1139-1144

indicate the past trend of the business and , to a degree, will assist
in forecasting the future trend .

1140. Some operative builders have a tendency to ex
pand beyond their financial responsibility. Therefore, because of
constant changes in the financial position of operative builders, the
activities and profit and loss statements of such borrowers must be
constantly watched . It is further necessary to be familiar with the

nature of the disposition of the properties for which commitments
have been issued .

1141. Ability to Discharge Obligations. Commercial
enterprises, in general, require credit in order to continue in business,
and, therefore, protect their credit reputations. For this reason, their
credit is usually based on definite audited statements. It is feasible
to accept the current credit record of a commercial borrower as a

clue to its financial capacity. In predicting the borrower's future
ability to discharge obligations, analysis should be made of the judg
ment employed to secure benefits from expenditures. The nature and

amounts of business obligations are analyzed as to their affect on
earning capacity. Certain types of indebtedness may be only
temporary, while others may show probabilities of continuance or
recurrence .

Income producing or income increasing obligations

demonstrate a more favorable situation than those incurred for

strictly transitory purposes. Arrangements made to discharge such
obligations is one indication of the effect of the indebtedness on
capacity. An analysis of the elements in this factor will reveal the
borrower's probable performance in the contemplated mortgage
transaction .

1142. Contingent liabilities that may become burden
some debts in the future should not be overlooked, but, at the same

time, undue concern should not be entertained where the actual

liability of such contingencies apparently will remain very limited or
remote or will probably be liquidated.
1143. In cases where it is required that principals join
with the commercial borrower as co - signers, endorsers, or guarantors

on the note, bond, or other evidence of the mortgage obligation, a
thorough analysis of the personal financial responsibility of such
parties shall be made.
PROSPECTIVE EARNING CAPACITY AND STABILITY

1144. The rating of this feature is based upon an analy

sis of the borrower's future ability to obtain and maintain income,
and to pay the contemplated mortgage obligation . It is rated by
analyzing such factors as evidences of net profit, operating possi

RATING OF COMMERCIAL BORROWER

1144-1149

bilities, and ability to discharge the contemplated mortgage obli
gation.

1145. Evidences of Net Profit. It may be assumed that
as long as a business enterprise can realize net profit it will continue
to stay in business and continue to pay its obligations. The usual

exceptions include corporations chartered for religious, charitable,
and similar purposes. In the absence of net profit or surplus reserves,
the only alternative sources for the acquisition of operating funds are
collateral or unsecured loans, and new capital. Sustained absence
of net profit will result ultimately in insolvency .
1146. Demand for the merchandise and services pro

duced by the company is necessary for the proper utilization of capi
tal. Profit is impossible without sales, and sales depend on demand.
Sales cannot rely entirely on need, because need may not be trans
lated into actual purchases. Mere sales do not indicate profit unless
the cost of production and cost of sales are below prices received .
1147. The analysis of this factor depends on the prob
ability and character of future net profit. The presence of net profit
at the time of analysis is to be noted, but more important is the con
tinuance of profit during the term of the proposed mortgage loan.
A business, in order to continue successfully, must meet competition

not only in its particular line of business, but also in other lines offer
ing substitute products or services.

1148. The foregoing paragraphs apply equally to the
operative builder, whether corporate or individual. He is literally
a manufacturer and merchandiser of dwellings. Not unlike other
enterprises his merchandise and services are for sale, and not for

personal consumption. Likewise, he generally provides himself with
merchandise before he has a purchaser.

1149. Operating Possibilities. The continued success
of a business will depend on the availability of facilities which will
permit the functioning of an operating program that can profitably
meet demand. The realization of future profit must be based on

(a) the existence of a buying market, and ( ) the ability to produce
and sell at prevailing competitive prices. While certain products
can , in a measure, introduce or attract demand, it lies largely
outside of the control of any one business enterprise. It is more

necessary for a business to be able to regulate its chosen activities to
demand, than to attempt to regulate demand to its chosen activities.
In order to anticipate and enjoy a stable market it is desirable for
a business to be in a position to ( a) regulate distribution to keep pace

with demand, and ( 6 ) change production with changing demand .
Stability of demand is essential to stability of profit. Stability of
operating profit is essential to stability of earned income.

UNDERWRITING MANUAL

1150-1151

1150. When considering an operative builder in the ca

pacity of a borrower it will be necessary to analyze the character of
his operations. His characteristics and financial statements will not
disclose all the facts necessary to determine his desirability as a bor
rower.

A further determination must be made of the economic

soundness of his projects. The Architectural and Valuation Sec
tions shall be consulted to ascertain whether the operative builder

borrower is constructing appropriate dwellings in suitable locations.
An operative builder who gives buyers what they want, where they
want it, deserves a favorable rating of this feature.

1151. Ability to Discharge the Contemplated Mortgage
Obligation. The purpose of analyzing the commercial borrower is to
determine the degree of credit risk involved in the issuance of mort

gage insurance. The previous feature, Financial Condition, involved
study of the past and present financial position in order to forecast
the future financial situation . In this feature the previous factors

present an analysis of the underlying forces which will govern the
possibilities of continuing business activity. The decision with re
spect to eligibility as based on this factor shall be predicated on evi
dences in the factors of these last two features in the Rating of Com
mercial Borrower grid, and will contribute to a high rating in this
feature where such factors reflect a highly desirable commercial bor
This factor will effect a lower feature rating in proportion
rower.
to the borrower's deviation from such standards. A reject rating

in this feature will be justified when the borrower's prospective earn
ing capacity and stability are too uncertain to establish, with reason
able assurance, its ability to discharge the contemplated mortgage
obligation.

PART II
SECTION 12

RATING OF EARNING EXPECTANCY

CONTENTS
Paragraphs

General Rating Instructions .
Rentability of Units ---Occupancy Percentage in Competitive BuildingsLikelihood of Serious Competitive Construction .Reliability of Rental Market Data----Reliability of Expense Prediction_
Rating of Property -----

1201-1206
1207-1209
1210
1211-1212
1213

1214-1216
1217
1218
1219

Rating of Location ..

Expense Ratio --

Effective February, 1938
Federal Housing Administration

PART II
SECTION 12

RATING OF EARNING EXPECTANCY

GENERAL RATING INSTRUCTIONS

Rating of Earning Expectancy
2

1

FEATURE

2

1

REJECT

9

12

6

4

3

5

RATING

15

Rentability of Units
13

Occupancy Percentage in Com
petitive Buildings
2

6

8

10

12

6

8

10

18

10

Likelihood of Serious Competi
tive Construction
Reliability of Rental Market
Data

Reliability of Expense Predic
tion
6

12

15

6

12

15

16

20

Rating of Property
Rating of Location
12

Expense Ratio
TOTAL RATING OF EARNING EXPECTANCY

1201. The category, Rating of Earning Expectancy, is
utilized only in connection with mortgages secured by rental income

dwelling properties. Before the Rating of Earning Expectancy can
be established the Rating of Property and the Rating of Location
must have been completed . When the total Rating of Earning
Expectancy has been established the result is used in the Rating of
Mortgage Pattern .

1202. The total Rating of Earning Expectancy is a rat
ing of the certainty, probable fluctuation, and probable rate of de
cline of the net earning expectancy of the property. It is a measure

UNDERWRITING MANUAL

1202-1205

ment of mortgage risk in terms of the qualitative characteristics of
the earning expectancy. The Rating of Earning Expectancy cannot
be completed until an estimate of the earning expectancy has been
made in accordance with the instructions given in Section 15, Valua
tion of Rental Income Dwellings. It should also be noted that the
last step in valuation, namely, capitalization , should not be com
pleted until after the Rating of Earning Expectancy has been estab
lished inasmuch as the rating itself should be used as one of the
determinants of the proper capitalization rates used to convert the
earning expectancy into a final value estimate.
1203. The Rating of Earning Expectancy shall be accom

plished by rating separately each of eight features, in accordance
with the principles outlined in this Section and Section 6, Meth
ods of Mortgage Risk Rating. The eight features have been weighted

on a scale of 100 points in order to retain the relative importance of
each when all are combined to obtain the total Rating of Earning
Expectancy. Each feature is marked on a scale of from 1 to 5, 5
being the highest rating. After analysis of the factors comprising
a feature, an X mark is placed in the column which is determined to

reflect the degree of risk involved. If the X mark is placed in any
column other than the Reject column, the figure appearing in the
marked square is carried over to the extreme right hand column of
the grid. If the X mark is placed in the Reject column, the word
" Reject” is written in the extreme right hand column of the grid .

One such rating of any feature will necessitate a recommendation for
the rejection of the application for insurance. If the word “ Reject ”
appears in the Rating column, it must also be written in that column

on the Total Rating line. If no such rating appears after any of the
features, the final rating of the category is obtained by adding the
figures in the rating column. The system is so designed that this
figure will be an expression of the rating on a numerical basis.
1204. The eight features which are rated to determine

the total Rating of Earning Expectancy are listed below with the
weights which have been ascribed to them :
a.
6.
c.
d.
e.
f.

Rentability of Units
Occupancy Percentage in Competitive Buildings_
Likelihood of Serious Competitive Construction.
Reliability of Rental Market Data ----Reliability of Expense Prediction -Rating of Property .

g. Rating of Location

h. Expense Ratio ----

15

5
10
10
10
15
15
20

1205. In establishing the several ratings it is highly im
portant to bear in mind the relationship between mortgage risk and

RATING OF EARNING EXPECTANCY
1205–1209

the characteristics of the earning expectancy. Earning expectancy
is construed to represent a flow of net income extending from the

present indefinitely into the future. One danger in making an esti
mate of net earnings is to assume average conditions and ignore
variations and fluctuations from the average through coming years.
The description of an estimate of net earnings as a single amount of

annual income is of little significance in the measurement of mort
gage risk until it is described in qualitative terms which indicate its
characteristics. There must be a determination of the probable sta
bility of the earning expectancy. This can be accomplished only
after consideration is given to the probable certainty as to amount,
periodic fluctuation , rate of decline, and duration of the net earnings.
The Rating of Earning Expectancy is an attempt to examine and
measure these qualitative characteristics.
1206. It should be pointed out that certain of the fea
tures are rated on the basis of set rules rather than by judgment
alone. Deviation from these set rules may be made only in instances

where the text indicates that the rules are judgment guides. In
other cases compliance with the rules is mandatory.
RENTABILITY OF UNITS

1207. This feature, Rentability of Units, is rated by
judgment comparison . If the units in the building are in a strong
competitive position in the rental market, a 5 column rating is
ascribed. If the units are in a relatively weak competitive position,

a 1 column or Reject rating is ascribed. In every case the compari
sons must take competitive rental rates into account and balance
them against the rental rates used in the valuation of the property.
The Valuator must form his judgment by analyzing the rapidity
with which available rental space is absorbed in other properties
or by known demands for accommodations in the rental market.

His considerations must take into account the supply of space of
various types in the community and he should compare the supply
with the requirements of typical families for space .
1208. Major emphasis is placed on the probable future
trend of rentability of the units. Even in cases where high occu

pancies, at current rental rates, can be readily obtained in the current
market, intermediate or low ratings may be justified if evidence indi

cates a strong probability that the market will become oversupplied
and cause a future recession in rental rates during early future years.
1209. To establish a rating of Rentability of Units, con
sideration is given to those factors used in rating the features in the

Rating of Location and the Rating of Property which appeal to ten

UNDERWRITING MANUAL

1209-1212

ants rather than owner occupants. The attractiveness of the space ,
the appeal of the location, and the equipment and services offered
will have a strong bearing on rentability. Room sizes, numbers of
rooms in the apartments, transportation facilities, and the character

of local centers near which the property is located are considered in

relation to the preferences of prospective tenants in the rental market.
OCCUPANCY PERCENTAGE IN COMPETITIVE BUILDINGS

1210. It is presumed that this feature, Occupancy Per
centage in Competitive Buildings, is most successfully rated when
statistics showing average vacancy percentages in competitive build

ings are available. It deals with future probable competitive rela
tionships only by inference inasmuch as it is rated in terms of cur
rent occupancy percentages. The following table may be used as a

guide to correct rating. Valuators need not be bound by it because
general vacancy statistics do not always cover the precise group of
properties which are strictly and significantly competitive.
Current Occupancies in Competitive Space :

Place X
in column

5
4
3

96% to 100 % --91 % to 95 %

86 % to 90 %
79 % to 85 %

2
1

70 % to 78 %
Less than 70 % ---

Reject

LIKELIHOOD OF SERIOUS COMPETITIVE CONSTRUCTION

1211. This feature, Likelihood of Serious Competitive
Construction , views future competition in terms of probable new
construction of similar accommodations in the immediate neighbor
hood or in strongly competitive neighborhoods. The presence of
vacant land which can , under existing zoning ordinances and other
restrictions, be used as sites for the construction of competitive
buildings, must be balanced against the actual probability of such use .
The following table is used to rate this feature :
Likelihood of Large Amounts of Competitive Construction :

Place X
in column

Remote

Little
Moderate ---

Strong
Great

4
3
2
1

1212. In general, the future period of time which should
be viewed is the next three or four years from the date of analysis.
The imminence, in point of time, of competitive construction should
color the rating ascribed .

RATING OF EARNING EXPECTANCY

1213-1214
RELIABILITY OF RENTAL MARKET DATA

1213. The rating of this feature, Reliability of Rental
Market Data , is not based upon the failure of the Valuator to assem
ble data of a reliable character. It is presumed that rental market
data compilation has been complete. This feature takes into ac
count the uncertainties which remain after the compilation of data.
The character of the required data is indicated in Section 15, Valua

tion of Rental Income Dwellings and Section 18, Compilation and
Recordation of Data. To establish this rating an analysis is made
as to the reliability of all information having a bearing on the
amount of rent the units will command, the rapidity with which they
can be rented and re-rented , and the extent to which they can com

pete successfully in future rental markets. It is the quality or degree
of reliability of the data which is rated, not the apparent significance
of the data. The rating is decreased when data are meager, unre
liable, or of uncertain quality. Such a condition usually exists when
there are few comparable properties in the neighborhood or where

the subject property has the characteristics of a pioneering venture.
Special attention should be directed to those items of data concern
ing factors which may cause wide fluctuations in the future gross

earning capacity of the property. The following table is used to
establish the rating of this feature :
Quality of Market Data :
Excellent-

Place x
in column

5
4

Good
Fair .

Questionable
Poor

3
2
1

RELIABILITY OF EXPENSE PREDICTION

1214. The rating of this feature, Reliability of Expense
Prediction, is not based upon the failure of the Valuator to assemble
data of a reliable character. It is presumed that the operating ex
pense data compilation has been complete. This feature takes into
account the uncertainties of the expense prediction which remain
after the compilation of data. The character of the required data is
indicated in Section 15, Valuation of Rental Income Dwellings and
Section 18, Compilation and Recordation of Data. To establish this
rating an analysis is made as to the reliability of all information hav

ing a bearing on the amounts which will be required to operate, main
tain, and manage the property. It is the quality or degree of certainty
of the expense forecast which is rated , not the apparent significance
of the data. The rating is decreased when data are meager, unreliable,
or of uncertain quality. It is decreased when only limited confidence

UNDERWRITING MANUAL
1214_1217

can be placed in the correctness of the final estimate of total operating
expenses. Such a condition usually exists when there are a limited

number of comparable properties or where the plan of operation is
untried and operating data are difficult to obtain .
1215. Special attention is directed to all those items of
data concerning factors which may cause wide fluctuations in
future operating expenses. Among these the principal one is almost
always the uncertainties in the tax situation . The present tax burden
may be heavy or light. As long as it is reasonably certain not to
change materially, the feature rating is not decreased on this account.

Ratings vary downward according to the necessity for additional
taxes and the likelihood that they will be levied . Some of the con
tingencies which require lower ratings are :
a. The prospect that the property will become a part of a
special tax district or be subjected to other special
assessments

6. The financial condition of a county or municipal jurisdic
tion which lacks population and the resources necessary
to maintain local services now attempted
c. The likelihood of an adverse change of taxing policy
d. The uncertainties with respect to the burdens for relief in

taxation budgets
1216. The following table is used to establish the rating
of this feature :
Place X

Reliability of Expense Prediction :

in column

5
4
3

Excellent----

Good ..
Fair .-

2
1

Questionable
Poor

RATING OF PROPERTY

1217. The Rating of Property is determined in accord
ance with the principles set forth in Section 8. This feature is
then rated by using the following table :
If category rating is
80
70
60
55
50

Place X
in column

to 100 .
to 79_
to 69
to 59
to 54.

4
3
2
1

Under 50

Reject

5

RATING OF EARNING EXPECTANCY
1218_1219
RATING OF LOCATION

1218. The Rating of Location is determined in accord
ance with the principles set forth in Section 9. This feature is
then rated by using the following table :
Place x

in column
5
4
3
2

If category rating is
80 to 100_.

70 to 79_
60 to 69_.
55 to 59_
50 to 54_

1

Under 50

Reject
EXPENSE RATIO

1219. This feature, Expense Ratio, is the most heavily
weighted feature in the Rating of Earning Expectancy. The ex
pense ratio is calculated by dividing the total estimated expense of

operating, taxes, insurance, and management by the estimated yearly
effective gross revenue for the last year specifically estimated . The

expenses do not include items for depreciation or vacancy allowances
but do include all items for which actual outlays will have to be
made. The effective gross revenue includes only expected collections.
Therefore, it is the difference between gross revenue at 100 %
occupancy and the sum of the allowances for vacancies and collec

tion losses and all other contingencies which affect the amount of
revenue collection. The significance of this ratio as an index of

risk is apparent. A net income of $ 2,000 per year, which is the result
of an effective gross revenue of $ 5,000 and expenses of $ 3,000, is
more hazardous than a net income of the same amount which derives

from a gross revenue of $ 3,500 and expenses of $ 1,500. In the first
case, the expense ratio is 60 % ; in the second case it is 42 % . A 20 %
recession of rents reduces the $ 2,000 net income $1,000 in the first

case, but only $ 700 in the second case. That is, the higher the
expense ratio, the greater the risk . In determining expense ratios
all fractions are dropped. This feature is rated strictly by the
following table :
If Expense Ratio is

Under 35 %
35 %
45 %
53 %
60 %
65 %

to 44 %
to 52%
to 59 %
to 64 % --and over

Place X
in column

5
4
3

2
1

Reject

PART III
SECTION 13

. METHODS OF DWELLING VALUATION

CONTENTS
Paragraphs
1301-1305
1306-1317
1308-1314
1315-1317
1318-1332

Purpose of Valuation ..
The Character of Value_.
Definition of Value -Sources of Real Estate Value_ .

Implied Valuation Procedure ..

1319

Axioms of Valuation .--

1320
1321-1322

Delineation of Property to be Appraised ..
Substitution Theory-

1323–1328

Basic Procedure ----Selection of Method ...

1329_1332
1333–1338
1334
1335
1336

Supplementary Procedures_
Mechanical Equipment and Accessories..

Dwellings on Higher -Use Sites--Leasehold Estates.

Taxes and Special Assessments---Valuation of Fragmental Properties --Integral Factors in Valuation --Determination of Rental ValueEstimation of Remaining Physical and Economic Life
Land Valuation by Comparison .--

Replacement Cost of Property
Valuation Concepts----Plottage Increment..

1337
1338
1339_1376
1340_1349

1350-1360
1361–1369

1370_1376
1377-1381
1377

1378
1379

Marketability and Conformity -Environmental Changes --Depreciation, Deterioration , and Obsolescence_
Distinction between Cost and Value -

The Accuracy of Valuations.--

1380
1381
1382-1397

Sources of Errors .-

1382-1383

Reasoning Used in Estimation ---Desirability of Methodical Procedure_-

1384_1392
1393-1394
1395–1397

Valuator's Final Judgment

Effective February 1938

Federal Housing Administration

PART III

SECTION 13
METHODS OF DWELLING VALUATION

PURPOSE OF VALUATION

1301. Because the National Housing Act does not permit
the insuring of any mortgage which involves a principal obligation in

excess of a stipulated percentage of the value of the mortgaged prop
erty, it is necessary for the Federal Housing Administration to secure
appraisals from its own Valuators. Furthermore, the values of
properties must be ascertained because the ratio of the loan to the
value is one of the considerations in the risk rating process.

1302. Valuations utilized by the Federal Housing Ad
ministration must serve the specific legal purposes of the National
Housing Act. There must be a uniform interpretation of what the
Act means by " appraised value” and uniformity with respect to meth
ods used to estimate value. While it is possible that appraisals will
sometimes vary as a matter of judgment, no variations should be per
mitted to result from differences in the concept of the purpose of
valuation, the definition of value, or differences in methods of
estimation .

1303. The valuation of dwelling properties for the pur
pose

of determining the amount of security solves only a part of the

mortgage lending problem . While valuation is a most important
element in the analysis of mortgage loans, it does not constitute the.
sole basis upon which mortgages are selected. The security for a
mortgage loan is only partially disclosed by valuation, and valuation
is used to analyze the security principally by comparing the amount
of a proposed mortgage with the estimate of value of the property.
1304. In connection with the activities of the Federal

Housing Administration, valuation must produce an estimate which
directly assists in the decision with respect to the eligibility of a
loan for mortgage insurance. Valuation is never an end in itself.
There are two ways in which property value constitutes security for a
loan. The first, and by far the more important one, is the incentive
to make interest and principal payments on the loan because of the
importance of the property to the owner. The second is the value

UNDERWRITING MANUAL
1304-1308

of the property recoverable under conditions of foreclosure.

Em

phasis is placed on the order and relative importance of the two
kinds of security. Security has more to do with the avoidance of
foreclosure than with the possibility of a recapture of capital by sale

after foreclosure. In general, dwelling properties are primarily
pledges. The first class of security has significance to the lender
chiefly because the borrower has a stake in a valuable and desirable

property and would not care to lose an equity which is of considerable
value to him and of less value to the lender .

1305. The Federal Housing Administration requires the
Valuator to place a value on all the property delineated and de
scribed by him as eligible security in accordance with instructions in

Section 5, Minimum Eligibility Requirements. This does not pre
clude the setting of separate valuations on fractions or portions of

the properties submitted, but does require that the Federal Housing
Administration Valuation fixed by the Chief Underwriter shall
embrace the entire eligible security of whatever character it may be.
The requirement that all the property be appraised does not imply
that mortgage insurance limits will be enhanced in direct proportion

to value added by pledging additional property as security, but is
prescribed solely in the interests of good practice and uniformity of
procedure.
THE CHARACTER OF VALUE

1306. The word “ value” refers to the ability of useful
thirgs to produce benefits for human beings in answer to their needs
or desires. The meeting of such needs or the satisfying of such de
sires requires the occurrence of events in the future, never in the past.
Value does not exist unless future benefits are in prospect.

Its

measure is the present worth of expected benefits which may be
realized only upon the occurrence of future events.
1307. In the valuation of real estate , properties are ap

praised. “ Property ” refers to certain rights which a person enjoys
by virtue of his ownership of wealth. In this sense , property is the

privilege of using physical real estate facilities, not the facilities
themselves.

1308. Definition of Value. The Federal Housing Ad
ministration recognizes that there are many purposes for which valu
ations are made and that there are, of necessity, many possible defi

nitions of " value". Definition depends upon the purpose for which
the estimate is to be used . At the same time, the Federal Housing

Administration has only one objective in view in connection with
valuation. It therefore utilizes only one concept of value. The word

" value ", as used by the Administration , refers to the price which a

METHODS OF DWELLING VALUATION

1308_1311

purchaser is warranted in paying for a property for continued use
or as a long-term investment. This concept is defined as the price

which well-informed typical buyers, acting intelligently, voluntarily,
and without necessity, would pay for the property. It always pre
sumes a price which is justified by the future long-term benefits which

will accrue through ownership to a typical owner.
1309. The above definition of value describes the ex

change value concept and places emphasis on the idea that value is
a price which typical buyers are warranted in paying. This is pre

sumed to be equivalent to the price a typical owner is justified in pay
ing, whether he is actually a new purchaser or the present owner .
1310. A primary distinction is made between value, as
defined above, and market price. Both are value concepts and take
cognizance of a market, either present or implied . There are cases
where the two may be identical in amount, but quantitative differ
ences are frequently encountered. Another way of describing this
is to distinguish between what a property is worth and what the
current market thinks it is worth. The accompanying diagram illus

trates the necessity for careful distinctions between concepts of value.
Such concepts vary with the motives and purposes of buyers and
sellers. The diagram on the following pages indicates why " value”

may have several meanings. The concept of value used for mort
gage lending purposes is that indicated by the bold type words
opposite " Buyers. ” The chart explains that there can be several

prices justified by different motives. It shows that market prices
are not necessarily acceptable as valuations.

1311. While it is recognized that the required “ justified
selling price” or “ justified purchase price ” or simply “ value” can be
interpreted variously depending upon the differences in purpose of
appraisal, the Federal Housing Administration recognizes a some
what general market containing a reasonable number of " typical”
buyers. The value to be estimated , therefore, is the probable price
which typical buyers are warranted in paying. This valuation is
sometimes hypothetical in character, especially under market condi
tions where abnormalities in price levels indicate the presence of
serious quantitative differentials between the two value concepts.
With the definition of value prescribed for use by the Federal Hous
ing Administration, marked differences between " available market

prices" and "values" will be evident under both boom and depression
conditions of market. No other definition is acceptable for mortgage
loan purposes inasmuch as one of the objectives of valuation in
connection with mortgage lending is to take into account dangerous

aberrations of market price levels. The observance of this precept
tends to fix or set market prices nearer to value.

1311

'awho
buyers
The
to
tend
ctions
pay
influenced
are
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Prices
current
Buyers
will
They
inwell
are
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hold
underadequate
intelliact
and
formed
an
by
not
if
at
and
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of
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of
excess
in
not
levels
newithout
gently
present
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than
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fu
of
worth
present
future
oferm
the
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t
con-worth
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prospective

cessity
.

benefits
ditions
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benefits
erm
-tture
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.
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.

of
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and
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.
y
benefits
-term
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ture
that
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BUYERS

benefits
that
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.

.
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orctions
will
They
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Buyers
,p
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buyers
The
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to
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ay
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by
and
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than
higher
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mar
a
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bene.special
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price
inflated
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ket
prices
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y
tions
,b
necesof
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al
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though
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ceed
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to
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ternatives
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as
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of
bene
-t
erm
that
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will
accrue
to

.
users

typical
users
.

UNDERWRITING MANUAL

atend
to
' ctions
buyers
The
by
influenced
are
paid
Prices
current
pay
will
They
without
act
who
Buyers
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market
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an
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are
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but
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rise
to
present
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-tconditions
erm
fupresent
the
market
.tive

'atend
sellers
The
influenced
received
Prices
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sell
will
They
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are
who
Sellers
hold
to
ctions
intelliact
underand
adequate
not
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less
not
if
prices
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accrue
will
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that
will
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tions
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.
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The
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SELLERS

able
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enced
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nd
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price
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term
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.

typical
to
.accrue
users

METHODS OF DWYLLING VALUATION

of
worth
present
the
than
less
and
without
negently
the
than
existing
worth
standing
of
condimarket
benefits
-tbenefits
long
future
erm
prospective
long
future
erm

.
cessity

1311

UNDERWRITING MANUAL

1312-1314

1312. Valuation, in accordance with the prescribed defi
nition of value, cannot be feasible without recognizing that each
property offers a buyer a future income stream in the form of services

or monetary net profits. The essence of valuation is in the attempt
to forecast as accurately as possible the certainty, amount, character,
and attractiveness of the future income stream and to translate it,

by such means as are available, into an estimate of present capital

value. The latter value has already been defined as justified or war
ranted purchase price. By reverse reasoning this definition of the
concept of value controls the considerations with respect to the fore
casts of the future income stream .

1313. One concept is found among many appraisers and
lending agencies, namely, the idea of “ loan value. ” The Federal
Housing Administration recognizes no necessity for the use of such
a term . If it refers to a correct valuation, then the word " value"
should suffice.

If it is intended to refer to a valuation somewhat

higher or lower than value, it leads to unsound practice.
1314. “Normal value” is a term which is frequently used.
It is very rarely, however, that it can be satisfactorily defined . Nor
mal value has been used to mean a value which, in the past, was
higher or lower than that which exists. Such a concept is apt to re
sult in unsound valuations because generally it is accompanied by the
inference that in a short time prices and values will return to the
so -called “ normal”. Therefore, it is inferred that it is not proper to
recognize existing conditions and facts which have created present

values at points which the appraisers consider to be “abnormal.” The
instability of the general price structure in times past has caused great
fluctuations in real estate price levels so that there is really no single

level that can be pointed out as a normal level. It is improper to
assume that a certain level of real estate prices that existed at one
time is “ normal”, and that prices therefore will inevitably return to
that level in the future. All values depend on future occurrences

and the process of estimating values necessitates the making
of assumptions with regard to the future. The past is often useful
in forecasting the future, and the manner in which events have oc
curred in the past may be a reliable indication of what will probably
happen in the future . However, an exact repetition of events can
very seldom be contemplated. While the above probably throws sus
picion on appraisal concepts of normal value, it does not necessarily
imply that they are utterly worthless. Without some notion of
the idea of a median trend or normal level of value, appraisers

may find it difficult to distinguish between value and available market
price. The distinction between the current price and the value must

METHODS OF DWELLING VALUATION

1314-1319

follow more from a forecasting process than from a reference to
value levels in the past.
1315. Sources of Real Estate Value.

The value of a

real estate property results from the benefits which its utilization is
expected to confer on the owner. There are various forms in which

real estate may be useful. Residential real estate is useful because

it provides shelter. This obvious fact, however, is significant only
when the motives of the owner or typical prospective owners are used
as the basis for a further examination of the character of the useful

ness . To one owner a house appeals as a dwelling place for his own

family. The appeal of another residence may be related almost
solely to investment motives. In the first case, the expected services
of the property are enjoyed directly as they accrue . In the second

case, the expected services are enjoyed indirectly in the form of
dollar income. In every case, however, the utility of the property
is the source of any value it may have and valuation can be accom
plished only by an examination of the usefulness of the property.
1316. The degree of usefulness varies with the char
acteristics and qualities of the properties, the requirements of the in

habitants of the community, and the scarcity of available properties.
Value thus appears in relation to supply and demand and in terms
of the relative advantages of available properties. Usefulness and
scarcity create eagerness for possession and competition ensues in
the real estate market.

1317. Usefulness is, of necessity, prospective and lies in
the future . The buyers and sellers in the market examine, or are
presumed to examine, the available properties in terms of future use
fulness and translate their expectations into present prices which
reflect their forecasts with respect to the extent, quality, and
certainty of the future services and productivity. These considera
tions by prospective buyers, who compete with one another, create

real estate price levels which become guides in valuation .
IMPLIED VALUATION PROCEDURE

1318. It is evident that sound valuation procedure must
embrace and use both the definition of value and an examination of

the source of value. These lead, by logical derivation, to the estab
lishment of certain axioms of valuation and to the outlining of a

basic procedure.
1319. Axioms of Valuation .

There are certain basic

valuation principles which are axiomatic, or self-evident. These
include :

a. Valuation presupposes the existence of a buyer
6. Valuation presupposes the existence of a seller

UNDERWRITING MANUAL

1319–1320 (1)

c. Valuation presupposes a sale in which the buyer is well in

formed, and acts intelligently, voluntarily, and without
necessity

d. Valuation presupposes a sale in which the seller is well

informed, and acts intelligently, voluntarily, and without
necessity

e. Valuation endeavors to estimate prices which represent the
worth, at the time of appraisal, of the future benefits from

long-term use which will arise from ownership, rather
than merely prices which can be obtained in the market

f. Valuation recognizes the importance and usefulness of sales
prices, provided it is determined whether or not such sales

prices were fair and warranted ; and provided the motives,
intelligence, and wisdom of the parties to the sales, as well

as other conditions surrounding them and influencing the
determination of the sales prices, are ascertained and
weighed
g. Valuation presupposes and recognizes that intelligent buy
ers and sellers consider the utility of real property
Valuation
recognizes that the prices at which competing
h.

properties are available, either by purchase or by build
ing, set or tend to set the approximate upper limit of
possible value

i . Valuation presupposes and recognizes that well - informed
buyers and sellers are commonly aware of the existence
of competing properties and compare their respective
asking prices, desirability, advantages, and disadvantages,
and future prospects

j. Valuation recognizes that replacement cost at the time of
appraisal sets one approximate upper limit of possible
value

k. Valuation recognizes that value may be much less than
either replacement cost or available market price.
l. Valuation presupposes and recognizes that well-informed
buyers and sellers compare and contrast the advantages

and disadvantages of renting with those involved in
ownership
1320 ( 1). Delineation of Property to be Appraised .

The Valuator is required to estimate the value of specific properties.
In a legal sense the word “ property ” refers to rights which are pos
sessed through acquisition of title, that is, of ownership. It is these

rights in relation to specific properties which must be valued. They
must be delineated before they can be valued . The nature of the

METHODS OF DWELLING VALUATION

1320 ( 1) -1320 (3)

title held by the party whose rights are being valued determines the
delineation . Thus, if title is held in fee simple, free of all encum

brances, the rights are the most extensive possible. If such a title is
encumbered , the rights are correspondingly restricted and may be

less valuable, depending largely on the nature of the encumbrances.
For example, encumbrances in the nature of easements, reservations,
restrictions, and rights-of-way may cloud the title and lessen the
value of the owner's estate. Valuation cannot be made without

knowledge of encumbrances or without being based on some assump
tions regarding them . Title may also confer only the rights estab
lished by a lease. The lessee's rights are only those described in the
lease or conferred by law and are subject to those reserved by the
lessor.

The terms and conditions of the lease must be ascertained

before the lessee's " property " can be delineated and valued. In any
event, regardless of the nature of title, the rights of an owner, though
exclusive, are never absolute for they are always subject to the rights
of the sovereign authority, such as the right to tax, to regulate and
control as by zoning ordinances or other legislative enactments, and
the right of eminent domain. Delineation of property is affected by
such matters.

1320 (2). Delineation of the property to be appraised
also depends on the extent of the physical property described in the

instrument which conveyed title. Valuators are supplied with legal
descriptions of the properties which are offered as mortgage security.
In each case they are required to delineate and describe the portion
which comprises eligible security. Their valuations must embrace
all the property thus delineated and described, even though land
in addition to an

area sufficient to suitably accommodate the

building improvements is included . Furthermore, if an easement
over adjoining property for ingress and egress or for light and air,
or some other purpose, is included in the property described , or is
found to be appurtenant to it, the right consisting of the easement
must also be embraced in the valuation .

1320 ( 3 ) . In some instances the property described may

embrace rights other than rights in realty. Proper delineation will

eliminate any such rights from the valuation. They might relate to
such things as stoves and refrigerators ( though these are sometimes
classed as realty, in which event they would be included in the de

lineation ), garden tools, household equipment, and other chattels or

personal property. Some items of equipment, window shades and
screens, for example, are appurtenant to the real estate and, there

fore, properly included in the property delineated. Some rights are
not appurtenant but are " gross”, that is, they do not run with the

UNDERWRITING MANUAL

1320 (3)-1322

land but are simply personal rights vested in the existing owner.

They would not automatically pass to a purchaser as would appurte
nant rights. Consequently, they would not be elements of the valua

tion. Usually rights-of-way, easements, and riparian rights are
appurtenant.

1320 (4 ) . Property rights include the right to use and
occupy, the right to lease to others, and the right to sell. The exer
cise of these various rights results in the realization of benefits. The
extent and nature of the rights determines the extent and nature of

the benefits which, in turn , determine the value to be ascribed to the

delineated property. However, the benefits cannot be valued except
in consideration of the characteristics and motives of owners of vari
ous types. The right to occupy, or to lease, or to sell vests in any
owner holding title in fee simple unencumbered . The owner might

be an owner -occupant who values the property because of its desira
bility as a place of residence for his family. Or the owner might be
one who values it because of the net rental he can realize from it.

Again, the owner might be a mortgage company, an operative builder,
or a speculator, and to any of these owners the property would be

valuable mainly for the money obtainable in a sale. Obviously,
though the rights possessed by any of these owners would be identi
cal, the value ascribable to these rights could well be different to
several of them . After delineating the property, or rights, to be
appraised, Valuators are required to value them from the point of
view of typical buyers to whom the property exerts strongest appeal,
not from that of an owner who is an operative builder, a financial in
stitution, a speculator, or any other type of temporay owner .
1321. Substitution Theory . The buyer, in any case, is

not warranted in paying more than it would cost him to purchase

other substitute properties affording equal advantages and subject
to equal disadvantages. The buyer is not warranted in paying any
more, and the seller is not warranted in accepting any less, than the
price at which other properties having equal facilities, equal desir
ability, and equal utility, and subject to the same risk of loss or

possibility of enhancement of desirability or value in the future, can
be purchased from well-informed owners who act intelligently and
are free to act of their own volition and desire. This principle ap
plies to any means of securing a substitute property, whether by
outright purchase, or by building a duplicate.
1322. This leads to the conclusion that sound valuation

method must recognize the market prices at which comparable proper
ties are available as the approximate upper limit of valuation. It also

means that the cost of replacement of a property, by entering into a
construction program , is also the approximate upper limit of possible

METHODS OF DWELLING VALUATION

1322-1325

valuation. Neither the estimation of available market price nor
the estimation of the replacement cost of a property is, in itself, an
appraisal process in accord with the definition of value. These esti
mates do, however, enter directly into the valuation procedure as
limiting control factors. In general, these estimates are construed
to be the absolute upper limits of valuation . In certain cases, how

ever, there are logical reasons to consider them as approximate upper
limits only. These reasons are brought out in the descriptions of the
practical methods.

1323. Basic Procedure. The purpose of valuation , the
definition of value, the axioms of valuation , and the practical limita

tions of appraisal data dictate the basic valuation procedure. Sound
procedure systematically employs, insofar as it is practicably pos
sible, the theoretically correct method of valuation . The basic pro
cedure embraces the following :
a . A study of the future utility of the property and of the
motives of possible prospective buyers
6. A forecast representing the most probable series of future
services to be derived from ownership of the property
0. An analysis which converts the forecast services into a
present price or valuation

1324. Study of Future Utility. The first step in the

basic valuation procedure, the study of future utility, includes the
selection of possible uses, the rejection of uses which are obviously
lower uses than others, and the determination of uses in terms of

alternative kinds of possible buyers and differing motives of such
buyers. The second step, the forecast, relates to either the future
direct services, the amenities, which will be enjoyed by an owner oc

cupant, or to dollar incomes which are the source of value to an owner
investor. In some instances, motives of possible typical buyers will
require the forecast to relate to both amenity incomes and dollar
incomes. In every case the forecast must embrace the entire future.
It is incomplete if it includes only a forecast of the services

or returns which are expected to accrue during the next year, a typical

early year, or " on the average” in early years. The third step, the
conversion of the forecast into a valuation, is accomplished variously,
either by determining warranted prices by comparison of the expected
services with those of other properties on which accepted valuations
have been established, by capitalization of predicted monetary returns,
or both processes in combination .
1325. Returns from Property. The future services of

properties are best conceived if they are visualized as being in the
form of a flow of returns. The returns will be periodic services in

UNDERWRITING MANUAL

1325-1327

cluding actual shelter, enjoyment, pride of ownership, or net income.
They include amenities and monetary earnings. Both forms of re
turns should be considered as a flow of income, whether the income
takes the form of direct satisfactions or dollars.

1326. In urban residential real estate the flow of returns

is present only when the site is occupied by useful buildings or other
improvements. Undeveloped vacant land is presumed to become
productive shortly after the completion of construction. Typically,
the flow of returns will rise rapidly to a maximum rate in the early
life of the improvements and gradually decline during midlife and

late life until the improvements have finally lost profitable useful
ness and the flow of returns is only large enough to justify purchase
of the property as vacant land. The accompanying diagram shows
the trend of the flow of returns in the typical case . It assumes, but
does not indicate, periodic fluctuations attributable to changes in

gross revenues, taxes, operating expenses, undersupply or oversupply
of competitive properties, or other causes.
MID - LIFE

to — LATE LIFE
LIFE
ECONOMIC
OF
-END

RETURNS
SUFFICIENT
ONLY
TO
VALUE
LAND
SUPPORT

-*

PERIOD
CONSTRUCTION

VACANT
LAND

EARLY
LIFE

NEW CONSTRUCTION - REMAINING ECONOMIC LIFE

k_EXISTING CONSTRUCTION -REMAINING ECONOMIC LIFE

1327. Translation of Forecast to Estimate of Value.
The third step in the basic valuation procedure is the translation

of the forecast of returns to an estimate of value. The predicted
returns are amenities, monetary net incomes, or both in combination .

In valuation, these returns are translated to an equivalent present
worth in the form of a price. In theory, this is precisely what the
market does. It compares probable future amenity and dollar re

turns and assigns values according to their quantity, quality, and
duration .

It is known that there is a relationship between the

level of the net returns a property is capable of producing, and the
value of the property. The ratio of the net returns to the value is

METHODS OF DWELLING VALUATION
1327–1331

described as the rate of return . When used to determine the value

from predetermined estimates of net returns, it is described as the
capitalization rate. The rate will be relatively low when the future

returns are certain and of long duration. It will be relatively high
when the returns are uncertain or subject to wide fluctuation.
1328. Capitalization rates used to translate forecast re
turns into estimates of value may be applied only to net returns.
In certain cases of valuation, it is feasible to forecast gross returns
and to assume that, on the average, the expenses of operating the
different properties are constant for the same sizes and grades of
properties. When gross returns are used, the Valuator translates
his forecasts into an estimate of value by multiplying by a conver
sion factor. The effect is the same as if he had used net returns and

divided by a capitalization rate. The use of conversion factors is,
however, justified only by the validity of the assumption that the
gross returns of several properties embrace expenses which are sub
stantially constant from case to case .
1329. Selection of Method. The basic procedure is de
scribed in terms of properties owned in fee simple unencumbered .
All cases require valuation of the unencumbered fee first. If the ac

tual property is a leasehold estate, the value of the leasehold is deter
mined afterward in accordance with instructions in paragraphs 1336
( 1 ) to 1336 ( 12) .
1330. There are two alternative methods of valuation

prescribed . As described , they apply to properties owned or to be
owned in fee simple unencumbered . They are :

a . The amenity comparison method of valuation, described in
Section 14

6. The capitalization method of valuation, described in
Section 15

1331. The Amenity Comparison Method is applied to

amenity income dwellings. Amenity income dwellings are defined
as properties which exert appeal to a measurable degree to typical
prospective purchasers interested in the direct amenity services which
the dwelling is capable of rendering an owner occupant. Such
a purchaser will consider buying the property as a place of residence
for himself and his family. In addition, his motivation may include
the desire to secure monetary returns. Most cases of single family

dwellings are appraised by this method . Small multi-family dwell
ings are correctly appraised by the method when the motives of the
typical buyers include the intention to live in one of the family
units.

UNDERWRITING MANUAL

1332–1334 (2)

1332. The Capitalization Method is applied to rental
income dwellings. Rental income dwellings are defined as proper
ties which exert appeal solely, or almost solely, to prospective pur
chasers interested typically and only in the net monetary returns

which the properties are capable of producing. Such a purchaser
will consider buying the property only because of the dollar returns
he anticipates. Some cases of single family dwellings are correctly
appraised only by this method. These are cases in which the typical
available prospective buyers are confined to persons other than those
who would wish to live in the premises. The method is applicable

principally to multi-family dwelling properties.
SUPPLEMENTARY PROCEDURES

1333. Supplementary procedures and modifications of
the appraisal process are used to solve the special problems presented
by mechanical equipment and accessories, dwellings on higher-use
sites, leasehold estates, taxes and special assessments, and the
valuation of fragmental properties.
1334 (1). Mechanical Equipment and Accessories.
Certain electrical and mechanical devices are installed in homes.

In

many instances the installations are such that some or all of this
equipment loses its character as personal property and becomes an

integral part of the real property. Equipment which is part of the
real estate is part of the security for the mortgage on the property,
and therefore affects the value estimate. If the equipment is wisely

chosen and installed, it may enhance the value of the property to the
full extent of its cost in the case of a new dwelling. If, however,
the cost of the equipment is too great an outlay in relation to the
cost of the structure, or if the typical buyer cannot afford the cost of
operating the equipment, it will not enhance the value of the prop
erty to the full extent of its cost. First, the Valuator must be able
to know just what equipment in the building is part of the real
property and what is personal property, so that he may know ex

actly what he is to appraise. Second, he must determine to what
extent the value of the property is enhanced by the equipment which
is part of the realty. Insofar as any of the equipment is in the na
ture of chattels, he must omit it from the rental value estimates if

feasible to do so . In any event, value of chattels is never to be in
cluded in the estimate of value.

1334 (2). If the case involves an old structure, and it is
intended that new mechanical equipment and accessories will be
installed in such a way as to become part of the realty, the Valuator's
problem is the same as in the case of new structures.

The Valuator

must determine to what extent the installation will enhance the

METHODS OF DWELLING VALUATION

1334 ( 2 ) -1335 (2)

property value. Many of these mechanical devices are subject to
rapid deterioration due to the wearing out of moving parts, and
to speedy obsolescence due to continual change and improvement in
design . For these reasons it may not be wise to install them where
the costs of installation, maintenance, and operation will be too great
in relation to the value of the property.

1334 (3) . In cases involving rental income dwellings
the value added by special mechanical equipment will be reflected

in the amount of rent these properties can command. In estimating
the value of such a property the Valuator must ascertain (a) of what
the equipment consists, ( b ) what is its replacement cost, (c) what

it will cost to operate and maintain, (d) how long a probable re

maining economic life it will have, and (e) the number of times it
will have to be replaced during the estimated remaining economic

life of the building improvements. Then he must calculate what
amount per annum will have to be taken from the gross income the
property will produce in order ( a) to operate and maintain this
equipment, and (8 ) to recover the value he assigns to it. This

amount he uses as a deduction in his income analysis in ascertaining
the net income which may be expected from the property. In this
way he can justify the value assigned to the property including its
short -lived equipment.

1334 (4). The Valuator is given assistance, where new
buildings are involved, by the Architectural Inspector, who is in

structed to included in his report a separate item representing the
replacement cost of any equipment which is part of the real property
and which will suffer rapid deterioration or obsolescence.
1335 (1) . Dwellings on Higher-Use Sites. There are
cases in which the property to be appraised consists of a single
family residence upon a lot suitable at the time for commercial or
multi-family residential use. Some appraisers attempt to estimate
value in such cases by adding a land value based on the higher use
to the so-called "depreciated replacement cost” of the residence.
Such a valuation is incorrect because it is based upon the erroneous

premise that the value so attributed to the land is enhanced by the
residence, by an amount equal to the so-called depreciated replace
ment cost of the structure.

The fact that the residential use does

not represent the highest and best use for the site is thus ignored .
The premise is incorrect and any conclusion based upon it is likewise
erroneous. It would also be erroneous to ascribe a value to the land

for the existing residential use and then proceed as in ordinary cases.
1335 (2). The value of a residential property can be

equivalent to the sum of the value of the site and the replacement
cost of the structure upon it, only if the structure is new and repre

UNDERWRITING MANUAL

1335 (2) —1336 ( 1 )
sents the highest and best use for the land. Furthermore there must

be a demand for such residential properties at prices equivalent to
this sum . Obviously, the conditions described cannot apply in the
case of old residences on apartment or business sites, and therefore a

replacement cost estimate cannot be used for valuation purposes in
such cases, for such an estimate will always exceed the value of such
properties.
1335 (3) . In dealing with properties which are not im
proved to their highest and best use, if the improvements are capable
of producing a net return in excess of the sum imputable to the land

and the costs of taxes, operation, and maintenance, then their economic

life has not yet terminated and their value upon the site may be
determined by the use of the capitalization method of valuation . The
earnings of the improvements cannot be treated as though they were
to continue indefinitely, when , as a matter of fact, they will continue
for only a relatively short time. If the residence has reached the end
of its economic life, then the value will not be in excess of the worth

of the land plus the salvage value, if any, of the improvements.
1335 (4). If a site used for a residence is found to be

zoned for business use, or if it fronts upon a street portions of
which are being devoted to commercial purposes, the Valuator must
not assign a value to the lot equal to the value of another nearby

site which actually is being profitably used for commercial pur
poses. Before the residential site can have a value equivalent to
that of the lot which is actually improved and being utilized
profitably for business purposes, there must be an immediate need
for the site for equally profitable business purposes. Generally

speaking, in American cities, most lots which are being used for
residential purposes, but which front upon commercially zoned
streets, will probably not be utilized for business purposes until the
lapse of long periods of time, during which their owners will re
ceive little or no net return from them but will have to carry ex

cessive burdens of taxation and sacrifice the interest earnings which

they might enjoy if the sums which they paid for the properties
were invested in some more productive form of property. The
general tendency is to overestimate the value of such properties.
1336 (1) . Leasehold Estates . Section 201 of the Na

tional Housing Act permits the insurance of mortgages eligible in
other particulars which are first liens on real estate the titles to

which are held by mortgagors either in fee simple unencumbered or :
a. Under a lease for not less than ninety-nine years, which
is renewable

6. Under a lease having a period of not less than fifty years
to run from the date the mortgage was executed

METHODS OF DWELLING VALUATION

1336 ( 1 ) -1336 (5)
In certain localities in the United States considerable numbers of

residential properties are leasehold estates. The valuation procedure
in such cases involves additional steps.
1336 (2) . When a long term lease upon real property is

made, the effect is to create two distinct properties. The lessor still
holds his title in fee simple, but since it is encumbered by the lease
which he has given, his interest is designated the " leased fee.” The

lessee acquires the rights to the benefits which the property will pro
duce during the term of the lease, provided he does not default in

the performance of those acts required of him under the terms of
the lease. His interest is designated the “ leasehold estate.” In
exchange for the rights, he is obligated to pay a rental to the owner
of the fee and to discharge the other obligations placed upon him
by the lease . It is not deemed essential here to prescribe the more

complex methods of leasehold estate appraisal. The procedure set
forth herein produces results of the required degree of accuracy
for the valuation of small residential leasehold estates and is pre

sented with the aim of giving sufficient direction to Valuators, in
order that they may properly perform their functions in cases
where this type of ownership exists.
1336 (3) . The Valuator determines the total value of

the property as though owned in fee simple and unencumbered by
a lease. He then determines the value of the leased fee. Finally,
he deducts the value ascribed to the leased fee from the estimated

value of the unencumbered property and accepts the difference as
a reasonable approximation of the value of the leasehold estate. He
then enters the results on the Report of Valuator in the following
manner :
ESTIMATE OF VALUE OF LEASEHOLD ESTATE
$ 4,800
ESTIMATE OF VALUE . - In my opinion the alue of the property described above, aksuining the contempl
iinprovements or new
construction described in exhibita, if any, accompanying FHA Form No. 2004a, or assuming the repairs or alteration or addition , if any,
listed under item ( 15) have been completed, is...
unencumbered by. Lease.
S......6,000
Distribution of value estimate: Land ....
@ $.......... 30 .
s..2,500 .
per lot, Ir. It ., On ft.
Main Building ................ S..6.000.
Remaining lease tern - 30 yrs renewable
$ 60
Annual ground rent
Carage .....
S ...... 400..
5 %
Capitalization rate
Other Improvements.................. 100.
$ 1,200
Haluation of leased fee

These steps are described in greater detail in the following para
graphs.

1336 (4). The first step is to estimate the value of the
property as though owned in fee simple unencumbered. This is done
in the same manner as in any case where a leasehold estate is not
involved, and all the instructions and suggestions contained in the
Underwriting Manual are to be followed in this step.
1336 (5 ). The next step is to estimate the value of the
leased fee, that is, of the lessor's estate . In order to do this, it is
necessary to be familiar with the terms of the lease. This necessitates

UNDERWRITING MANUAL

1336 ( 5 ) -1336 (7)
a reading of that document. A decision must be made as to whether

or not the lease terms are fair and equitable. If they are not, it is
possible that the lessee will default. Of course, if he has erected a
building at a substantial cost to him , and the building is suited to the
site, the default of the lessee may not result in any loss to the lessor.

On the other hand, it may result in substantial monetary gain to him .
Such would be the case if the lease provided that upon default of
the lessee and consequent forfeiture of his rights, all improvements
upon the land would revert to the lessor without cost to the latter.

Such a condition is usual in cases of long-term leases. The elements
of value in the lessor's rights, that is, the leased fee, are :
a . The present value of the net rentals which the lessee is to
pay under the lease

b. The value of the " reversion ", that is, the value of the right
to regain possession of the property and the benefits it

will produce after termination of the lease
1336 (6) . The valuation procedure in the case of a lease
for a definite period of years, and not renewable, differs in some
respects from the procedure followed in the case of a lease renewable

forever, but it will not be necessary in the operations of the Federal
Housing Administration Valuators to make any distinction in the
two cases. This is because under the provisions of the National

Housing Act, a lease in an eligible case must run for at least fifty
years. Furthermore, in view of the fact that the values of the sites in

all cases will not be large, the possible error that may result from
failure to follow a different procedure will be so minute that it will
always be inconsequential.
1336 (7). Valuation of the Leased Fee. The ground
rents reserved under a lease renewable forever may be treated as

“perpetuities”, that is, as payments which will continue periodically
forever. The valuation of such rentals is by direct capitalization
after a proper rate of capitalization has been chosen . The rate of
capitalization varies in different cases depending upon , (a) the rea
sonableness of the amounts reserved as rent, ( b ) the certainty that

the lessee will be able and willing to pay the rents when due, (c)
the amount of the " stake” of the lessee in the property, (d) the

future prospects of the property with regard to maintaining or en
hancing its desirability, utility, and value, and (e) the rate of return
obtainable from other types of investments. If favorable conditions

exist, it will not be unusual for capitalization rates applicable to the
valuation of leased fees to range upwards from about 4% . The

process of capitalization of a net rental receivable in perpetuity is
simple, merely involving division of the yearly rental by the capitali
zation rate. For example, if the ground rent is $ 90 per year net to

METHODS OF DWELLING VALUATION

1336 (7 ) -1336 ( 8 )

the lessor, and it is assumed that the proper capitalization rate is
4% , the capitalized value of the ground rent payable in perpetuity is
$ 90 divided by 4% , or $ 2,250. If, instead of 4% , it were determined
that the capitalization rate should properly be 6% , the value would
be $ 90 divided by 6% , or $ 1,500. Under these conditions, there will
be no " reversion " to the lessor, that is, the property presumably will
never revert to the lessor, inasmuch as the lessee has the right to
renew his lease forever. Therefore, the total value of the leased fee

in the example quoted would be $ 2,250 or $ 1,500, depending upon the
rate of capitalization.

1336 (8) . Valuation of the Leasehold Estate. Having
taken the steps outlined above, the Valuator will have reached a con
clusion with regard to :

a . The total value of the property in fee simple unencum
bered by the lease .

7. The value of the leased fee ( lessor's interest ).
The valuation of the leasehold estate ( the lessee's interest in the
property ) is then determined by deducting the valuation of the

leased fee from the total valuation of the property in fee simple
unencumbered by the lease. The result so obtained is a close ap
proximation and is accepted by the Administration as the value of
the leasehold estate.

Example No. 1. A ground lease upon a single family resi
dence site having more than 50 years to run calls for a
rental of $ 60 per year, representing 6% upon a ground
value of $ 1,000 at the time the lease was made. The
lessee erected a residence upon the site at a cost of $ 5,000
several years prior to the date of appraisal. The value
of the leasehold estate is determined as follows :
( a) Estimated value of the property in fee simple unen
$ 6,000

cumbered

Distribution of total valuation :
Land

Buildings
Total.---

$ 1,500
4,500

$ 6,000

( 0 ) Estimated value of the leased fee : The lease is well se
cured, land value has increased since the lease was made,
the district is well protected with appropriate restric
tions and zoning, and has developed into a uniformly

desirable residential area. It is determined that a fair
capitalization rate of lessor's ground rent is 5% ; there
fore, the valuation of the leased fee is $ 60 divided
$ 1,200
by 5%-( c ) Valuation of leasehold estate_

$ 4, 800

UNDERWRITING MANUAL

1336 ( 8 ) -1336 (9)

In the foregoing example, it will be noted that the value of the lease
hold estate exceeds the value of the improvements. This is because
the land has enhanced in value and the ground rent is therefore lower

than it would probably be if a new lease were to be made at the time
of appraisal.
Example No. 2. In this case, conditions are the same as in the
foregoing example except that the district has depreci
ated in value, and it is found that the owner's expendi
ture of money for his home has proven unwise. The
lessor's ground rent is still well secured, but because of
unfavorable factors affecting the neighborhood, the
proper capitalization rate is 6 %.
( a ) Estimated value of the property in fee simple unen
$ 4,000

cumbered .
Distribution of total valuation :
Land

Buildings

$ 500
3, 500

Total.--- $ 4, 000
( 6 ) Valuation of the leased fee, $ 60 divided by 6% --$ 1,000
( c) Valuation of the leasehold estate_

$ 3,000

In the above example the value of the leased fee exceeds the value of
the land . Likewise the leasehold estate is less valuable than the por

tion of the total valuation ascribed to the improvement. In such cases ,
the results are entered on the Report of Valuator in the following
manner :

ESTIMATE
VALUE
OF of
OF LEASEHOLD
ESTATE
$ 3,000 or new
ESTIMATE OF VALUE .- In my opinion
the value
deseribed above,assurning
the property
the contemplated improvements
construction described in exhibits, if any, Accompanying FHA Form No. 2004a , or assuming the repairs or alteration or additiona, if any,
listed under item (15 ) have been completed , is........ unencumbered.by. Lease.
$ ....4,000 .
Distribution of value estimate : Ladd ....
-500 ....... per lot, Ofr. ft., q.ft.
.500.. @ $ .....
55 years
.3., 500 .. Remaining lea se term
Main Building
$ 60
Reserved annual rent
Garage.....
65
Capitalization rate
Other Improvements ..
Valuation of leased fee_ $ 1,000 .

1336 (9) . The laws of some states fix the methods

whereby lessees of residential properties under long-term ground
leases may "redeem” the ground rentals reserved under their leases by

purchasing the fee simple title from the lessor, thereby destroying
the lessor-lessee relationship . In such instances, the appraisal pro
cedure must be consistent with the legal requirements. For exam
ple, assume that under a state law a lessee has the right to redeem
the ground rent by paying the lessor a sum equal to the capitalized
value of the ground rent on a 6% basis. Thus, in Example No. 1,
if such state law existed , the value of the leased fee would be $ 60

divided by 6% , or $ 1,000 rather than $ 1,200, and the value of the
lessee's estate would be $ 5,000 rather than $ 4,800. Legal enactments

METHODS OF DWELLING VALUATION

1336 (9-1337 (2)

of the type mentioned have the effect of giving lessees options to buy

at definite prices, and if an option to purchase exists in a lease, the
value of the lessor's interest, or leased fee, cannot exceed the option
price, although it may be less than that figure.
1336 ( 10). Subleasehold Estates.

Sometimes lessees

under long term leases create subleasehold estates by subleasing their
rights to others. Such subleasing is not unusual in cases where one

individual leases several parcels of ground and then subleases each

parcel separately to different persons. The procedure to be followed
in valuing subleasehold, or sub- subleasehold, estates is the same in
principle as that outlined herein for the valuation of ordinary lease
holds. The Valuator simply capitalizes the total rental reserved in
the sublease and deducts the resultant sum from the total valuation

ascribed to the property as if unencumbered .
1336 ( 11). Valuators must realize that the ownership of
a property which is a leasehold estate involves more risk than the own
ership of either a leased fee or an unencumbered property. Further

more, mortgage investment in leasehold estates is generally more
hazardous than in unencumbered properties. Consequently, valua
tion procedure in such cases requires the exercise of discriminating
judgment.
1336 ( 12 ). The maximum amount of an insurable loan

on a leasehold is determined, in part, by multiplying ( a) the valua
tion unencumbered by lease by ( 6 ) the maximum percentage appli
cable and subtracting ( c ) the value ascribed to the leased fee. Thus,

in Example No. 1, assuming the 90% maximum would apply, the
maximum insurable loan on the leasehold would be $ 4,200 ($6,000 X
90 % = $ 5,400 minus $ 1,200 = $ 4,200 ). In Example No. 2, it would be
$ 2,600 ( $4,000 X 90 % = $ 3,600 minus $ 1,000 = $ 2,600 ).
1337 (1). Taxes and Special Assessments . The level
of general property taxes and the character and amounts of special
assessments affect the values of properties. The greater the amounts

of such burdens, the less valuable are the properties subjected to
them , even though they may offer identical services to their owners.

1337 (2) . General property taxes are levied yearly and
must be paid yearly or more frequently. Within any given com
munity the level of taxes is reflected in the market prices which
properties command, and except in cases where the assessed valua

tions are not properly equalized, appraisal procedure is not affected,
inasmuch as the market price data and rental data used by the Valu
ators already contain the necessary adjustments. Differences in tax
levels, however, do affect the comparisons which appraisers make and
should be taken into account.

UNDERWRITING MANUAL

1337 (3)

1337 (3) . The effects upon value of special assessment
liens are different from those produced by general property tax liens.
Whereas all properties in a community may be subject to general
property taxation, levies in the nature of special assessments are
made only upon the properties within the boundaries of the special
assessment district. Such special assessments differ from general
property taxes, not only in the respect just mentioned , but also in that

they continue for a definite period of years only, whereas the general

property taxes continue indefinitely. Therefore, if special assessment
liens exist, due allowance for this condition must be made in the valua
tion process. Properties against which special assessment liens exist
are less valuable than they would be if these liens did not exist. This

is made apparent by considering the conditions reflected in the several
cases outlined below .

Case No. 1. A property free of special assessment liens but sub
ject to general property taxes : Value, $ 6,000.
Case No. 2. The same physical property, subject not only to
general property taxes but also special assessment liens
totaling $ 200 now due and payable. A purchaser of this
property must pay the amount due and the value of the

property is therefore less : Value, $ 5,800.
Case No. 3. The same physical property, subject not only

to general property taxes but also to special assessment
liens totaling $ 500, payable in ten yearly installments of
principal plus interest at 6 per cent per annum on the
deferred amounts. Because of the risk created by the pos

sibility of default in paying the installments of interest
and consequent foreclosure and loss of title, or because of
the interest rate charged which may be excessive in the
light of current financial conditions, this property may be
less valuable by $ 500, or more, than a similar property
free from assessment liens : Value, $ 5,500 or less.

Case No. 4. The same physical property subject not only to
general property taxes, but also to a special assessment lien
which is a lien upon all of the properties within the special
assessment district and which continues a lien upon all of

these properties until it is entirely extinguished . Special
assessment bonds outstanding, $ 500,000. Assessed value of

the special assessment district, $ 3,000,000. Assessed value
of the property being appraised, $ 3,000 or 1/1000 of the
district assessed value. The effect of the assessment lien

on the value of the property is much more pronounced
than in Case No. 3. The following paragraph discusses

METHODS OF DWELLING VALUATION

1337 ( 3 ) –1337 (5)

the reasons for this. Value, less than $5,500, probably con
siderably less.

Case No. 5. The same physical property and condition as in
Case No. 4, except that the assessment district is broken

down into zones, each of which bears a different percentage
of the total levy against the entire district. Assume that
the assessed value of the property is still $ 3,000 and of the
entire district $ 3,000,000. However, the property is in an
area which is designated Zone A of the assessment district,
which zone is required to pay 20% of the total district lien
( $500,000 ), or $ 100,000. It is seen now that the assessed

value of the property is 1100 of that of the zone in which it
is located , so that if all owners of properties in the zone
and assessment district pay their yearly assessment levies,
the property appraised will be charged 14100 of $ 100,000 or
$ 1,000 plus yearly interest charges. The value therefore
will be less than $ 5,000, and probably considerably less.
1337 (4) . In Case No. 4, if all of the property owners

in the special assessment district pay installments of principal and
interest each time they become due, the owner of the specific property
considered will have to pay 11000 of $ 500,000, or $ 500 , in yearly
installments, plus interest. Therefore, the minimum reduction in
value as compared with Case No. 1 would be $ 500. However, if any
of the other property owners in the district become delinquent in
their assessment payments, the delinquency may cause an increase in
the amounts which will be levied against the properties in the district
during the following year. This may result in an increase in the

amount of delinquency and necessitate a still greater levy for the
next year. In this way, the special assessment burden may mount
up year by year, falling more and more heavily upon the shoulders
of those owners able to pay or unwilling to abandon their properties.
It is possible for such burdens to reach the point where owners in the
district voluntarily surrender their properties. This possibility is

mainly responsible for the statement above that the value probably
would be considerably less than $ 5,500. If special assessment liens
of the type mentioned in Cases No. 4 and No. 5 exist, it is essential
that information be gathered with regard to ( a) the amount of delin
quency , if any, ( b ) the likelihood of foreclosure by the owners of the

lien, and (c) the likelihood of a pyramiding of the assessment levies.
1337 (5). In cases where special assessment liens exist,
the Valuator must appraise the properties as they stand, subject to
the assessment liens. In no such case is it permissible for him to
base his appraisal upon the hypothetical condition of the assessments

UNDERWRITING MANUAL

1337 ( 5 ) -1338 (2)

being paid. In each such case the estimate will be decreased by at
least the amount of the liens against the property , or that proportion
of the lien upon the entire district which would represent the mini
mum that would probably be assessed in all the future yearly levies

against the specific property under appraisal. In determining this
minimum he would be influenced by :

a. The assessment levy made during the current year against
the property appraised

6. Whether or not the levies had been increasing in the
prior years during which the assessment lien had existed

c. The probable trend of the amounts of the levies in the future
d. The total amount of the lien outstanding against the district
e. The ratio of the assessed value of the property appraised to
the assessed value of the assessment district, or of the
zone in which the property lies
1337 (6). When properties lying within the boundaries
of special assessment districts are sold, the buyer may either assume
the burden of paying the assessments as they come due, or he may
insist upon the immediate payment by the seller of existing special
assessment liens. Obviously, the purchase price will be different in
the two cases. For this reason, it is essential that when Valuators
obtain sales price data , they ascertain the conditions of the sale with
regard to special assessment liens as well as other conditions.

1338 ( 1). Valuation of Fragmental Properties. Valu
ators are required to place a value on all the property delineated and
described by them as eligible security, in accordance with the rule

cited in paragraph 1305. At the same time, they are required to set
separate valuations on fractions or portions of eligible properties
where such estimates assist in the patterning of an insurable loan
or determining the value of the security remaining when there is to
be a partial release of security. When only a portion of the prop

erty described in the application is found by the Valuator to be
eligible security, he is required to delineate and describe and base
his valuation on the portion which is eligible. This valuation of the

eligible fragment is used by the Chief Underwriter in ascertaining
the maximum amount of an insurable loan . The same figure is used
in rating the first feature of the Rating of Mortgage Pattern grid.
1338 (2) When the property described in the Valua
tor's assignment is found to include eligible land which is in addition
to the area required to suitably accommodate the buildings involved
in the case, the Valuator must indicate on his report what portion of
the property includes the building improvements and what portion is

METHODS OF DWELLING VALUATION

1338 (2 ) —1338 (3)

excess land . He must value the entire property described and in
addition distribute this valuation between the fractions into which he

divides the entire property. The prescribed valuation processes are
followed in making the valuation of the entire property. The value
ascribed to the excess land is the difference between the valuation of

the entire land area and the valuation of the area required to suitably
accommodate the building improvements. This latter area must be
sufficient, of course, to constitute a natural, marketable real estate

entity such as described in Section 5, Minimum Eligibility Require
ments .

1338 (3 ) . Cases arise in which mortgagors and mort

gagees desire the Federal Housing Administration to approve of the
partial release of property subject to the insured mortgage lien.
Valuators are required to make special reports in connection with
these cases . Frequently the area involved in the partial release is

small and unusable by itself. On account of its lack of utility by
itself, it might appear logical to assign it no value but this would be
incorrect. Valuation of the area is accomplished by ascribing to it a
portion of the utility attached to the entire land area of which it is an
integral part and valuing it accordingly. Sometimes it appears that
the value of the property which will remain under the mortgage af
ter the partial release will be the same as that assigned to the entire

property under the lien before the release and that, therefore, the
area involved in the release is of no value. This would not be true.

Inasmuch as the small area contributes something to the utility of the
whole, it must, therefore, have some value, even though it is nominal.
Usually the partial release is sought from the mortgagee so that the
area involved may be sold to the owner of adjacent property. The

purchase price under such circumstances is a guide to the desired
conclusion, though it very often may greatly exceed a reasonable val
uation because of such matters as the presence of necessity or ex
traordinary motivation on the part of the buyer. In partial release
cases, the Valuator is to take the point of view of an owner of the
subject property and decide what a fair and reasonable demand would
be with reference to a proper consideration for the sale of the area
concerned in the partial release transaction. Such a consideration
would be that which is sufficient to compensate for any loss in value

suffered by severing the area from the entire property. Sometimes
consideration of the utility which the small area will have in con

junction with the property to which it is to be joined may be of con
trolling significance. However, the necessity of the buyer does not
enter into this consideration . The Valuator must also report any

restrictions which he concludes should be required to be imposed on
the area sought to be released . Restrictions recommended should be

UNDERWRITING MANUAL

1338 (3) –1341

such as would prevent use of the area in any way to adversely affect

the property remaining under the insured mortgage lien or any other
property in the neighborhood. In event the area involved in the re

lease is capable of separate and independent use, the value is to
be estimated in the customary way , that is, in view of the highest
and best use of the site as an independent site. Thus, though ten lots
might be valued at $ 7,000 as a unit, one lot for which an immediate

demand for use exists might properly be valued at $1,000.
INTEGRAL FACTORS IN VALUATION

1339. In both the amenity comparison method and the
capitalization method of valuation, Valuators are required to make
four estimates which are integral factors in the appraisal process.
These are :
a. The estimate of Rental Value

b. The estimate of Remaining Economic Life of Building
c. The estimate of the Value of Land by Comparison

d . The estimate of Replacement Cost of Property in New
Condition
1340. Determination of Rental Value.

In the risk

rating system , rental data are used in rating the second feature
in the Rating of Mortgage Pattern . Estimates of rental value
are also used in valuation. By reason of the vital place which

estimates of rental value have in the determination of valuations,
the greatest care must be given to their estimation . Small differ
ences are important and accuracy is attained only by the assem
blage of large amounts of evidential data in the rental market. The

estimates are not to be off hand opinions but the results of thorough
investigation. In practically all residential neighborhoods when
the " newness " of the district has disappeared, it is common to find
many homes vacated by their owners and rented to tenants. Homes

in such neighborhoods gradually acquire the characteristics of invest
ments. They are no longer bought or sold as homes but merely as
financial investments. The net rental returns they will produce

become of primary importance in estimating their values.
1341. All rental estimates must be on a strictly compar

able basis. The estimates of monthly rental values reported by the
Valuator must be estimates which relate to the properties on an un

furnished basis. They are not to relate to properties on either a
wholly or partially furnished basis unless this is the only feasible
basis to use. Usually when single dwellings are rented on an unfur
nished basis, the landlord agrees to pay only for the mainte

METHODS OF DWELLING VALUATION
1341-1345

nance of the structure and for major repairs made necessary for
defects in the structure or its equipment, or because of de
terioration which has been allowed to accrue through no fault of
the tenant. To secure the necessary uniformity the basis of the
estimate must be as defined above. In comparing rentals for dif
ferent properties, the same conditions of tenancy must apply. In
other words, the agreement between landlord and tenant as to who
is to pay for light, gas, water, or any other expenses must be the
same in each case, or necessary adjustments must be made before
comparing the rentals.
1342. Care should be exercised whenever properties are
located in areas in which there are wide seasonal fluctuations in

rents. Rentals in summer or winter resort areas are cases in point.
Rental values at the height of the rental season should not be re
ported as the monthly rental value. The same restriction also ap

plies to rentals at the ebb of the rental season . In every case the
reported monthly rental value must be 112 of the price which a pro
spective tenant would be warranted in paying for the right to occupy
the premises on an unfurnished basis for a full year. This is not
equivalent to the average per month of the rents obtainable from
different tenants for different portions of the year.

1343. If a property contains more than a single rentable
unit, the rental value estimate is the sum of the rental values of the

individual units. This means the gross monthly rental which the
property is capable of producing if all units are rented for the
amounts determined as their monthly rental values, without any
loss of rent from any cause . If an owner occupies a unit, its rental
value is included .

1344. The estimate of rental value used for rating the
feature Ratio of Total Payment to Rental Value of the Mortgage
Pattern is the rental obtainable from a typical prospective tenant

who will occupy the premises during the ensuing 12 months. The
same estimate is used in an appraisal of an amenity income dwelling
by the amenity comparison method of valuation. It is also used to

estimate the net income during the first year in an appraisal of a
rental income dwelling by the capitalization method of valuation .

The rental value estimates applied to the second or other years, when
several years' estimates are used, are preductions embracing probable
changes in available rents in the several future early years.
1345. There is practically always a rental market. Sales
prices of real estate have been subject to violent changes as have all
other prices in times past. When realty prices fall, owners withdraw
property from sale or else continue to ask prices that will enable
them to recover their costs. The result is that real estate sales, ex

UNDERWRITING MANUAL

1345–1348

cept under compelling circumstances, cease to occur and a “ frozen "
market comes into being. However, there is usually a residential
rental market, and since rent- paying ability determines rental levels,

and rental levels and value levels are related and move up or down
sympathetically, therefore rentals obtainable when the sales market is
frozen become significant aids in valuation. Again, rent-paying
ability usually is influenced little by speculation which creates ar
tificial and unsustainable sales price levels. Therefore, residential
rental levels are usually excellent aids in the estimation of residential

property values and the estimation of the extent of changes in such
values.

1346. Asking prices for rental purposes are somewhat
different from prices asked for purposes of sale. Prices asked for

sale frequently do not conform with values. Rental prices asked
usually conform very closely, frequently they conform completely,

with rental values and the rental prices actually paid or readily
obtainable.

1347. Ordinarily there should be no difficulty in de
termining the proper rental estimate, inasmuch as there is usually
an active rental market so that, by making intelligent comparisons
and using verified data, an accurate estimate can be made. Rentals
which are out of line with others involving similar properties and
facilities are discarded. Competition between landlords and the

discriminating judgment usually exercised by prospective tenants
make most actual rentals for residential properties acceptable as a
basis of comparison. In determining monthly rental value, rents
paid or asked for like accommodations equally well-located must be
ascertained. Rentals for inferior or superior accommodations are
also useful by comparing and rating the various rental units. Actual
rentals paid can be modified and used in estimating rental value

for vacant or owner-occupied premises. The method of comparison
used to estimate land values and available market prices of im
proved property are applied. The former method is described in
Paragraphs 1361 to 1369. The latter method is described in Section
14, Valuation of Amenity Income Dwellings. It is incorrect to esti
mate and to report a rental value by basing it on a predetermined
estimate of the value of a property to which an assumed ratio of
rent to value is applied.

1348. Values of amenity income dwellings bear a rela

tionship to monthly rental values. Properties of greater rental value
will have higher values than those of lesser rental values, other

there
things being equal. However, in amenity income properties,
value to the
exist differences in the ratios of the total amount of the

METHODS OF DWELLING VALUATION
1348

rental value according to the various price ranges. It is also import
ant to note that while several properties may have the same monthly

rental value, their capital values may be different because of such
conditions as differencies in the remaining economic lives of the

structures, and differences in tax burdens, maintenance costs, and
in the stability of the neighborhoods. In the application of the
Amenity Comparison Method of Valuation described in Section

14, the monthly rental value for the ensuing 12 months is esti
mated and recorded in all cases. However, in certain instances an
additional estimate of monthly rental value must be made. In these
cases it is this second estimate which is used as the basis for deter

mining the Derived Monthly Value. This second estimate of monthly

rental value is required when at the time of appraisal the Valuator
concludes that at the expiration of the first or second year after the
date of appraisal, there is likely to be a substantial drop in the
monthly rental value of the property under consideration. Such a
conclusion might be justified if it were ascertained that the demand
factors affecting the real estate rental market substantially outweigh
the supply factors, and have produced a seriously unbalanced and
unstable condition . For example, there might be a shortage of
housing accommodations and a strong active demand for additional
residential units. A strong demand and inadequate supply would
result in excessive rental values. This condition, however, could not
continue indefinitely inasmuch as new construction would be under
taken and the shortage would be alleviated or entirely eliminated.
During this period rental values would inevitably decline. Other

conditions might also suggest to the Valuator that currently existing
rental values might drop substantially and abruptly in the first few
years subsequent to the time of appraisal. In any event, where the
Valuator foresees such a decline, he is required to reach a conclusion
as to the point to which the monthly rental value will probably fall
after the circumstances and conditions which are causing the tempo

rarily excessive rental value level have disappeared. He reports this
second estimate of rental value and uses this amount in applying the
Amenity Comparison Method . This procedure is prescribed only in
those instances where an abrupt decline in rental value appears to be
in prospect during the second or third year subsequent to the date of
appraisal, as it is believed it would be extraordinary to find a rea
sonable basis upon which to make a specific prediction relating to
years more distant in the future. Rental value changes which are
likely to occur in these more distant years are taken into account at

UNDERWRITING MANUAL

1348-1352

another point in the application of the Amenity Comparison Method ,
namely in the selection of Conversion Factors.
1349. In forecasting rental values for the first, second, or

third years in the valuation, the rentals ascribed may be either the
same or different for each year. In this connection it is appropriate
to point out that frequently new dwellings, especially multi- family
structures, experience marked decreases in rental value after the first
few years but may be fairly stable thereafter. In every case the
attempt is made to predict the probable actual levels as seen from

the date of appraisal.
1350. Estimation of Remaining Physical and Eco

nomic Life of Buildings. Valuators are required to give estimates of
the remaining economic lives and physical lives of buildings. Archi

tectural Inspectors also make estimates of the remaining physical
lives of buildings. In either case, the estimates should be for the
period from the time of examination until the predicted end of life,
rather than estimates of the total lives described in the following
paragraph.

1351. Because buildings are subject to physical deteriora
tion and obsolescence, their periods of usefulness are limited.
As they deteriorate or obsolesce, their ability to serve useful pur
poses decreases, and eventually disappears. This decline and ulti

mate disappearance of utility may occur gradually or rapidly.
The total economic life of a structure is the period of time be
tween the completion of the building and the disappearance of its
ability to produce services or net returns over and above a fair
return on the land value. At the end of its economic life, it may

still be structurally sound and in good physical condition, so that
it can still be useful, though not profitably useful. The period of
time between the completion of the building and the time when
it is no longer fit or safe for use , or when it is no longer practicable to
maintain it in safe, usable condition, is its total physical life.
1352. The difference between the value of the total serv

ices or total revenues of a property, and the expenses, is the net return .

The flow of returns referred to in the foregoing paragraph is net. As
the value of a property arises from its capacity to produce net returns,
the characteristics of the future net income stream must be forecast
in valuation.

The future net income stream has three characteris

tics, namely, ( a) quantity, or the size of the income stream at the
time of appraisal and thereafter, (b ) quality, or the changeability
of the size in the future, and ( c) duration , or the period of time
during which the stream in any size will endure. Deterioration and
obsolescence will decrease the average amount of net returns from

time to time in the future, thereby decreasing the margin between

METHODS OF DWELLING VALUATION

1352-1354

amounts of net returns and the periodic amounts which represent a

fair return on the value of the land. The availability of the serv
ices of the land as a building site is not limited as to duration, but
continues indefinitely into the future, for the land does not de
teriorate physically or disintegrate. Its earning capacity usually
continues and is, for all practical purposes, interminable . It gen
erally varies in accordance with the course of future utilization rep

resenting the highest and best use. However, the services of the
buildings are limited in duration , owing to the fact that the build
ings will eventually become useless due to the action of forces which
cause deterioration, disintegration, and obsolescence. Therefore,
that portion of the income attributable to the buildings, whether

measured in services or dollars, is of limited duration and subject
to decline during the period of its continuance. Gradually, the value

of the property declines until eventually only land value remains. At
such time the building has reached the end of its economic life.
1353. Economic life can never be greater than physical

life. An estimate of the probable remaining physical life of a struc
ture fixes the maximum estimate of remaining economic life. It also

helps to determine the qualities of the building from an engineering
standpoint. The remaining economic life may be, and frequently is,
less than the maximum possible physical life. In valuation, estimates
of both physical life and economic life are made. Both are dealt with
and are jointly treated, because the factors which limit each of them
operate to lessen property values, and often cannot be differentiated
one from the other. However, in a great majority of cases the factors
which result in obsolescence seem to operate with greater force than
those which result directly in physical deterioration . In most in
stances, this results in the termination of economic life before the end

of physical life. This fact causes the distinction which is made be
tween the probable physical lives of buildings and their probable
economic lives. It is the probable future economic life of a building,

rather than its probable future physical life, which is of importance
in valuation .

1354. In predicting remaining economic lives, six types
of factors are considered :

a. The economic background of the community or region and
the need for accommodations of the type represented

6. The relationship between the buildings and the immediate
environment

c . Architectural design, style, and utility from the functional
point of view ; the likelihood of obsolescence attributable
to new inventions, new materials, and changes in tastes

UNDERWRITING MANUAL

1354-1357

d. The trend and rate of change of the neighborhood

e. Workmanship and durability of construction ; the rapidity
with which natural forces cause physical deterioration
f. Physical condition and probable cost of maintenance and

repair ; the policy of owners and occupants and the use or
abuse to which structures are subjected

1355. If an old building is incapable of producing an

annual income sufficient to pay the expense of repairs, insurance, and

taxes, and to produce returns upon the value of the land, its useful
life has come to an end. The improvements upon the lot possess no

more value than the amount which can be obtained from a purchaser
who will buy them and remove them from the site.
1356. Another example is an old residential property
which produces annual revenue sufficient only to pay for taxes, insur
ance, maintenance, and an additional amount which is found to be
only a proper and sufficient return upon the value of the site. In this
case there is no return which might properly be attributed to the
building. The building is producing only enough revenue to take
care of necessary expenditures and a return upon the land value. The
economic life of the improvements has therefore come to an end and
it is found that the value of the property is approximately the same
as that of the land alone.

1357. The future economic lives of buildings cannot be

precisely determined, because it is impossible to foresee the occurrence
of events or new discoveries which affect the values of existing struc

tures by making them obsolete or by hastening and intensifying the
operation of those forces which produce obsolescence. All that can
be expected is that estimates of future economic life will be of such

character as will cause them to be accepted as plausible by well- in
formed and reasonably minded people. While it is impossible to
gauge the accuracy of economic life estimates except in a very general

way, it is possible and necessary for Valuators to be consistent in
making such estimates. In cases of properties of very similar charac
ter and situation, the estimates will also be similar. Poorly built
structures will be ascribed shorter lives. Better built structures will

be ascribed longer lives. Prospective changes in environments may
affect the estimate in either direction . Estimates of remaining lives

have significance in terms of each other. That is, the estimates can
not represent reliable determinations of the actual lives but do indi

cate probable relative lives as between different properties. While
it is impossible to know how long any building will produce net
returns, it can be indicated that a given building will probably
have a longer or shorter economic life than other buildings.

METHODS OF DWELLING VALUATION
1358-1360

1358. In making these estimates Valuators should re
ceive material assistance from analyses of the conditions and rela
tionships reflected in individual feature ratings in the Property and
Location categories. The feature ratings in these categories are
indexes of the relative stability of the income stream , either in the
nature of dollars or services, which may be expected from the prop
erties to which they apply. High feature ratings in the Property
and Location categories will indicate that estimates of remaining

economic life should be high when compared to the possible maxi
mum which the Valuator considers might apply under the most

favorable conditions, and the higher the ratings the nearer the
estimate should approach the possible maximum .
1359. Low ratings of the features in the Property cate
gory will indicate that the estimate of remaining economic life should
likewise be relatively low. The lower the ratings, the farther should
be the estimate from the possible maximum applicable under the
most favorable conditions.

1360. Low ratings of the features in the Location cate

gory will not necessarily indicate that the estimate of remaining
economic life should also be relatively low . The economic life esti

mate may be relatively high if the Rating of Property is high, al
though the Rating of Location may simultaneously be low. This
is true because of the opposite effects produced on the economic life

estimate and on the Location rating by threatening or probable
encroachments of incongruous land uses and by threatening or

probable infiltration of inharmonious racial groups. The probability
or imminence of such encroachments or infiltrations will result

always in low ratings of some of the features in the Location cate
gory. However, these same forces may operate to either extend or
shorten the remaining economic lives of structures in the areas in
volved. For example, if there is any possibility of encroachment by
an incongruous use which will tend to raise the level of land values
in the neighborhood under consideration , it will have the effect of
shortening the remaining economic lives of residential structures in
the district. On the other hand, if the threatened encroachment in

volves the introduction of land uses which will result in lowering the
levels of land value in the neighborhood, the effect will be to lengthen
the remaining economic lives of the residential structures therein .
In the first instance the introduction of the more profitable uses will

result in higher tax burdens, decreased percentage of owner occu
pancy , and a decline in the gross rental value of properties in the

neighborhood. These forces will operate to hasten the time when the
residential structures cannot produce income in excess of a fair

UNDERWRITING MANUAL

1360-1363

return on the value of land and, therefore, will shorten the span of
remaining economic life. In the second case, the introduction of
less profitable uses will tend to lower tax burdens, and, while it will
also decrease the percentage of owner occupancy and the gross rental
value - and probably will lessen the amount of net returns that can

be produced — it will tend at the same time to maintain net returns
at a point sufficient to provide a return on the buildings. The infil
tration of inharmonious racial groups will produce the same effects
as those which follow the introduction of incongruous land uses, when
the latter tend to lower the level of land values and lessen the desira

bility of residential areas.
1361. Land Valuation by Comparison. In the pre
scribed methods of valuation, the land value is separately estimated
by determining the fair price at which comparable sites are avail

able in the same or in competing localities. The Valuator is required
to assemble and analyze data regarding sales and asking prices of sites
similar to those he must appraise .

1362. It is recognized that market sales data do not

absolutely control the establishment of land value by comparison.
It is acknowledged that the Valuator must deal with the factors
which cause buyers to pay certain prices, as well as directly with
the prices they have paid for sites. In many instances the prices
paid may have resulted from necessities and points of view of par
ticular purchasers. Sales data are important only if they embrace
information which accounts for the prices paid. Such information
includes :

a . The actuating motives of buyer and seller
6. The relative intelligence of buyer and seller in negotiating
the sale

c . The relative skill in bargaining of the buyer and seller
d. The fairness of the price paid in view of prices asked for
available sites affording equal advantages and subject to

equal possibilities of enhancement or loss of value
e. The date of the sale and the general and specific environing

and economic conditions which then existed and whether
or not such conditions have changed since that date
1363. It must be noted, too, that sales prices are of vary
ing usefulness and importance according to the rapidity with which

price levels of sites may be changing. In an unusually active sales
market, such as exists in “ boom ” times, rising prices, stimulated by

strongly competing buyers, reach a point where fairness disappears,
insofar as prices are concerned .

Stability and permanence are

nonexistent at such times, as well as in times of rapidly declining

METHODS OF DWELLING VALUATION

1363-1366

prices, and the prices then obtained in sales are almost worthless as

information in estimating value. However, their frequency, coupled
with pyramiding prices, constitutes a warning of the imminence of
a reversal of the price trend. Only in times of comparative stability
of the price structure are sales prices of substantial worth in valua
tion. Thus, after a price decline has set in, developed, and finally

spent its force, as at the end of a period of economic distress, and
voluntary sales transactions begin to occur, it is probable that the

sales prices in such transactions will closely approximate value,
provided the parties are well informed and act intelligently. A
Valuator will generally overvalue property unless he recognizes

the changing relationships between sales prices and value.

He

should understand that in certain periods, sales prices may generally
exceed value, while during other periods the prices may be below

value. Only in times of comparative stability of the general economic
structure, and during periods when there is a fairly well balanced
relation between the factors of supply and demand, will sales prices
approximate or actually equal value. As sales prices increase in a
rising market, value estimates will accompany the prices in their
climb toward a peak . Before sales prices reach their peak, however,
they may have outstripped value. Later when a break occurs and
prices start down, the Valuator's point of view may cause him to
maintain his value estimates at higher levels, although the value
levels are below the sales prices at the peak and stay below them
in the early stages of the decline. In the later stages they will
become equal to the prices and then, for a time, exceed them .
1364. In general, the rate of change of real estate prices
will indicate the relative usefulness and importance of sales prices.

The greater the rate of price change, the lesser the significance of
sales prices, and vice versa .
1365. Generally, prices at foreclosure or forced sales are
not fair and are therefore of no use . This may or may not be true

in every case. In times of declining price levels, a forced sale might
be made quickly for an amount which would be higher than that ob
tainable if a reasonable time elapsed during which efforts to obtain

a higher price were made. Such a forced sales price could easily be
as much as, or even more than, was warranted at the time. In peri
ods of comparative stability, or of advancing price levels, it is prob
able that forced sales prices are unfair and of little worth as useful
data in valuation.

1366. Sales prices are of importance when they can
be analyzed and made to reveal points of view regarding value held
by a substantial number of persons. Insofar as they represent the
value estimates of isolated individuals, they are of little worth as

UNDERWRITING MANUAL

1366–1370

part of the data . This places emphasis where it belongs, namely, on
the why and wherefore of the particular prices paid in specific trans
actions, rather than upon the prices themselves.
1367. Unless information is gathered on sales trans
actions which occurred close to the time at which the Valuator makes

his appraisal, correction may be necessary because of changed en
vironing and economic conditions.
1368. When sales prices are found to be reasonable and
are used by the Valuator, it is of extreme importance that careful

comparison be made of the environmental influences and their prob
able future effects on the desirability and value of each property.
The site under appraisal must be intelligently and correctly graded
in terms of its relative desirability as compared to the others. The

sales price of one can be modified accordingly and regarded as a
tentative index of the value of the other. For example, a comparable

site was sold for $ 750. Investigation convinces the appraiser that the

sale price was reasonable. A comparison percentage of 100 is as
signed to the site being appraised . The two properties are compared.
The Valuator notes similarities and differences with respect to the
relative stability and permanence of the desirability of their respec
tive environments, tax burdens, and other factors. A percentage of
comparison is then ascribed to the other site. This percentage must

indicate his opinion as to the relative desirability of the site, meas
ured in terms of the desirability of the site being appraised. If the
site compared to the one under appraisal is graded at 125 % , the sales
price $750 is divided by the grading 125% . The resulting figure of
$ 600 is tentatively assigned as the value of the site being appraised.
1369. Many of the considerations herein with regard to
sales prices also apply to asking or listing prices for sales purposes.
The latter are useful when comparisons are made between listed prop

erties and a site being appraised. The listing prices are modified so
as to determine a probable sales price for the property involved .
The procedure is the same as in the use of sales prices. Listing prices
generally may be regarded as fixing the maximum valuation for
properties of equal desirability. However, they do not, of them
selves, indicate the values.

1370. Replacement Cost of Property. The approxi
mate upper bracket or limit of possible value is the cost of replace
ment of the property, assuming the building improvements to be in
new condition. Estimates of the cost of replacement of building im
provements in new condition are made, and are then used by the
Valuator to estimate the cost of replacement of the entire property
land, buildings, and all miscellaneous costs - in new condition . This
latter estimate becomes the approximate upper limit of possible value.

METHODS OF DWELLING VALUATION
1370-1371

While value may possibly be equal to this uppermost limit, it is also

possible that it may be any amount below this limit. Value depends
entirely upon usefulness, not upon the cost of construction or replace

ment. Value tends to conform to cost but this is not to imply that
it is always equivalent to cost. The expenditure of money for a
dwelling structure does not necessarily create value equal to the cost.
Estimates of replacement cost of property are not intended as meas
ures of value, and are not to be so regarded. They merely indicate
the possibility that value may exist to an equivalent amount. It is
the Valuator's task to decide whether or not the possibility is an
actuality in any case .
1371. Cost of construction also may be in excess of value
at a given time because under some circumstances a reduction in cost
may be in prospect. If construction costs decline, value will also
decline if it was originally equal to cost. Thus, it might be assumed

that a new method of constructing buildings is invented. At first
the costs of using it are great, (a) because of high production costs
attendant upon the construction of newly devised machinery required
to manufacture special materials, or to fabricate special units used

in the new construction method, ( 6 ) because of high promotional
costs attendant upon the introduction of a new method to the public,
and the creation of a public demand for its use, and ( c) because of

high labor costs while the method is being introduced , resulting
from lack of skill of building craftsmen in dealing with unorthodox
materials, or in utilizing construction devices or methods not familiar
to them. Obviously, when the pioneering stage has been passed, pro
duction costs will be decreased through mass production, and labor
costs will decline through increased skill of the laborers. It is plain
that the costs involved in the beginning must exceed value because
of the prospect of declines in costs, if for no other reason . Perhaps
this would not be true if a dwelling were a short -lived commodity .
For example, certain articles of wearing apparel when they are new
may be much more valuable than their cost because they represent
the first appearance of a new style. The satisfaction of having been
first to introduce the style compensates the wearer for the initial

excessive cost. Although he may quickly discard the article, he feels
that he has received value for his money . But dwellings involve
substantially large expenditures and they must last for a long time.
Therefore, if a decline in construction cost is in prospect, the intelli

gent buyer will consider the value, at most, to be no higher than
the point to which construction costs will decline. He may believe
that some benefit will accrue to him by being the first to own a house

of a new style, but it is more than likely that he will not believe any
such benefit will accrue from style alone. Any benefit would have to

UNDERWRITING MANUAL

1371-1372

come from superior living qualities and lesser operating and mainte
nance costs, combined with lower construction costs than for houses
of usual type. It follows that, in cases involving new construction
methods or materials, replacement costs may be of relatively little
significance in valuation analyses, while the costs of replacement of
building improvements of the same design, size, and layout, but built
with orthodox materials and by traditional methods, are likely to
be of greater significance. In such cases, the latter costs rather than
the former tend to fix the upper limit of possible value.

1372. The replacement cost of property is estimated to
make possible the application of the substitution theory described
in paragraph 1321. As a consequence, the concepts on which the sub
stitution theory rests constitute the basic assumption on which the
replacement cost estimate must rest. Therefore, the estimate of
replacement cost of property should include all items of expense to
which a typical prospective owner would be subjected if he were
to undertake to replace or reproduce the improvements involved upon
a site of equal value. These items include not only cost of land
and buildings, but additional items. The items are indicated in the
following list :
a . Price at which an equally desirable site can be purchased
or the value ascribed to the subject site
b. Cost of survey

C. Cost of preparing site for improvement, including cost of
finished grading, terracing, retaining walls, and land
scaping

d . The cost required to replace building improvements in new
condition , determined in accordance with the instructions
in Section 16

e. Appraisal fee of lending institution, if customary
f. Federal Housing Administration examination fee
g. Initial service charge

h. Cost of showing condition of title
i. Cost of revenue stamps

j. Preparation of mortgage or deed of trust
k. Recordation of mortgage or deed of trust
1. Preparation of note or bond

m. Notary fee
n. Settlement fee

0. Pro rata expense for taxes on land during the construc
tion period
p. Pro rata expenses for taxes, if any, on building improve
ments during the construction period

METHODS OF DWELLING VALUATION

1372–1373

q. Pro rata premium expense for fire, windstorm , and other
hazard insurance during the construction period
r . Interest on invested capital during the construction period
From the foregoing, it is apparent that the Valuator's estimate of

the replacement cost of a property in new condition would exceed
the sum of the replacement cost of the building improvements and
the land, as such . At the same time this emphasizes the distinction

between " land and buildings" and " property ". The land and build

ings are simply material things, while the property which an indi
vidual purchaser seeks and buys is, in reality, the rights and benefits
arising from ownership. It is the replacement cost of the property,

rather than merely of land and buildings, which sets the upper limit
of possible value.
1373. An illustration of an estimate of the cost of re

placement of a property in new condition is given below .
Estimated cost of Replacement of Building Improvements in Nero Condition

Main building

$ 6,447
412
205

Garage
Other Improvements

$ 7,064

Total

Estimated Cost of Replacement of Property in New Condition

Grading and landscaping
Building improvements ( as above ).
Appraisal fee of lenderFHA examination fee_--

Initial service chargeTitle

insurance ---

Preparation of deed
Recordation of deed .

Preparation of note..
Notary fee_-----

$ 1,350

$ 1,350

25 $ 25
320
7,064

320

7,064
10
21
70
49
5
5
5

10
21
70

aNera

Price of site_
Survey of site----

49
5
5

2

2

10

10

0
10

10

$ 8, 946
Subtotal ( Total cash investment ) --Interest on invested capital at 6% per yr. for construction
period of 4 mos. ( $ 8.946X6 % X4/12 ) --

179

Taxes on land during construction period of 4 mos.
( $30 X 4/12 ) -Taxes on building improvements during construction
period . ( No tax ) --Hazard insurance during construction period ..

Subtotal (Miscellaneous items ) ---

0

$ 391

391

Total Estimated Cost of Replacement of Property
in New Condition ----

$ 9, 125

UNDERWRITING MANUAL

1374-1377

1374. Prepaid future items of expense attendant on
acquisition of the property are not allowable items for inclusion in the
estimate of replacement cost of property. Taxes for any period be

yond the typical construction period may not be included , nor may
any portion of the premiums for hazard insurance extending beyond

completion of construction . The premium paid on account of mort
gage insurance is a prepaid expense item and may not be included in
the estimate of replacement cost of property. No allowance is per
mitted to cover commissions to brokers for the arrangement of a sale
of either the site or the finished property, or for the arrangement of
mortgage financing.
1375. Some of the items or allowances in the cost esti

mate may not create equivalent value in a particular case . For exam

ple, the structure erected might be inappropriate to the neighborhood,
and the completed property would be less valuable than its cost . This
again calls attention to the fact that estimates of replacement cost are
of little significance in valuation work , except as maxima. An owner
might erect a house which would cost him 50% more than the houses
which generally characterize the neighborhood, but the value might be
less than that of other houses nearby providing the same facilities.

The expenditure of money for retaining walls and terracing and land
scaping may also prove wasteful, since excessive expenditures on
account of such items may create value to the extent of but a fraction
of their cost.

1376. The building cost estimates which are used by the
Valuator give the cost of duplicating the structures in new condition .
The significance of such estimates is greatest in the case of new , or
nearly new, structures. They become of less and less significance as
older and older buildings are the subjects of valuation. In a great
many cases the buildings to be appraised will not be new ones . The
cost estimates, therefore, will be of little significance in such cases.
VALUATION CONCEPTS

1377. Plottage Increment. Plottage increment is de

fined as the increase in unit land value produced by combining smaller
ownerships into larger single ownerships. The presence of the plot
tage increment is accounted for solely in the greater utility of larger
tracts. Plottage increment is not a characteristic of a single tract of

land. It is a concept which applies only in comparing a large tract
with the specific smaller units of which it is composed, and is based
upon the potential utilization. In residential real estate, the assem
blage of smaller parcels produces a plottage increment only if the
smaller parcels by themselves are of such a size and character as to

METHODS OF DWELLING VALUATION

1377-1379 ( 1)

have small utility. The maximum effect of plottage obtains if the
lot and the improvements together constitute a naturally marketable
real estate entity. Excess land is rarely worth as much per unit
of area . As a consequence , land cannot be valued except in terms of
the actual amount of land in single ownership.
1378 (1). Marketability and Conformity. The essence
of the analysis used to estimate the value of a dwelling property is
found in a consideration of marketability factors. Marketability
refers to the state of being salable. Ease of marketability may result

from fitness and adaptability, or from demand. Current salability
at a price is significant, but of relatively less significance than factors
which improve or detract from the continuous probability of ready
sale during a long period of time in the future. The odd and strange,
the peculiar and the unusual tend to impair long time marketability
and to reduce values. The typical, usual, regular, and popular in
crease marketability. The study of the extent to which properties
may be expected to be marketable should include cognizance of the
lack or existence of, and probable breadth of markets. Any factor
which limits the probable number of possible willing purchasers
becomes a valuation factor and not infrequently estimates of value

must be deliberately lowered until the estimates reach a level at which
a reasonably general market is tapped.
1378 (2). The extent to which the property being ap

praised is suited to its environment must be determined by the
Valuator. This matter is dealt with in some detail in Sections 8 and
9. Data relating to conformity are of very great importance because

nonconformity may produce adverse effects, such as the shortening of
economic life, hastening of obsolescence, and limiting of marketabil
ity, thereby affecting value. Regardless of the characteristics of any
residential property, its value can be utterly destroyed by influences
external to itself.

1379 (1). Environmental Changes. A superficial ex
amination of residential areas in any American city reveals the fact
that, with practically no exception, such districts decline in desira

bility with the passage of substantial periods of time. It is possible
that the rate of such declines will generally be slower in the future
than it has been in the past, because the rate of population growth in
the United States is, and has been, on the decline. This factor, popu
lation growth , has been one of the main causes of the loss of desira
bility which residential districts have experienced. It is obvious that

as new population comes into a given region, new residential areas
spring up within communities that have already been established .
These newer districts present a strong appeal as places of residence, and

UNDERWRITING MANUAL

1379 ( 1 ) -1379 (5)

people living in the older districts experience the urge to sell or rent
their old homes and acquire new ones in the newly developing resi
dential areas. In this matter the older districts gradually lose the
aspects of owner -occupant communities and take on the aspects of
tenant-occupant districts.

1379 (2). The older district still remains desirable, but
only to families whose social status or standards of living are lower
than those of the families which have vacated the district.

This

process of change in occupancy by families of successively lower stand
ards of living is accompanied by declines in desirability and value.

The value decline may be arrested in some cases where the utility of
the sites in a particular district undergoes a transition to more pro
ductive uses. However, the district almost inevitably declines in

desirability, and usually in value as well, after it is once established
and before any such transition to higher uses takes place. The rate
of decline varies in different districts according to the rapidity with
which new forces destructive of residential values operate within each

district and according to the intensity with which these forces act.
Many districts enjoy sustained value levels for long periods of time.
In fact, most of them decline very slowly and the lapse of a number
of years is necessary before the fact that a decline is taking place
becomes obvious.

1379 (3 ). The phenomenon to which attention is here di

rected also results from causes other than population growth . The
development of modern transportation systems, extensions of, and

changes in the routes of transportation lines within individual com
munities, and the making available of automobiles to families of
comparatively low purchasing power, have promoted the develop
ment of new residential districts and greatly speeded the rate of
declines in the desirability and value of the established ones. The
encroachment of nonconforming uses in residential sections, such as

the introduction of commercial, manufacturing, and industrial enter
prises, and the physical deterioration of the buildings in these sections
are other obvious and common causes.

1379 (4). It is very important that the Valuator make a

study of the causes of declines in the desirability and utility of resi
dential districts. Otherwise he will not develop the greatest accuracy

in his valuation estimates and in the ratings which he must make.
1379 (5). It is not possible to totally exclude or pre
vent the growth or operation of value destroying influences, for it is
practically inevitable that all residential property will eventually

decline in desirability or utility, and therefore in value, even though it
may require substantial periods of time. This risk is known and

METHODS OF DWELLING VALUATION

1379 ( 5 ) -1380 ( 1 )

acknowledged. If the decline is slow , the resulting risk can be offset
in mortgage transactions by requiring periodic amortization payments

on the loan. However, the important thing is to discover whether,
during the mortgage loan period, especially during early life, the
property involved will be subject to unusual, extraordinary, and

excessive loss of desirability, such as would occur if the district
experienced a transition from fine residential use to industrial use, or
from occupancy by people with high annual family incomes to people
with low incomes.

1379 (6) . It is, therefore, especially important to search
diligently for the presence of any adverse influences which lessen or
destroy desirability or utility, and to discover the absence of safe
guards which are intended to protect against declines in value or
desirabilty. In such categories the following are included :
a . A declining population in the neighborhood or community
or region

b. A decline, or danger of decline, of the desirability of the
neighborhood through the influx of people of lower living
standards

c. A decline, or danger of decline, of the desirability of the
neighborhood as a place of residence through the introduc

tion of commercial, industrial, or manufacturing enter
prises, or nuisances or inharmonious uses of any kind
d . Lack of appropriate and adequate deed restrictions and
effective provisions for the enforcement thereof

e. Lack of appropriate and adequate zoning regulations
1380 (1). Depreciation, Deterioration, and Obso
lesence. Depreciation is defined as loss in value from any cause
whatever. Frequently the term is used in the narrow sense of loss in
value caused by physical deterioration , and sometimes it is used to

signify deterioration itself. Accrued depreciation at any time is
defined as the difference between value at the time of appraisal and
the replacement cost of the structure in new condition . The word
" deterioration ” refers to the decay and disintegration which takes
place in structures with the passage of time. It is caused by natural
forces, by the elements, and by use. It operates to terminate the
physical lives of buildings. The term " obsolescence ” refers to those
changes in the usefulness of structures which causes them to become
less desirable and less useful. It operates to terminate the economic
lives of buildings. It does not affect physical life as it does not cause
deterioration.

Deterioration and obsolescence cause a lessening of

utility and thereby result in depreciation, that is, loss in value. It

UNDERWRITING MANUAL

1380 ( 1 ) -1380 (3)

is essential to understand the nature of the causes of depreciation,
not because of any necessity of measuring the amount of depreciation
which has occurred since the completion of a building, but because

of the necessity of estimating how these forces will probably affect
utility in the future. The forces which cause deterioration and
obsolescence operate continuously. They may operate in the future
in the same manner or in different manner than in the past. By
studying the manner in which they have operated in the past, greater
accuracy in the estimates as to how they may operate in the future
is attained .

1380 (2). Obsolescence has greater significance in valua
tion than deterioration . It is caused by :
a . New inventions and discoveries

6. Changes in the preferences and tastes of the public, as for
example, with regard to styles of architecture, geograph

ical locations as places of residence, the extent of plumbing
facilities provided in residences, sizes of rooms, and heights
of ceilings

c. The encroachment of incongruous uses, as when commercial
and industrial enterprises are introduced into residential
neighborhoods
d. The infiltration into residential districts of people whose
living standards are lower than those of the people who
already inhabit these districts
e . The failure of substantial numbers of property owners in
the district to maintain their properties in good condition
f. Increases in land values which result from changes in the
highest and best uses for which land is suited

1380 (3) . Accrued depreciation is not of primary im
portance in valuation. It is the difference between value and cost
of replacement. To measure it, it is necessary to make two estimates :

the value as of date of appraisal, and the cost of replacement in new
condition as of the same date.

The difference between the two esti

inates is the amount of accrued depreciation. The determination of
accrued depreciation is a byproduct of the valuation process rather
than an essential step in it because value always depends on the

amount of future benefits, not upon the deduction of expired benefits
from the benefits presumed to be indicated and measured by the
cost of replacement. Therefore, the valuation process is properly
confined to the estimation or forecasting of the probable extent and
nature of future benefits and the translation of such predictions into
estimates of present value.

METHODS OF DWELLING VALUATION

1380 ( 4 ) –1380 ( 5)

1380 (4). Attempts to estimate accrued depreciation di
rectly, rather than to measure it after the value estimate has been
made, are likely to produce grossly inaccurate results. Such at
tempts usually start by estimating the replacement cost of the build

ing in new condition. It is then assumed that this cost represents the
value of the building new, an assumption which frequently is incor
rect. Next, it is assumed that the amount of accrued depreciation
caused by deterioration and obsolescence can be determined (a) by
ascertaining the time which has elapsed since the building was com
pleted, ( 6 ) by considering the physical condition of the structure as
revealed by examination , so as to discover how deterioration has

occurred , and ( c) by observing the extent to which the structure is
obsolete in architecture, design, and equipment. Then accrued depre
ciation is presumably determined by (a) assuming some annual per
centage rate of depreciation due to deterioration, ( 6 ) multiplying
it by the replacement cost and the age of the building, and (c) add

ing an amount equal to the cost of needed repairs and of modern
izing the structure to offset unusual deterioration and obsolescence.
However, the resulting total may be, and usually is, very inaccurate .
In valuation, the emphasis properly belongs upon the length of the
probable remaining economic life, rather than upon the length of the
past physical life, and upon probable future benefits, rather than
replacement costs. The reason for this is : all value derives from the
future, none from the past.

1380 (5). In valuation great reliance, unfortunately, is
commonly placed upon a valuation procedure which starts with

replacement cost in new condition, then estimates accrued deprecia
tion of building value by a direct method - usually the so-called
straight-line method or some variation of it - next deducts this item
from cost, then adds present land value, and calls the result the value
of the property under appraisal. Sometimes, by coincidence, use of
this procedure gives a correct conclusion, but it is erroneous in
principle, since it places major emphasis upon the past and does
not estimate the extent of future utility. The straight-line method
of estimating accrued depreciation is defective in a number of im

portant particulars. Its use requires acceptance of the premise that
replacement cost in new condition is equivalent to value in new

condition, and therefore that so-called “ depreciated replacement
cost” is equivalent to value. In other words, it is assumed that re
placement cost, less accrued depreciation calculated by some arbi
trary method of direct estimation based on cost and age data, is
equivalent to value at the time of appraisal. The straight-line
method is also defective in that it is based upon the premise that

buildings decline in value in equal yearly amounts. While the aver

UNDERWRITING MANUAL

1380 (5) -1381 (4)

age depreciation per year may be 2% , it does not follow that in
10 years the building value will have declined 20 % , in 30 years 60 % ,
45 years 90 % , and so on . Therefore, such a procedure is of question
able merit. Methods of depreciation which utilize sinking fund com

putations are subject to the same criticism and have no place in real
estate valuation .

1381 ( 1) . Distinction between Cost and Value. Cost

and value are sharply distinguished. Value depends on the extent
of utility in the future, while cost may depend on conditions in the
market or on outlays for labor and materials, and these conditions
or outlays do not necessarily deal with factors which create value.
The only exception is the case of a building which is new and repre
sents the highest and best use for the site. This implies there must
be a proper relationship between supply and demand and also be
tween construction costs and other costs in general. Costs are re
lated to value only from the point of view of substitution , the cost
required to replace an equal amount of function . In this sense, cost
of replacement becomes the approximate upper limit of value.
There is a tendency, but no certainty, that value of a dwelling in
new condition will be equivalent to replacement cost in new condition.
Since value and replacement cost can be equal, estimates of replace
ment cost in new condition can be used as approximate “ ceiling "
estimates of possible value, thereby acting as controls on the
judgment of the Valuator.
1381 (2). The distinction between cost and value is bet

ter appreciated by a consideration of certain valuation concepts,

including highest and best use, overimprovement, and underimprove
ment, and improved value.
1381 (3) . Highest and Best Use. The highest and best
use of a real estate site is that use or succession of uses which makes

the land most productive. In determining highest and best use,
the test is to discover which program of future utilization is capable
of developing the highest return on the land over a substantial

period of time. Highest and best use does not refer to a building of
the greatest size that someone might be induced to erect. The con
cept of highest and best use is without meaning unless the available

uses compared are thought of in terms of buildings having different
functional designs.

1381 (4). Overimprovement and Underimprovement.
An overimprovement is an improvement so costly or so large as to
produce land returns lower than those which could have been pro
duced on the same site by a less costly or smaller improvement. An
underimprovement is an improvement which, because of its size or

METHODS OF DWELLING VALUATION

1381 (4 )-1385

cost, produces a land return less than could have been produced on
the same site by some other larger or more costly improvement. Both
overimprovement and underimprovement fail to develop fully the
potential capacity of the site. The land value is not modified or
changed, but the total value of the property is adversely affected.
Therefore, buildings which are overimprovements or underimprove
ments are always worth less than the costs required to replace them .
THE ACCURACY OF VALUATIONS

1382. Sources of Errors. Incorrectness or inaccuracy of
valuations results from various causes. The following list is provoc
ative of thought :

a . Lack of judgment and experience
6. Haste and carelessness

c . Inadequate data

d. Data of poor quality
e. Incorrect interpretation of data
f. Incorrect method of valuation

g. Faulty application of correct method
h. Influence on Valuator

The lines of action required to minimize inaccuracy in valuations are
obvious. At the same time, the considerations discussed in following
paragraphs are worthy of examination.

1383. The accuracy of valuations is relative only. Valu

ations are based on judgment and cannot be regarded as precise
measurements. Relative accuracy is obtained when the estimate of
value falls between limits which are reasonable . Valuations are

deemed correct when expressed precisely in dollars at any point be
tween the limits. Valuators with long experience find that their
opinions with respect to values take form , during the process of
appraisal, by direct and simultaneous comprehension of all factors,
as much as by the detailed method itself. The process tends to be a
corroboration rather than the source of the final opinion.
1384. Reasoning Used in Estimation. The technique

of estimating embraces the use of thought habits and patterns of
mental discipline. Reasoning to correct conclusions requires the sub
ordination of prejudices and preconceived notions, and necessitates a
rigid application of logic.

1385. Integration of Items. The principal justification
for the use of analytical methods of appraisal is that the number of
items on which the appraiser's judgment is permitted to play is
materially increased. The formation of an opinion by an over -all
“ sizing up ” of the problem can rarely be as accurate as one formed

UNDERWRITING MANUAL

1385–1389

after integrating a number of estimates which relate to individual

items. Therefore, valuation procedure which progresses first by the
making of a number of estimates of individual items and then pro
gresses to a logical integration of the estimates, leads to greater
accuracy in the final estimates of value.

1386. Plausibility. Accuracy is derived only when the

integral and final estimates are characterized by plausibility. Valua
tors should always set estimates at the most reasonable, most fair ,

and most likely amounts, as opposed to placing them at possible
extremes.

1387. Bracketing. In establishing criteria to determine

plausibility and probability, competent Valuators test them in terms
of possible upper and possible lower limits of items, thereby bracket
ing the zone within which the final estimate should lie. Next, they
proceed to narrow the limits as much as possible, and finally select
as their estimate a figure lying approximately midway between the
narrowed limits. It may not always be precisely midway between
the limits, but in general the bracketing process does conclude with
a strong presumption of correctness attaching to some one level of
estimate .

1388. Interpolating. In many problems of estimation ,

the bracketing limits established will be derived from estimates made
in connection with other properties. In such cases, it is logical to
derive the new estimate by sandwiching it between established esti
mates. For instance, the approximate levels of value of two types
of properties may have been set . The level of value attributableto
a third type may be recognized as "more than " , or " less than ” the
others.

The directions in which estimates tend to move under

changed conditions are usually known. Thus, by interpolation be
tween established limits or extension beyond limits it is possible to
give some control to the process of estimation and thereby secure

consistency and plausibility in final opinions.
1389. Averages. A word of caution should be given in
connection with the use of averages. Expressions such as " average

conditions”, “ average price”, “ average value”, “ average house ", or
" average lot”, are frequently used. Ordinarily, “ typical” is meant
rather than “ average.” An average figure or condition can only be
of substantial use in appraisal procedure if it is composed of quan
tities that do not vary considerably from the average itself. Some

appraisers are tempted to use published statistics reporting various
facts applying to entire municipalities. This practice is dangerous
unless it is first ascertained that the average figure can be properly
utilized in the specific case .

METHODS OF DWELLING VALUATION

1390_1393

1390. Normal Relationships. Ordinarily, the relation
ships between several individual estimates are reasonably similar inso
far as typical properties are concerned. It is well to bear in mind
and use the normal relationships as checks and guides in making
estimates.

1391. Consistency by Arbitrary Treatment. The gen
eral valuation problem , from the point of view of estimation , may
be divided into two parts. First, there is the desirability of ascer
taining the correct general level of values. Secondly, there is the

desirability of placing valuations on a large number of properties
in such a manner that they are consistent one with another. As
estimation problems, the two phases of valuation fall in different

ranges. The first is solved by the application of adequate data and
sound method . The second is secured by arbitrary but reasonable
adjustments which bring about consistency. Consequently, after the
limits within which an estimate of value should fall have been es

tablished, the actual setting of the precise dollar valuation is and

should be done by making the estimate consistent with other valua
tions.

1392. Probability. Inasmuch as prospective services of
properties occupy such a dominating position in the valuation proc

ess, the accuracy of results necessarily depends upon the quality of
the forecasts which are made. The Valuator cannot know to a cer

tainty which future events will occur. Therefore, he bases his pre
dictions upon the most probable course of future events. Forecasting
is a necessity in valuation. It is impossible to assume a position

which declares that it is neither feasible nor justifiable to make fore
casts. The very nature of value itself makes prediction an integral
part of valuation method. All the devices which aid in forecasting
the most probable course of future events are used . The principal
one of these is the use of information relative to the past because
there is a strong presumption that, under like circumstances, future
events will follow much the same course and derive from much the

same causes as did past events.

1393. Desirability of Methodical Procedure. The advan
tages of methodical procedure in valuation include the following :
a . The discovery, isolation, and identification of individual in
fluences which combine to create, sustain, or destroy value
is accomplished

6. Appraisal procedure is standardized to a reasonable and
desirable degree

c. The extent of the zones within which acceptable valuation
estimates must fall is limited, bringing under some control
the estimates of individual appraisers

UNDERWRITING MANUAL

1394-1395

1394. In valuation it is preferable to resort to analytical
methods rather than to depend on unaided judgment. Judgment con
trols the valuation process, but a methodical procedure will serve to
break down the complexities of the problem . It allows the Valuator

to piece together and weigh more phases of the problem , and to con

sider the manner in which various factors operate in creating value.
Part of the relative accuracy is derived directly from the quality of

the data. The remaining accuracy is derived from the method of
valuation employed. Illogical reasoning in correlating the elements
and a faulty process impair accuracy, while a logical process, sound
methods, and the correct interpretation of the factors contribute to
accuracy . The methods used in valuation have definite limitations

and are useful aids only when the appraiser knows their limitations

and uses the methods intelligently. No method of calculating realty
values can be relied on implicitly to the exclusion of what the experi
enced appraiser knows to be in accord with common sense and good
judgment. The data deal with many matters that are incapable of
exact measurement. Furthermore, valuation requires forecasting of
matters that cannot be definitely ascertained . Estimates are used in
place of measurable quantities. If the estimates are based on such
knowledge as is available with regard to the matters considered, and
are in accord with sound, common sense principles, the conclusions
produced will be sound and will be acceptable as reasonable and accu
rate estimates by reasonable and well informed individuals. Absolute

necessity for good judgment characterizes every step in valuation
procedure.
1395. The Valuator's Final Judgment. The Valuator
should never lose sight of the fact that the value which he must esti

mate is the price which a well- informed typical buyer would pay , and
be warranted in paying, for the property appraised, rather than the
maximum price which could be obtained if the property were offered

for sale. In determining such a warranted price, a buyer will give con
sideration to both the cost and the value which may be assigned sepa
rately to the land and to the improvements upon it. He will also
consider the prices at which he can obtain other equally desirable
properties of like characteristics, from well- informed sellers who,
when selling, would be acting intelligently, voluntarily, and without
necessity. He will contrast the advantages of renting with the advan

tages of buying, as indicated by comparison of the cost of renting and
cost of buying, and he will consider the many other matters to which

attention is drawn in this Section of the Underwriting Manual. He
will not be especially interested in, or greatly influenced by what the
property has cost someone else in times past, or what it would cost to
build it today, though he will desire information regarding these mat

METHODS OF DWELLING VALUATION
1395–1397

ters; but he will be vitally interested in the ability of the property to
produce a stream of future benefits for him if he were to purchase it.
The characteristics of this stream of benefits its present size, the

extent of any probable diminution in its size in the future, the cer
tainty of the continuation of the flowing stream , and the length of the
period during which the flow may be expected to continue — will deter

mine the price which he is warranted in paying, and, hence, the value
of the property.
1396. There is no virtue in undervaluation of proper

ties, and great risk of loss is introduced by overvaluation. Federal
Housing Administration Valuators must avoid both undervaluation
and overvaluation . Their attention is directed to the fact that specu

lative elements cannot be considered as enhancing the security of
residential loans. On the contrary, such elements enhance the risk
of loss to mortgagees who permit them to creep into the valuations of
properties upon which they make loans. Valuators shall not report
valuations that cannot be justified by existing conditions which they
find and of which they are aware, and by reasonable and plausible
estimates with regard to the effects of conditions which may reason
ably be expected to prevail in the near future subsequent to the date
of valuation .

1397. The valuation process requires the Valuator to

gather, analyze, and interpret a great volume and variety of data.
Because the necessary data are gathered piecemeal, there is danger
that he will assign greater importance to some of the data than they
are rightly entitled to receive, and reach a conclusion which is pre
mature and unsound. Before reaching his final conclusion , it is
essential that he place himself at a distance, figuratively speaking,
from the problem with which he is dealing in order that he may
get a broad, comprehensive view of the whole group of data and of
the aspects of the problem in its entirety. He must not remain
so close to the great volume and variety of data which he must con
sider that he will fail to properly appraise the relative importance of
the various matters which comprise the data and lose sight of the
general characteristics of the entire problem . Let him stand off at
a distance after analyzing the data, and consider the resultant effect

produced by the multiplicity of influences which operate in every case.
Then it is more likely that the conclusions which he reaches as a

result of any valuation method or procedure which he may follow ,

or comparisons which he may make, will accord with that which will
be required of all Federal Housing Administration Valuators, namely,

that their conclusions in every case shall be fully supported , reason
able, sound, and sensible.

PART III
SECTION 14

VALUATION OF AMENITY INCOME DWELLINGS

CONTENTS

Valuation Process---

Paragraphs
1401–1405
1404
1405

Selection of Method .---

Steps in Valuation Process_

The Determination of Derived Capital ValueRatings and Economic Life..
Monthly Rental Value ----Degree of Owner -Occupancy Appeal..
Monthly Amenity IncrementDetermination of Derived Monthly Value --Conversion Factors ...

Valuation of Land Determination of Derived Capital Value .
The Estimate of Available Market Price

1406_1426
1408–1409
1410_1411
1412-1413

1414-1417
1418-1420
1421-1424

1425
1426
1427-1432
1433

The Estimate of Replacement Cost of Property.
Determination of Estimate of Value --Judgment Control of Results ----

1434_1439
1435-1439

Distribution of Estimate of Value ---

1440-1442

Comparative Valuations.--

1443-1444

Effective February , 1938

Federal Housing Administration

PART III

SECTION 14
VALUATION OF AMENITY INCOME DWELLINGS

VALUATION PROCESS

1401. Most single family and certain multi-family prop
erties, salable to prospective owners interested to some degree in direct

services and amenity income, are best appraised by the amenity com
parison method of valuation. This method consists of four principal
operations, as follows:
a. The making of an estimate of the value of the property by

determining the gross returns which the property is capa
able of producing, and then converting them into an esti
mate of derived capital value

6. The setting of possible upper limits of valuation by making
estimates of the replacement cost of the property in new
condition and of the price which the property would
probably bring in a reasonable time if offered for sale in
the market

c . The establishment of a final valuation by comparing the

estimates of derived capital value, replacement cost of
property in new condition, and price available in a sale
d . The distribution of the final valuation to its component
parts.

1402. In the process, the estimation of derived capital
value constitutes the essence of the method and is the major attempt
to ascertain a proper valuation . The estimates of replacement cost
of property are used solely as possible upper limits of value. Esti
mates of available market price, if lower than either of the other two,
are used, with certain exceptions, as approximations of the upper
limits of valuation .

1403. The process requires the separate estimation of the
total value and of the land value, but not a separate valuation of the

building improvements. However, the building improvements are
ascribed values which are the portion of the total valuation remain
ing after deducting the separately made land valuation.

UNDERWRITING MANUAL

1404-1405

1404. Selection of Method. The first step in any valu
ation is to determine the basic assumption on which the valuation is
to rest by following the line of thought developed in Section 13,

Methods of Dwelling Valuation. The Valuator is required to study
the characteristics and environment of the property being appraised
so as to ascertain whether it exerts appeal to prospective purchasers
who are interested typically in the amenity returns, i. e., direct serv

ices and satisfactions, which the property is capable of producing for
an owner -occupant ; or whether it exerts appeal solely, or almost

solely, to prospective purchasers interested typically and only in the
monetary returns obtainable through ownership and renting of the
property. This enables him to select the proper method of valuation .

If the appeal is solely, or almost solely, to purchasers desiring only
monetary returns, the property should be appraised by the capitaliza
tion method described in Section 15, Valuation of Rental Income

Dwellings. If a measurable degree of appeal is exerted to pur
chasers for amenity returns receivable through owner - occupancy,

then the property should be appraised by the amenity comparison
method of valuation described in this Section . This method rarely
applies to the valuation of four -family properties.
1405. Steps in Valuation Process . The first step in

the valuation process is the determination of the basic assumption on
which the valuation is to rest. This is described in paragraph 1404 .
If the amenity comparison method is found to apply to the case , the

valuation process normally proceeds in 14 additional steps. The
order of the steps is designated by letters as follows :

a. The Rating of Location is determined in accordance with
the instructions in Section 9.

6. The Rating of Property is determined in accordance with
the instructions in Section 8.

C. An estimate of the remaining economic life of the building is
made in accordance with instructions in Section 13.

d . The monthly rental value of the property is ascertained in
accordance with instructions in Section 13.

e. A study is made to determine the degree to which the prop
erty exerts owner - occupancy appeal, that is, the extent of
its ability to satisfy fully all the desires which owner
occupants typically seek from a property. The results of
this study are expressed as a percentage, thus: “Owner
occupancy appeal 60 % .” This analysis is described in
paragraphs 1412 and 1413.

VALUATION OF AMENITY INCOME DWELLINGS

1405

f. Selection is made of an amenity increment percentage which
reflects the degree to which the monthly value of the serv
ices of the property to a typical owner -occupant exceeds

the monthly rental value. The owner -occupancy appeal
percentage enters into this selection. Amenity increment
percentages and the methods of selecting them are de
scribed in paragraphs 1414 to 1417.
g. The derived monthly value is determined by multiplying the
monthly rental value by the selected amenity increment
percentage and adding the amount thus derived to the

monthly rental value. This step is described in para
graphs 1418 to 1420.

h. Selection is made of a conversion factor reflecting the cer
tainty, quality , and duration of the derived monthly value.
Conversion factors and the methods used to select them are

described in paragraphs 1421 to 1424.
¿. An estimate of the value of the land is made by comparison
in accordance with the instructions in Section 13.

If excess

land, as defined in paragraph 1425, exists a separate valu
ation of the excess area may be required . Instructions
are found in paragraph 1425 .

j. The derived capital value of the property is determined by

multiplying the derived monthly value by the selected
conversion factor and adding the valuation, if any, of
excess land. This process is described in paragraphs
1425 and 1426 .

k. A judgment is formed with respect to the available market
price of the subject property in accordance with the instruc
tions in paragraphs 1427 to 1432. This requires consider
ation of sales data relating to improved properties of
similar type and characteristics in the same or in com
peting neighborhoods.
1. An estimate of the replacement cost of property in new con
dition is made in accordance with the instructions in
Section 13 .

m . The derived capital value is compared with the estimates
of available market price and replacement cost of property
in new condition . This comparison leads to the determina
tion of the estimate of value. The latter figure is the
Valuator's final total valuation .

The instructions cover

ing the making of the comparison and the determination

of the final value estimate are given in paragraphs 1434 to
1439.

UNDERWRITING MANUAL

1405–1408

n . Finally, the total amount of the estimate of value is dis
tributed to the component parts of the property in accord
ance with the instructions in paragraphs 1440 to 1442, and
the results are entered on FHA Form No. 2015 .
THE DETERMINATION OF DERIVED CAPITAL VALUE

1406. The estimate of derived capital value is found by

first determining the derived monthly value attributable to the prop
erty for the ensuing 12 months, multiplying this amount by a con
version factor, and then adding the value ascribed to excess land, if

any. The derived monthly value is determined from an analysis
of the rent obtainable from a typical tenant and an analysis of the
direct services the property is capable of rendering an
occupant during the ensuing 12 months. The validity of the method

depends, in part, upon the assumption that expense ratios are quite
similar for amenity income dwellings of the same type, in the same
general locality. The translation of derived monthly value to the
estimate of derived capital value by the use of conversion factors

reflecting the probable certainty, quality, and duration of the returns
in future years, is in accord with general capitalization theory. It is
practical to the extent that data compilation is thorough, judgment is
used in the determination of derived monthly value, and consistency
characterizes the selection of conversion factors .

1407. The use of estimates of gross returns as the basis
of valuation is justified because expense ratios in amenity income
dwelling properties of the same type, quality, and price group are
relatively constant and variations are adequately allowed for in the

conversion factors. The only items of expense subject to wide
variations in these properties are the expenses for repairs, main
tenance, replacements, and taxes. These expense items are factors
which affect the ratings ascribed to the Property and Loca
tion categories in the risk rating system . These ratings, in turn, are

used as criteria in the selection of conversion factors. Therefore, the
use of estimates of gross returns is feasible in the process.
1408. Ratings and Economic Life. After the Valuator

has determined that the amenity comparison method applies to the
case , he proceeds with the first steps. The first three steps comprise
the determination of the Rating of Location, the Rating of Prop

erty , and the estimate of remaining economic life . These steps are

included early in the process because they require the Valuator to
become thoroughly familiar with the detailed characteristics of the

property and its environment. As finally used for valuation pur
poses, the two risk categories will have significance both because

VALUATION OF AMENITY INCOME DWELLINGS
1408-1410

of the ratings ascribed to individual features of the categories and
because of the total ratings of the categories as well.

1409. For purpose of illustration the steps in the amenity
comparison method of valuation are shown by means of an example.
The conclusions thus far reached may be listed as follows :
Ana Total Rating of Location -6. Total Rating of Property ---C. Remaining Economic Life of Building ----

57
86

35 years

1410. Monthly Rental Value . Instructions regarding

the estimation of monthly rental values are given in Section 13. The
instructions deal with the making of rental value estimates in rental
markets in which the demand and supply factors are approximately
balanced and rental values reasonably stable. They also deal with

markets in which the demand factors substantially outweigh supply
factors, resulting in seriously unbalanced conditions and excessive
and unstable rental values. Under such circumstances the instability
of the rental value structure cannot be given effect satisfactorily in the
amenity comparison method of valuation except by use of an estimated
monthly rental value which the Valuator determines to be a reasonably

stable one. He must , therefore, reach a conclusion as to the point to
which the temporarily inflated rental values are likely to decline when

forces which have produced the inflated conditions have spent them
selves. For example, assume that in a particular case the rental
actually obtainable for the ensuing 12 months is estimated at $70 per
month and this figure is found to be the rental value for that period ,
that is, it is found to be in line with rentals asked and paid for resi

dential accommodations of the type and quality under consideration .
However , the Valuator concludes that in a year or two the rental ob
tainable and rental value will probably drop to $60 per month . In
this case $ 60, rather than $70, is the monthly rental value to be used in
the amenity comparison method . Aside from this modification , the
Valuator proceeds in accordance with the procedure as described in
this Section . It might appear that some adjustment will be needed on
account of the use of a figure for monthly rental value lower than the

amount actually obtainable . However , no adjustment is needed .
This is true because the amount by which the currently existing
monthly rental value is excessive represents a premium which prospec
tive tenants in the market are willing to or must pay in order to secure
residential accommodations of the type and quality desired by them
or available for their use . A purchaser for owner - occupancy could
avoid the necessity of paying this premium . It would be manifestly
improper to use a currently existing excessive rental value in the

amenity comparison method and make an addition thereto of an

UNDERWRITING MANUAL

1410_1412 ( 1 )

amenity increment determined by using the temporarily high rental
value as a base. If this were done it would presume that the typical
purchaser for owner -occupancy could avail himself of both a rental
return as an owner -landlord during the period of excessive rental value
levels and an amenity return as an owner -occupant at the same time.

Obviously this is both impossible and an illogical assumption. The
currently existing high rental value cannot be used because the amenity
comparison method postulates a typical purchaser for owner-occu

pancy. The point at which the prospectively declining rental values
are likely to become relatively stable must, therefore, be used. It is
emphasized that the foregoing procedure is to be followed only in
instances where the Valuator is reasonably certain that there will be
an abrupt and unusual decline from rental value levels within a year
or two from the date of appraisal. Declines which may occur in more
distant years are taken into account directly when selection is made
of the conversion factor applicable in any given case.
1411. In instances where the Valuator is required to make
two estimates of monthly rental value covering different periods of
time in the future he records his conclusions in this manner opposite
question (21 ) on FHA Form No. 2015 :
( $70 )

$ 60

( 21 ) Monthly rental value, unfurnished .--

The example being used in this Section assumes that only one esti
mate of monthly rental value is required . The Valuator's conclusion
is expressed as follows:
d. Monthly Rental Value---

$ 40

1412 ( 1) . Degree of Owner -Occupancy Appeal. The

Valuator next proceeds with step (e ) to ascertain the degree to which

the property exerts owner-occupancy appeal. He must study the
property and its environment so that he may reach a conclusion as
to the relative intensity of the desire for ownership and owner
occupancy of the subject property which would be aroused on the
part of a typical person or family which could afford to own the
property and which is in the market to purchase and occupy a home.
He must outline in his own mind the nature of the conditions with

reference to a property, neighborhood , and neighborhood inhabi
tants which would be most acceptable to such typical persons or
families. The immediate objective of this phase of the valuation

process must be uppermost in his mind. That is, he must con
stantly remember that this step is the major one in estimating the
extent to which the services of the subject property may be more
valuable to a typical owner-occupant than to a typical tenant-occu

pant, or the extent to which the returns a typical owner -occupant

VALUATION OF AMENITY INCOME DWELLINGS

1412 (1 )-1412 (2)

would receive may have a monthly value in excess of the monthly
rental value. It is obvious that anything pertaining to the prop
erty or the immediate neighborhood which enhances the owner

occupancy appeal of the property will likewise enhance its appeal
for tenant- occupancy. While the prospective owner -occupant will
demand at least as much as a prospective tenant- occupant, the former
will be more exacting in his requirements, more discriminating, and
more critical of the property and its surroundings. Therefore, in

considering significant factors which determine the degree of owner
occupancy appeal, the Valuator must view them from the standpoint
of the highly critical and carefully discriminating attitude of a
prospective typical owner -occupant, rather than from that of the
relatively tolerant and superficial attitude of a typical tenant
occupant.

1412 (2). Shelter is a universal necessity and is ob
tained either by renting residential accommodations or by purchasing
them . Nearly all individuals at some time or other have a desire to
own and occupy their own homes. The hopes and wishes from

which this desire emanates are fulfilled in varying degrees by home
ownership and owner -occupancy. The extent to which they are satis

fied in this way depends upon matters pertaining to the properties
purchased, to the neighborhoods in which they are located, and to
the characteristics of the people inhabitating these neighborhoods.
When the best possible conditions exist relating to a property, the

neighborhood , and the neighborhood's inhabitants, fulfillment of these
hopes and wishes is possible to the greatest degree and the owner
occupancy appeal of the property will likewise be greatest. There
is no statistical or mathematical basis of measuring the degree of
owner -occupancy appeal in any case ; therefore, degrees of owner
occupancy appeal ascribed to properties are merely relative. How
ever, the standard , in terms of which comparative degrees are ex
pressed , embraces the very best conditions which would have to exist
with reference to properties in various price groups, neighborhoods

for such properties, and inhabitants of such neighborhoods in order
to fulfill completely the hopes and wishes which depend for realiza
tion on ownership combined with occupancy of a home. A prop
erty which exerts strong owner- occupancy appeal will arouse an
intense desire for both ownership and occupancy of it on the part

of a person or family financially able to buy and maintain such a
property and in the market to purchase and occupy a home. This
desire would be aroused as the person or family would approach the
neighborhood. It would be stimulated upon approach to the prop
erty, and would attain to great intensity upon inspection of the

UNDERWRITING MANUAL

1412 (2 ) -1412 (3)

property and the gaining of knowledge that the neighborhood in
habitants were considered very desirable from the standpoint of the
person or family inspecting the property. To the extent that char

acteristics of the approach to the neighborhood, the neighborhood
itself, the subject property, and the neighborhood inhabitants were
less favorably regarded, the intensity of the desire for ownership
combined with occupancy of the property would be restricted , and
owner-occupancy appeal would likewise grade downwards.
1412 (3). In determining the extent to which a prop
erty exerts owner- occupancy appeal, the Valuator may be guided, in
part, by the evidences indicated in recent sales. The fact that

buyers have been purchasing with occupancy in mind probably indi
cates a degree of owner -occupancy appeal. However, such indica
tions can be used as evidence only by considering the actuating
motives of the buyers and numerous other significant factors. The
real test is : To what extent would the existing condition with ref
erence to any significant factor under consideration meet the maxi

mum requirements of an exacting and discriminating typical pros
pective owner-occupant ? This calls for a contrasting of the maxi

mum requirements pertaining to the condition from the point of
view of prospective typical owner -occupants with the requirements
of prospective tenant-occupants. The matters listed below are con
sidered to be significant factors in estimating the degree of owner
occupancy appeal. The first four and the eighth items relate to
the neighborhood and the others relate to the specific property being
appraised.
a. The appearance of the immediate neighborhood and of the
approach to it as they affect or create owner -occupancy
appeal.

6. The life-stage of the immediate neighborhood. Residential
neighborhoods usually enhance in desirability if they build

up sufficiently fast. When building stops, they remain rela
tively stable for a period of time, and then decline. The
tendency is for owner -occupancy appeal to go up, level off,
and then go down as the life -stage progresses. Evidences of
the life-stage, so far as owner -occupancy appeal is concerned ,

may be found in the age of the neighborhood, though this
may not be of major importance; the proportions of owner
occupancy and tenant -occupancy ; the percentage of vacant
residential units in the neighborhood ; the percentage of
vacant lots in the area and the rate of absorption of such lots
into use ; the rate of increase or decrease in population in the

neighborhood ; and the general impression gained from an

VALUATION OF AMENITY INCOME DWELLINGS

1412 (3) -1413

inspection of the area to ascertain if evidences of obsolescence
are observable.

c . The degree of prestige associated with the neighborhood as
a place for owner-occupancy in contrast with tenant
occupancy .

d . The degree of social and racial compatibility of the inhab

itants of the neighborhood. The presence of socially or
racially inharmonious groups in a neighborhood tends to
lessen or destroy owner - occupancy appeal.

e. The extent to which the subject property in its external
aspects and interior finish and appointments are especially
attractive to the eye and create a desire for ownership as
contrasted with tenancy.
f. The extent to which the functional quality of the property,
as evidenced by the ratings of the “ Function ” features in

Rating of Property, would be satisfactory to a prospective
owner- occupant in contrast with a tenant -occupant.

g. The relative newness of the building improvements of the
subject property, considered from the standpoint as to how
this condition adds to the desire to own and occupy rather
than to merely occupy as a tenant.

h. The extent and effect of neighborhood detractions, that is,
of things or conditions not already mentioned which detract
from appeal for owner -occupancy. A dilapidated or ugly

or obsolete building would lessen the owner -occupancy appeal
of adjoining and nearby properties. Traffic hazards, noise,
smoke, and obnoxious odors also are detractions.
i. The extent and effect on owner - occupancy appeal of any

inappropriateness of the subject property to its immediate
neighborhood.
The first seven matters listed may be considered positively , while the
last two require consideration as negative factors ; that is, they operate
to reduce the degree of owner-occupancy appeal.
1413. The conclusion takes the form of a percentage

expression which represents the degree of appeal for owner -occu

pancy. If the conclusion is that the owner-occupancy appeal is
negligible, then the amenity comparison method will not be appli
cable. In such cases the capitalization method described in Section
15, Valuation of Rental Income Dwellings, should be used . It is

assumed for the purposes of the example, that the Valuator has
reached a conclusion in this step as follows :
e . Owner -Occupancy Appeal ---

65 %

UNDERWRITING MANUAL

1414-1417

1414. Monthly Amenity Increment.

A residential

property which exerts owner-occupancy appeal will produce returns
or services to typical owner- occupants which are more valuable than
is indicated by the monthly rental value to typical tenants. For ex
ample, owner -occupants of such properties obtain returns which in
clude independence in use and control, satisfaction and pride from

the mere fact of ownership, and enhanced social status. Tenants
cannot realize these returns in the same degree, if at all. Therefore,

while the monthly rental value fully represents the value of the re
turns received by the tenant, the value of the returns realizable by a
typical owner-occupant is greater. The amount by which it is greater
is designated herein as the monthly amenity increment. Amenity

increment percentages are utilized for the purpose of ascertaining
monthly amenity increments which in turn are used to determine the
value of the monthly returns to typical buyers desiring to become
owner -occupants.

1415. Amenity increment percentages indicate the extent
to which the value of the monthly returns or services of a property
to a typical purchaser for owner -occupancy exceeds the monthly
rental value of the property to a typical tenant. The returns to the
owner -occupant are not received in monetary form but rather in the
form of direct services and satisfactions. However, for the purposes
of valuation a monetary value must be ascribed to these returns.

This is accomplished by multiplying the monthly rental value by the
appropriate amenity increment percentage and adding the amount
thus derived to the monthly rental value.
1416. Amenity increment percentages are ascertained by

studying cases in which valuations have already been established .
In this study the various conditions entering into the valuation and
justifying it must be known and available for analysis. The factors
vary for properties in different value groups and for properties

exerting various degrees of owner -occupancy appeal. Thus, within
any one value group, the higher amenity increment percentages are
found to relate to properties of higher owner -occupancy appeal.
With regard to properties in different value groups, the higher per

centages relate to the properties in the higher value groups, assuming
equal degrees of owner-occupancy appeal. Amenity increment per
centages are assembled in tabular form so that an appropriate in
crement may be readily selected after classification of a property into
the proper value group and after a conclusion has been drawn as to
the owner -occupancy appeal percentage.

1417. Amenity increment percentages are used to esti
mate the monthly value, for the ensuing 12 months only, of the

VALUATION OF AMENITY INCOME DWELLINGS

1417-1420

returns to typical owner- occupants. The certainty, constancy, and
duration of returns thereafter do not enter into the selection of

amenity increment percentages. These characteristics of the future
returns are given consideration at another point in the valuation
process. The value range and owner -occupancy appeal percentage
are the criteria which dictate selection of these increment percent

ages. In the example it is assumed that the amenity increment
percentage selected by the Valuator is as follows:
f. Amenity increment percentage for value range $ 4,000 to
$ 6,000 and for owner-occupancy appeal 65 % ------------- 10%

1418. Determination of Derived Monthly Value. The

next step requires the Valuator to determine the derived monthly value
imputable to the property for valuation purposes. Like the estimate
of monthly rental value, the derived monthly value is for the period
embracing the ensuing 12 months.

1419. The derived monthly value represents the value
ascribed for the next 12 months to the services and satisfactions realiz

able by a typical purchaser of the property for owner -occupancy. It
is always in excess of the monthly rental value, although sometimes

the excess may be small as in cases where relatively low owner-occu
pancy appeal percentages apply.
1420. The derived monthly value is ascertained by mul

tiplying the monthly rental value by the applicable amenity increment
percentage, thus:
g. Determination of Derived Monthly Value :

Monthly Rental Value ----

Amenity Increment Percentage --Monthly Amenity Increment.-

Derived Monthly Value ( $40 + $4)

$ 40
X10 %
$4

$ 44

If the amenity comparison method is used in appraising a small
multi- family property, the process is the same as in the case of a

single-family amenity income dwelling except that a slightly differ
ent treatment is prescribed in determining the derived monthly value.
The monthly rental values of the individual units are estimated as
in other cases. The owner-occupancy appeal percentage will be

lower than in the case of the single -family property, inasmuch as
the owner occupant must share the premises in certain respects with
tenant occupants and must also assume the burdens of operating a
rental business in connection with his own home accommodations.

The amenity increment percentage will be applied only to the rental
value of the unit likely to be occupied by a typical purchaser. After
this addition has been made, the derived monthly value is deter

UNDERWRITING MANUAL

1420–1422

mined by obtaining the sum of the resulting figure and the monthly
rental value of the accommodations which would be rented. This

step in the process, in the case of a two-family amenity income
dwelling is illustrated as follows:
g. Determination of Derived Monthly Value :
Owner -Occupant's Unit :
Monthly Rental Value ----Amenity Increment - 10 % ----

$ 40.00
4. 00

$ 44.00

Total_

Tenant-Occupant's Unit :
Value -.

40.00

Derived Monthly Value-----

$ 84.00

Monthly Rental

1421. Conversion Factors . There is a relationship be

tween the level of the returns a property is capable of producing
and the value of the property. The ratio of the total amount of
the value to the monthly amount of the returns will be relatively
high or low depending upon the certainty, quality, and probable
duration of the returns in the future . This ratio is described as
the conversion factor. The conversion factor in any given case is

equal to the value of the property divided by the derived monthly
value. Such a ratio may be used to determine a derived monthly
value figure when the value of the property is known, or to ascertain
an estimate of value when the derived monthly value is known .
When a conversion factor is used , it serves the same purposes as do

capitalization rates and remaining economic life estimates in the cap
italization method of valuation described in Section 15.

1422. Tables of conversion factors are established by
Chief Valuators to make certain that they conform to conditions in
local areas and in all types of markets. In setting up tables Chief

Valuators select a number of typical properties, the total valuations
and derived monthly values of which, have been previously estab
lished. A substantial number of properties should be selected for
this purpose. The Chief Valuators ascertain then what conversion
factors will produce the individual derived monthly values previously
estimated for each property. Thus, if the total valuation of a prop
erty is $ 5,000, and the derived monthly value is $ 45, the conversion
factor is 111. A tabulation should be made so as to facilitate study
of the various cases in order to discover and analyze the causes for

differences in conversion factors. The significance of remaining
economic life estimates, and of category and feature ratings of
Location and of Property should be analyzed in each case.

VALUATION OF AMENITY INCOME DWELLINGS

1423-1425 (2)

1423. Tabulations should be separately made according
to economic background areas, and should include properties char
acterized by upper and lower extremes and midway points as to
factors of major significance, such as remaining economic life esti
mates, location ratings, and property ratings. Properties having

substantially similar characteristics are arranged in the tabulation
by separate groups, and a table of conversion factors is set up by

analysis of the various significant factors. Valuations on the indi
vidual properties selected for the purpose are deemed correct when
the estimates of value are supported by market prices, the level of

which has developed during a period characterized by the absence
of extreme conditions of the real estate market . This is evidenced

when supply and demand are in close correspondence, when the

sales prices are in proper relation to the various group income levels
of purchasers, and when sales have been consummated on sound
financial bases. In using the tables, Valuators make adjustments and
interpolations as their judgment dictates. They are required , how
ever, to use the same conversion factor when identical conditions
apply to various cases and to use higher and lower factors in logical

relation to the differences in conditions applying to different cases .
1424. High ratings of the features in the Property and

Location categories when combined with long remaining economic
life estimates indicate the applicability of high conversion factors.
Lower feature ratings combined with shorter economic lives require
the use of lower conversion factors. Intermediate combinations of

these elements, which reflect the quality and duration of future re
turns, indicate the application of intermediate conversion factors.
In the example it is assumed that the Valuator's decision is as
follows :
h. Applicable Conversion Factor----

103

1425 ( 1) . Valuation of Land. The Valuator is next re

quired to reach a conclusion as to the value to be ascribed to all the
land which comprises an eligible area . This is accomplished in ac

cordance with instructions contained in Section 13. In determining
the extent of an eligible land area , the Valuator is guided by in
structions in Section 5. In the example it is assumed that the
Valuator's conclusion is as follows :
i. Valuation of land.

$ 650.00

1425 (2). If eligible excess land is found to exist, the
Valuator treats it in accordance with instructions which follow.
Excess land is defined as an area in excess of the area of a land

UNDERWRITING MANUAL

1425 ( 2 ) -1427

unit which is typical in the immediate neighborhood, or an area in
excess of that which is adequate to suitably accommodate the build
ing improvements in the case . If the excess land enhances the rental
value of the property, or the amenity increment percentage which
is applicable, or both , no special treatment is necessary. If the
eligible excess land does not enhance the rental value or the amenity
increment percentage, the Valuator estimates the value of the entire

eligible land area and ascribes a value to the excess land equal to
the difference between the valuation of the entire eligible area and

the valuation of an area typical in the immediate neighborhood , or
one which is adequate to suitably accommodate the building im
provements. In such cases, therefore, three land valuations are nec

essary , namely : (a) Valuation of the total eligible area ; (b ) valua

tion of typical area or area suitable for building improvements ;
(c) valuation of the remaining portion of the eligible area, that is,
the excess land.

If it is assumed that excess land exists in the

example, the Valuator's conclusions might then be as follows :
. Valuation of Land ( i. e. , the entire eligible area )Valuation of area suitable for building

improvements
Valuation of excess land ..

$ 1,050.00

$ 650.00
400.00

1426. Determination of Derived Capital Value. The

Valuator next proceeds to the determination of the derived capital

value. This merely involves multiplication of the derived monthly
value by the applicable conversion factor and the addition to the
amount thus determined of the valuation, if any, ascribed to excess
land. The process is illustrated in the following.
j. Determination of Derived Capital Value :
Derived Monthly Value---

Applicable Conversion Factor-

$ 44
X103

$ 4, 532
Excess Land - none_

Derived Capital Value---

00

$ 4, 532

THE ESTIMATE OF AVAILABLE MARKET PRICE

1427. After the Valuator has made the estimate of de

rived capital value he proceeds to make the estimate of available
market price. He assembles data on sales of similar improved

properties in the same locality or in competing localities and forms
a judgment with respect to the available market price of the subject
property.

VALUATION OF AMENITY INCOME DWELLINGS

1428-1430

1428. Market price estimation requires the use of sales,

asking prices, and offers, for the purpose of estimating prices ob

tainable for properties in the open market at the time, or within a
reasonable period after the date of appraisal. This necessitates many
comparisons relating to the nature and mutability of the characteris

tics, environments, desirability, and utility of the properties under
appraisal, and of those of like properties involved in the sales and
listing transactions or negotiations. In making such comparisons,
consideration is given to the entire range of data useful in estimating
residential property values. Inasmuch as sales and asking prices
may be greater, or less, than acceptable value estimates, it is plain that

market price estimation merely produces a conclusion with respect to
the price obtainable, irrespective of whether this price is warranted.
Of course, if the sales and asking prices considered are fair, when
viewed from the standpoint of future benefits which are likely to ac

crue to an owner, then the final conclusion as to the market price ob
tainable for any property under appraisal will also be the final conclu
sion as to a reasonable estimate of the value of the property. Therefore,
after making the comparisons and analyses necessary in market price

estimation, the Valuator must realize that the resulting conclusion can
not be accepted as a reasonable value estimate unless results produced
by other estimates indicate that the market price obtainable represents
a price that is warranted. This is tantamount to indicating that the
estimate of available market price is not a method of valuation. The
final use of the estimate in the amenity comparison method is to
establish one of the approximate upper limits of possible valuation,
except as noted in paragraph 1438.
1429. There are several devices used by Valuators in
making comparisons between properties. One obvious device is to
make direct comparisons of properties by over - all judgments of
their relative values. Another is to assign a comparison percentage
to the various properties, basing the percentages on a figure of 100 %
for the property under appraisal. A third device is to make the
comparisons in terms of lump sum differences in market price by
allowances for variations, such as sizes, accommodations, and
locations.

1430. When comparison percentages are used, the prop
erty being valued is assumed to have a market price status of 100 % .

Comparison percentages are then ascribed to the other properties with
respect to which the Valuator has obtained sales data. These per
centages must indicate his opinion as to the relative desirability and
worth of the properties, measured in terms of desirability and worth
of the property being appraised. Before ascribing percentages, he

UNDERWRITING MANUAL

1430-1431

should familiarize himself with all the characteristics, physical and

otherwise, of all the properties to be embraced in the comparisons.
Furthermore, he must consider the characteristics of the environ
ments in which the several properties are located, the nature, prospects

and the probable effect of any changes which may occur . After mak
ing the comparisons, he ascribes percentages and applies them to the

purchase prices of the properties compared with the one under ap
praisal. He thereby obtains indications of the available market price
for the property which he is appraising. The illustration below indi
cates how the comparison computations are made :
Indicated
Available
Market

k. Estimate of Available Market Price :

Price for
Property
Comparison
Prices Percentages
105 %
$ 5,000
906
4, 250
950
4 , 700
956
4,850
Sales

Properties Compared
B
с

D

4,000

E.

Estimate of Available Market Price ...

85 %

Under

Appraisal
$4,762
4,722
4,947
5 , 105

4,706

$ 4,850

The above method of computation enables the Valuator to visualize

easily the comparisons, and his judgment is partially guided by
" bracketing ." The amount finally selected as the estimate of avail
able market price is not determined by averaging the indicated

available market prices, because some of the sales used in the com
parison may have been made under varying conditions such as all
cash, substantial cash or instalment payments, or for motives which
may have affected the sales price.
1431. Some Valuators may find it easier to think in
terms of market price differentials. By "price differential” is meant
a lump sum addition or deduction from the price paid, asked , or of
fered, in order to correct for differences of whatever nature between
the properties used for comparison and the one under appraisal.
These differences may relate to number of rooms, number of baths,
basement area , quality of materials or workmanship, or livability.
For example, suppose that property " E ” recently sold for $ 4,000.

Suppose that the property to be appraised is apparently on a par
with “ E ”, except that the one under appraisal has one more room .
Assume also that the Valuator is justified in concluding that the
extra room would enhance the ability to command a price in the mar
ket to the extent of $750.

The price differential then would be

"plus $ 750.” The indicated price obtainable for the property to be
appraised would be $ 4,750. The illustration below shows how this
type of comparison is made :

VALUATION OF AMENITY INCOME DWELLINGS

1431-1434
Indicated
Available

k. Estimate of Available Market Price :

Properties Compared

Market
Price for
Sales
Prices

Price

Differentials

$ 5,000
4 , 250
4 , 700
4,850
4,000

B.
C.

D.
E.

Estimate of Available Market Price ..

Property
Under
Appraisal

- $ 450
+ 350
400
350

$ 4,550
4,600

+ 750

4,750

5 , 100
5 , 200

$ 4, 850

1432. When the Valuator has made the estimate of avail

able market price, he enters the result in the place provided for it
on FHA Form No. 2015 , Report of Valuator .
THE ESTIMATE OF REPLACEMENT COST OF PROPERTY

1433. After the Valuator has completed the estimate of
available market price, he is required to determine an estimate of
the replacement cost of property in new condition in accordance with

the instructions in Section 13. In the example, the conclusions are
as follows :
1. Replacement Cost of Property :
Main building --Garage ---Other improvements.

$ 3,900
400

Total Replacement Cost of Improvements..
Land valuation ---Miscellaneous allowable costs_

Total Replacement Cost of Property

$ 4,300
650
150

$ 5, 100

DETERMINATION OF ESTIMATE OF VALUE

1434. The determination of the total value estimate is,

in its simplest form, merely the acceptance of the particular one
which happens to be the lowest of the three estimates. If the esti
mate of derived capital value is less than either the estimate of
replacement cost of property or the estimate of available market
price, then it is accepted as the total valuation. If, however, the
estimate of derived capital value is not the lowest of the three esti
mates, it cannot be accepted as the final estimate of total value.

This is the practical application of the substitution theory described
in Section 13. The final estimate of value may not exceed the re
placement cost of the property. Furthermore, except as noted in

paragraph 1438, it cannot exceed the price at which an equivalent
property is available to a purchaser, either by purchasing a lot and

building the structures or by purchase of a completed property. In
the example the following comparison of the three estimates occurs :

UNDERWRITING MANUAL

1434_1438
m . Determination of Estimate of Value :

Estimate of Derived Capital Value-----

Estimate of Replacement Cost of Property
Estimate of Available Market Price ---

Estimate of Value (lowest of the three )

$ 4, 522
$ 5, 100
$ 4, 850
$ 4 , 525

1435. Judgment Control of Results. All estimates of

value are reported in round numbers to the nearest $ 100, $ 50, or $ 25,
depending upon the general price range within which the estimate

lies. While the general rule which usually governs the setting of
the estimate of value is to adopt the lowest of the three estimates,
there are certain exceptions. Thus, when the difference between the

highest and lowest is less than 3% of the highest of the three, the

Valuator may report a valuation equal to any amount within the
limits of the three figures. Another exception is stated in para
graph 1438.

1436. In the case of new construction or properties in
early life, the three estimates are frequently reasonably close together.
In a runway market in which building costs, land prices, and real
estate sales prices are soaring far beyond levels which can be sus
tained for reasonably long periods they would not be close.
1437. In the case of existing properties in midlife or
new properties which are overimprovements or underimprovements,
the three estimates are usually different by greater amounts. For

example, the estimate of derived capital value may be $ 3,900, and the
other two estimates may be $ 4,100 and $ 4,600. In such a case the
derived capital value of $ 3,900 is accepted .
1438. In some cases during recessions the estimate of
derived capital value may exceed the estimate of available market

price. For example, the estimate of available market price may be
$ 4,100, and the other two estimates may be $ 4,525 and $ 4,610. The
general rule would require the Valuator to submit $ 4,100 as his
valuation. However, because the valuation is made for the purpose
of long-term mortgage financing, and because the prices which prop
erties command in such depressed markets may be unduly low, the
Valuator is justified in giving consideration to the propriety of sub

mitting a figure higher than the estimate of available market price.
In the case cited, he might very properly submit $ 4,300 as his final
valuation, that is, the figure lying between the estimate of derived

capital value and the estimate of available market price. This line
of reasoning may be applied only during periods of recession. It

is always incorrect and is conducive to overvaluation during periods
of reasonable or intense market activity or during short lived periods
of inactivity.

VALUATION OF AMENITY INCOME DWELLINGS
1439–1441

1439. In localities where operative builders erect numer

ous homes for sale on a volume production basis, it frequently happens
that of the three estimates the cost estimate is highest, the derived
capital value estimate is intermediate, and the available market price
estimate is lowest. In such cases, the reasons for this relationship
may be as follows: the replacement cost estimate is based on the pre

sumption of a single building operation such as described in Section
16, Methods of Dwelling Cost Estimation, whereas the actual cost to

the operative builder is substantially less. This permits the builder
to quote reduced prices to the buying public in order to stimulate
demand, and accounts for the fact that the available market price is
the lowest of the three estimates. Where this condition exists, the

substitution theory applies with full force and the lowest of the
three estimates, namely the estimate of available market price, is the

accepted final valuation. If the three estimates are : derived capital
value, $ 5,100, replacement cost of property, $ 5,240, and available mar
ket price, $ 5,000, and if, in addition, the actual cost of replacement
of the property to the operative builder and land developer is only
$ 4,500, the Valuator uses the $ 5,000 figure as his final valuation . The
$ 500 difference is the profit of the operative builder and land developer.
DISTRIBUTION OF ESTIMATE OF VALUE

1440. After the Valuator has determined his final esti
mate of the total value of the property, he proceeds to make a

proper distribution of the total to the several component parts of
the property. This is done by ascribing to the land the land valua
tion secured in step i and distributing the remainder between the
main building and other improvements in approximate proportion
to the amounts of the several items as they appear in the estimate of

replacement cost of property. Computations may be rounded off
to the nearest $10 or $ 25, as judgment suggests. The results so
obtained are entered on FHA Form No. 2015.
1441. The distribution of estimate of value, in the case
of the example, appears as follows :
n. Distribution :
Replacement Distribution
Cost of

Property

Land

Main Building Garage .-Other Improvements.-Miscellaneous Allowable Costs .
Total,

of Estimate
of Value

$650

$ 650

3 , 900

3, 500

400

375

150

$5, 100

$ 4, 525

UNDERWRITING MANUAL

1442-1444

1442. When the difference between the total valuation

and the land valuation is less than the cost of replacement of prop

erty minus the land valuation, the difference is the amount of accrued
depreciation as a result of overimprovement, underimprovement, de
terioration, or other causes.
COMPARATIVE VALUATIONS

1443. Valuations will customarily be made according to
the complete amenity comparison procedure described in foregoing
paragraphs, unless the capitalization method described in Section

15 applies. However, it is desirable to make direct comparisons be
tween very similar properties which have recently been carefully
appraised by the amenity comparison method , not only to save effort

and expense, but to make the valuation activities result in strictly
consistent conclusions. Such comparative valuations are therefore
prescribed as sound procedure when large numbers of directly com
parable properties are found in the same immediate neighborhoods
and are made the basis of large numbers of applications for mort
gage insurance .

1444. If an operative builder or land developer is en

gaged in large operations, the valuations of properties will be ad
vantageously made by direct comparisons in many of the cases after

a satisfactory valuation has been made of one or more properties
in the building operation. The various elements which are standard

should be jointly considered for all properties simultaneously,

if

possible. By comparison, the valuation of properties differing only
in minor details may be determined by making adjustments which
adequately compensate for the differences. This should result in the

establishment of suitable tentative valuations before applications for
commitments are formally received .

PART III
SECTION 15

VALUATION OF RENTAL INCOME DWELLINGS

CONTENTS
Paragraphs
Valuation Process ..

Estimates of Gross RevenueDetermination of Rental Values
Total Rental Value of Space_
Miscellaneous Revenues ---

Occupancy Percentage ----Calculation of Effective Gross Revenue.

Estimates of Operating ExpensesRenting and Administrative Expense..
Regular Operating Expense ----Repairs, Maintenance, and Replacements_
Taxes and Hazard Insurance_
Estimates of Net Earnings_----

Estimation of Value by Capitalization ..

Steps in Capitalization ProcessValue Adjustments .

Completion of Forms -Mathematics of Capitalization.
Present Value of an Amount__

1501-1502
1503-1511
1505_1506
1507
1508
1509_1510
1511

1512-1525

1516-1518
1519
1520_1523

1524–1525
1526-1531
1532-1539
1533-1536
1537–1538
1539

1540–1549
1542

Present Value of a Declining Annuity -

1543–1544

Perpetuities----

1545-1546

Interest Tables ---

Provision for Future Depreciation .-Determination of Capitalization Rates --General Level of Capitalization Rates_
Selection of Rates .Furnished Apartments_

1547

1548–1549
1550-1555
1550-1553
1554-1555

1556-1566

Effective February , 1938 .
Federal Housing Administration .

PART III
SECTION 15

VALUATION OF RENTAL INCOME DWELLINGS

VALUATION PROCESS

1501. Multi- family dwelling properties and single fam
ily dwellings which, because of their character or location, are
salable to investors interested only in monetary returns, are best

appraised by the capitalization method of valuation. This process
consists of four major steps, as follows:
a . The making of estimates of the probable effective gross
revenues to be derived from rental operations under the
supervision of ordinary competent management

7. The making of estimates of the probable expenses of oper
ation , under the supervision of ordinary competent man
agement which would have to be incurred in producing
the effective gross revenues in the amounts estimated
c. The estimation of the net earning expectancy in both

quantitative and qualitative terms. The amount is deter
mined by calculating differences between the estimates
of effective gross revenue and the estimates of expenses
of operation and taxes. The quality or character of the
net earning expectancy is determined by analyzing the

factors which indicate the certainty, stability, possible
and probable fluctuation, and duration of the earning
expectancy

d . The translation or conversion of net earning expectancy by
capitalization into an estimate of the value of the
property

1502. The capitalization process, herein prescribed, es
tablishes the land valuation by comparison and assumes that the
building value is the remaining portion of the total valuation. In

other words, the value of the building is estimated by capitalizing
the portion of the net income remaining after deducting land returns.
The process of valuation in which the land valuation is determined
by capitalizing the land returns which remain after building returns
are deducted from the total net income, is not applicable to rental

UNDERWRITING MANUAL

1502-1506

income dwellings of the type with which the Federal Housing Ad
ministration is concerned . It provides no control over the land
value estimate because the land value is ordinarily but a small
portion of the total valuation and slight variations in the earning
estimates produce great differences in the estimate of land value.
ESTIMATES OF GROSS REVENUE

1503. Gross revenue at 100 % occupancy is defined as the

estimated total income actually derived from operations derivable at
100 % occupancy before deductions for operating expenses, taxes, in
surance, management, maintenance, and replacements. Effective gross
revenue is defined as the gross revenue actually anticipated. It is

distinguished from the gross revenue at 100 % occupancy and is an
estimate of total collections. It equals the gross revenue at 100 %

occupancy less allowances for expected vacancy and collection losses
and allowances for all other contingencies which reduce the amount
of revenue collections.

1504. Estimates of effective gross revenue are usually
made for yearly periods commencing with the year following the
date of appraisal and running for as many years as the Valuator

can make plausible forecasts. Ordinarily, forecasts are made for
one, two, or three years only. This is accomplished for each year
by (a) ascribing rental values to all rental spaces in the property,

( 6 ) adding them to secure the total rental value of space, (c) adding
to the total the estimates of miscellaneous revenue other than rents,

( d) determining the probable percentage of occupancy for the year,
and (e ) calculating the estimated effective gross revenue. Each of
these steps is described below .
1505. Determination of Rental Values.

There are

usually ample evidences upon which to base estimates of current
rental value.

Rental values must be ascribed to each individual

rental unit. This is necessary because very often the units in a

structure have different sizes, layouts, elevations, equipment, and
exposures and differ in appeal and desirability. Rentable units
occupied rent free shall be included at their rental values.
1506. Rental values are ascribed for each of the ensuing
years for which plausible estimates can be made. Ordinarily, this

will be for one year only, the ensuing 12 months, and will reflect
the current rental values of the units. The Valuator must reach a

decision as to whether these rental values are likely to increase
or decrease during the yearly periods following. If the information
gathered shows the probability or certainty of an increase or decline,
then the next step will be to estimate the rental values of the units
for each succeeding year, during the years subsequent to the time of

VALUATION OF RENTAL INCOME DWELLINGS

1506-1509

appraisal, during which predictions can be made with reasonable

confidence . In this connection it is appropriate to point out that
very often new rental income dwellings experience marked decreases
in rental value after the first few years of their existence, after which
the downward trend is likely to continue at a much slower rate .
1507. Total Rental Value of Space. After ascribing
rental values to each rental unit for each early year, the results are
tabulated in the following manner :
Monthly Rental Value
Apartment
Apartment
Apartment
Apartment

A - 1 ...
A - 2 ..
B - 1.
B - 2 ..--

Total Yearly Rental Value ---

1st Year

2nd Year

$ 62. 50

$62. 50

65. 00

67. 50
62. 50

62. 50
67. 50
$ 257. 50
$ 3,090.00

70. 00
$ 262. 50

$ 3, 150.00

1508. Miscellaneous Revenues. In certain cases there

will be miscellaneous revenues in addition to revenues derived from
rents. These include items such as collections for gas, electricity,
equipment rentals, and garage rents, if not included as rental units.
These should be estimated on the basis of 100 % occupancy and added
to the total rental value of space , as follows :
1st year

Total Yearly Rental Value --Extra Garage Spaces, 4 at $ 4.00 per month ..

Total Revenue at 100 % Occupancy .

2nd year

$ 3, 090

$3, 150

192

192

$3, 282

$3, 342

In the typical properties with which the Federal Housing Adminis
tration deals, there are seldom miscellaneous revenues.
1509. Occupancy Percentage. “Occupancy ” refers to
performance in relation to the securing of gross revenue. The esti
mate of gross revenue at 100 % occupancy is taken as the standard,
and " occupancy " is expressed as the ratio between actual gross reve

nues or estimates of effective gross revenues and the standard. The
occupancy percentage is, therefore, an expression of revenue-produc
ing efficiency. The word “occupancy” is frequently used to denote
the percentage of space occupied by tenants. As used in valuation,
however, the word refers to effective gross incomes, not space. It is
common practice to estimate the occupancy which will be equivalent

UNDERWRITING MANUAL

1509–1510

to the average for the remaining economic life after the initial years
for which specific occupancy predictions are made. This average is
what is herein referredto as the “ long -term average occupancy. ” It
is used to embrace all the years subsequent to the initial ones for which
specific estimates are made.
1510. The Valuator makes an estimate of the occupancy

percentage for each early year. In the case of new construction he
presumes a long -term average occupancy to be reached in early

life, usually in the second year, sometimes in the third year following
completion of construction. The occupancy during the first year
may be estimated at a lower percentage or at the maximum , depend
ing upon the probable experience indicated by current and prospec
tive conditions in the rental market. A prediction of future occu

pancy requires that a study of pertinent data be made, embracing not
only the immediate neighborhood but of the entire economic back
ground area as well. The Valuator assumes ordinary competent

management and considers the probability of attaining various oc
cupancy percentages. The question of supply and demand is of

paramount importance in the prediction . The economic background
of the area, directions of city growth, space supply, rate of growth
of population, and probable future supply data , properly arranged
in time series, form the basis of the prediction. With such informa
tion as to both probable supply and demand, it is possible to fore
cast occupancy year by year until the selected standard of Occu

pancy is reached. The factor relating to supply -demand relationships
necessitates consideration of the rate at which additional units of a

competitive character may be constructed in the community, and of
the ability of the market to absorb these units into use . In no case
is it proper to omit a deduction for vacancy and collection loss, for
it is not sound procedure to assume that none will occur. In some
instances, however, the Valuator may be warranted in assuming no
losses on this account for a very short time subsequent to appraisal.
This would be true in cases where it was well established that a short

age of accommodations existed. In these instances, however, the pro
vision for vacancy and collection loss must be introduced into the
calculations after the expiration of a short period during which it is
certain no such allowance need be made. Vacancies, concessions, and
collection losses are generally computed as a percentage of the rental
value of the property, although sometimes it is estimated by assum
ing that the vacancy and collection loss allowance will equal the rent

obtainable during a certain period such as a month per year. The
amount to be chosen should be the Valuator's best judgment as to
the most probable arithmetical average of yearly vacancy and collec
tion losses. There are a number of factors which will influence and

VALUATION OF RENTAL INCOME DWELLINGS

1510–1511

guide the Valuator's judgment such as the past actual experience of
the property ; the past experience of like properties in the same or
similar locations; the desirability of the rental units under considera

tion ; present and prospective relationships between the supply of
rental units of competitive character, and of the present and pros
pective demand for such units. The desirability of the rental units
under consideration obviously involves consideration of a great num

ber of related elements, including all those dealt with in making

feature ratings in the Property, Location, and Earning Expectancy
categories.
1511. Calculation of Effective Gross Revenue. After

arriving at plausible conclusions with respect to the occupancy per
centages during early years, they are used to determine the estimates
of effective gross revenue. A typical calculation of this kind follows :

Total Revenue at 100% Occupancy .
Predicted Occupancies--Effective Gross Revenue..

1st year

2nd year 3rd year

$ 3, 282
70 %

$3, 342
80 %

$ 3, 342

$ 2, 297

$2, 674

$ 3,008

90 %

An estimate of the effective gross revenue differs from an estimate
of the gross revenue at 100 % occupancy in that it contemplates an
expected reality. It represents the predicted actual collections. In
the example, the Valuator has used two sets of predicted rental
values. Usually one set at present market rates is used, inasmuch
as the direct forecasting of specific changes in rates is difficult. On
the other hand, if space is now under lease at rates which differ
from market rental values, the two sets of rates would be used. It
is also permissible and desirable if there is a sound basis for expect
ing the rental values to change within one or two years. In the

example, the Valuator used three different occupancy predictions.
Two usually reflect reality more accurately. In any case of new or

old construction, however, the estimate placed in the right hand
column ( 90% in example ) is the expected performance which should
characterize performance on the average throughout a number of
years in the remaining life of the property. The figure does not,
however, make any allowance for the general long time decline in
gross earning capacity which will result from future deterioration
and obsolescence. Allowance for this decline is provided for in the
adoption of an income premise applicable to the net returns attribut
able to the building improvements and is described in paragraph
1528.

UNDERWRITING MANUAL

1512-1513
ESTIMATES OF OPERATING EXPENSES

1512. As used here, “ Operating Expenses” denotes all
actual outlays occasioned by the ownership and operation of the

property. In this sense, operating expenses do not include vacancy
allowances, collection losses, allowances for deterioration and obso
lescence, or expenses connected with mortgage indebtedness. They
include the expenses incurred for heat, light, service, repair, and
maintenance of the premises. They include the expense for manage
ment. They embrace the premiums paid for fire and other hazard
insurance. They contain taxes and amounts paid on account of
special assessments. They also include amounts accumulated for the

purpose of actual physical replacements of equipment and machinery.
In making estimates of operating expenses, Valuators must assume
ordinary competent management and must set the several estimates
at levels where they parallel and justify the rental rates, occupancy
estimates, and predictions of economic life. As a consequence, the
actual operations of determining the effective gross revenues and the
estimated operating expenses are accomplished simultaneously by
the Valuator.

1513. In establishing estimates of operating expenses,
Valuators use three processes to secure the final estimate of total oper
ating expenses. These three processes include the following :
a. Making careful estimates of the probable average yearly
amount of each detailed item . The first step is to make
certain that the list of items is complete and embraces

allowances for every type of actual expenditure for which
outlays will have to be made during the economic life of
the building improvements. Then an estimate is made
of the amount of each item . The data are applied on a

per square foot, per cubic foot, per room , or per dwelling
unit basis, or on some other suitable basis.

Some items

are examined on several of the possible bases before the
final estimate for the item is accepted, and greater weight
is given for the results secured from one basis than from
others, depending upon the appropriateness of the unit.
The last step is to add the several estimates to secure the
first estimate of the total operating expenses.
b. Determination of the second estimate of total operating

expenses by assuming such expenses to be a percentage of
the effective gross revenue at maximum or average occu
pancy. This percentage is defined as the expense ratio
and is determined by examining data on the operations
of similar properties.

VALUATION OF RENTAL INCOME DWELLINGS

1513-1516

c. Examination of the ratios of the four major classes of ex
penses, mentioned below , to the estimate of total operating
expenses found by the first and second processes above,
and the making of adjustments to determine the third
estimate of total operating expenses.
1514. The Valuator then studies the three estimates he

has made and arrives at his final conclusion with respect to total
operating expenses. For illustration, the first process, the totaling
of estimates of all the individual items, produces a figure of $ 1,528.

The second process, the application of a typical expense ratio, say

45%, to the estimated effective gross revenue, say $ 3,008, produces
a figure for total expenses of $1,354. The third process makes it
appear that all major classes of expenses are in logical relation,
except that the allowance for heating appears high. Then , the Valu
ator restudies the heating item . If it is presumed that he finds it
$ 100 higher than he can now justify, he will probably establish his
final estimate of total operating expenses at $ 1,400. If, in any case ,
the three processes give substantially like results, he accepts the
result as an acceptable estimate. If the processes give dissimilar
results, he studies the three detailed analyses until he can either

(a) explain the differences, or ( 6 ) properly correct the results until
they are in alignment. In the first case, the first process will usually
be accepted as the final estimate. In the second case, adjustments
are made in the directions indicated by the reexamination .
1515. The four major classes of expense, used in the
third process above, are (a) renting and administrative expense ,

( ) regular operating expense, (c) repair, maintenance, and replace
ments, and (d) taxes and hazard insurance. These are used as

major headings in the following paragraphs. Under each of these
headings are listed the detailed items of expense on which the first
process above is based.
1516. Renting and Administrative Expense. The de

tailed items included may embrace most of the following :
a. Advertising
b. Commissions

C. Alterations for tenants
d . Office salaries

e. Office expenses

f. Legal and auditing expenses
g. Telephone
h. Expense of collections
ż. Management

;. Miscellaneous

UNDERWRITING MANUAL

1517-1519

1517. Small rental income dwellings are usually man
aged by their owners. Frequently, they reside in the property and
personally manage it. No payments are made for wages or salaries

for managerial services. Notwithstanding this fact, it is usually
necessary to make a charge against income for the expense of man
agement. The item is calculated on the basis of the usual expense
of employing services of property management concerns. This
charge is made even if there is no actual outlay of money , because
the valuation is for the purpose of determining the value of mort
gage security. Payment for management services will fall on the

new owner after acquisition. The fact that the property offers the
present owner a combination of amenity returns, money returns,
and an opportunity to earn additional income motivates prospective
owners to buy. These motives and their effect upon valuation are
recognized in the selection of suitable capitalization rates.
1518. In some cases, the estimate of Renting and Ad
ministrative Expense does not include some of the above enumerated

items such as advertising, commissions, office salaries, office expenses ,

and legal and auditing expenses. In these instances, a single charge
is made under the heading of Management. Care should be exercised,
however, to make certain that items not readily apparent are not
omitted . Advertising includes newspaper advertising, circulars,
signs, donations made for advertising purposes and similar items.
Commissions include all payments actually to be made and com
missions paid to tenants in the form of concessions. Under the item ,

alterations for tenants, the charge should be the average amount ex
pected yearly for this purpose. Alterations for tenants do not include

papering, painting, decorating, resurfacing floors, and routine main
tenance. They include only the cost of changes such as moving par

titions, changing cabinets, and similar items. Services rendered to
tenants personally by the owners should be taken into account in
order to determine a correct estimate of expenses.

1519. Regular Operating Expense. The detailed items
included usually embrace most of the following :
a. Heating and ventilating expense
b. Janitor expense

c. Lighting expense
d. Refrigerating expense
e. Water expense

f. Gas
9. Garbage and rubbish removal
h. Protection

VALUATION OF RENTAL INCOME DWELLINGS

1519-1520

i. Grounds expense

j. Cleaning
k. Exterminating
1. Miscellaneous

The determination of expenses grouped under this heading can be
accomplished easily by referring to the expenditures for such items

in other properties of the same type as the building being appraised.
When data on these items are taken from the actual expense expe

rience in a sufficient number of properties, the Valuator resolves the

various items into costs per unit. Costs are frequently expressed in
units such as cubic feet, square feet, apartments and rooms. He then

selects unit costs for the subject property by ascertaining the most
frequent unit costs found in the data relating to properties most
like the one being appraised. The amounts selected as final are not
necessarily the average of all the amounts within the group of prop
erties compared . The expense for heating and ventilating and the

wages of workmen employed to operate the equipment are included
under the heading of heating and ventilating expense. The item ,
janitor expense, should include not only wages and the expense for
janitor supplies, but the rental value of any rooms occupied rent free

by him , which could otherwise be rented. Lighting expense includes
the cost of electricity, light bulbs, other electric supplies, fuses, and
similar items. Whenever possible, the expense for electricity, gas, or
other medium used for refrigeration should be set up separately, to
gether with minor supplies used in refrigerator upkeep. If water
and gas are supplied by the management, the respective expenses
should be shown. In handling these data on the regular operating

expense items, the expense units applied are based on areas, cubical
contents, revenue, or other suitable bases. Thus, fuel may be based
on cubical contents, lighting on areas, refrigerating, water, and gas
on rentable units, and other items, such as exterminating, on number
of rooms.

1520. Repairs, Maintenance, and Replacements. The

detailed items included embrace most of the following :
a. Repairs to structure

6. Repairs to equipment and fixtures
c. Painting
d. Decorating
e. Structural replacements

f. Equipment replacements
g . Miscellaneous

UNDERWRITING MANUAL

1520–1523

Allowances for repairs, maintenance, and replacements should be in
cluded in amounts equivalent to the probable average yearly expenses
for these items. Except insofar as it may indicate that the average
is likely to be high or low or usual, the present physical condition
of the building is not a factor. Neither is the fact that a buliding is
new and will not have burdensome maintenance and replacement

expenditures for a considerable period. These allowances must be
sufficiently large to be adequate to cover the average expense through
out the remaining economic life of the building. For example,
limited amounts must be spent each year for maintenance and repair
items of more or less minor character. The exterior walls of frame

structures must be maintained by painting them every two, three,

or more years. Many types of roof covering must be replaced once
or more during the useful life of the structures. Certain items of

mechanical and plumbing equipment must be periodically replaced .
1521. The expense data on most properties exhibit wide
fluctuations from year to year in the actual expenditures made for

maintenance and replacements. For this reason the actual figures
for any particular year cannot be used in the estimation of future
expenses. The experience in a number of years of operation, how

ever , may be illuminating. For illustration, it may indicate the pres
ence of structural deficiencies that can be corrected , or the proba
bility of relatively high maintenance costs in the future.
1522. The allowance for maintenance should represent

the probable future average expense per year of maintaining the
property in such physical condition as will sustain its attractiveness
to tenants and prevent occurrence of physical deterioration at an

excessive rate. Relatively small items of expense which occur fre
quently are considered as maintenance.

Examples are painting,

decorating, minor repairs to mechanical and electrical equipment,
plastering repairs, and pointing of masonry.
1523. Generally, items having fairly long spans of useful

life but less than the estimated economic life of building improve
ments and involving a substantial monetary outlay are considered as

replacements. Examples of such items are roof covering, heating
plant, plumbing fixtures, and electrical refrigerators and cooking
stoves when classed as realty. Determination of the expense item to

to used for replacements is accomplished in five steps as follows :
( a) An estimate is made of the replacement cost of each
replaceable item.

(6 ) An estimate is made of the probable total span of useful
life of the item.

VALUATION OF RENTAL INCOME DWELLINGS
1523

(c) Determination is made of the number of times the item
will probably have to be replaced during the remaining
economic life of building improvements by dividing the
estimated remaining economic life of the building im
provements by the estimated total span of useful life
of the item . If the result is a whole number, the num
ber of times replacement must be provided for is one
less than this number. If the result contains a fraction,
then only the fraction is deducted to obtain the num
ber of complete replacements. These deductions are
made because replacement is not necessary at the end of
economic life of building improvements.

(d) The amount of expense to be charged on account of each
replacement item is determined by multiplying the re
sult found in (a) by the result found in ( c) and divid
ing by the estimated remaining economic life of build
ing improvements.

(e) The total expense item on account of replacements is
determined by adding the result found in (d) for each
item .

The basis used in making the calculations relates to an item of the
same quality as the one to be replaced. An example assuming a
probable remaining economic life of building improvements illus
trating the method of estimating allowances for maintenance and
replacements follows:
Maintenance Items

Exterior Painting :

Estimated cost $ 220. Required every
4 years . Average expense per year.- $55

Interior Decorating:

Estimated cost 16 rooms at $12 per
room $ 192. Required every 3 years.
Average expense per year .--

$ 64

Miscellaneous Repairs and Minor Plumbing system $ 30, heating system
Repairs:

$ 30 , roof repair $20, refrigerator re

pairs $20, cooking stove repairs $ 10,
miscellaneous $ 24 .

Average expense

per year..

$ 134

Replacement Items
Roof Covering :

Estimated cost of replacement, $250.
Estimated total span of useful life,
15 years. Number of times replace

ment required (35+ 15 = 2.33) 2. Av
erage expense per year ( $ 250X2 + 35 ).
Floor Covering:

$ 14

Linoleum in the kitchens and bath
rooms.

Cost of replacement, $ 150.

Estimated total span of useful life,

8 years.

Number of times replace

required (35 + 8 = 4.38) 4 .
Average expense per year ($ 150X 4
+35) --ment

$ 17

UNDERWRITING MANUAL
1523-1524

Replacement Items
Window Shades :

Estimated cost of replacement, 60 @

Electrical Refrigeration :

$ 1.00 = $60. Estimated total span of
useful life, 5 years. Number of
times replacement required (35+ 5 = 7
-1 = 6 ) 6. Average expense per
year ($60X 6 + 35) ---Estimated cost of replacement, $ 360 .

$ 10

Estimated total span of useful life,

Heating System :

Plumbing Equipment:

Electrical Cooking Stoves:

10 years. Number of times replace
ment required (35 + 10 = 3.50 ) 3. Av
erage expense per year ( $ 360X3 + 35 ) $ 31
Estimated cost of replacement, $ 800.
Estimated total span of useful life,
20 years. Number of times replace
ment required ( 35 + 20 = 1.75) 1. Av

erage expense per year ($ 800X1 + 35 ) . $ 23
Estimated cost of replacement, $ 600.
Estimated total span of useful life, 25
years. Number of times replacement
required (35 + 25 = 1.40 ) 1. Average
$17
expense per year ( $600X1 + 35 ).
Estimated cost of replacement, $ 400.
Estimated total span of useful life, 15
years .

Number of times replacement

required (35 + 15 = 2.33) 2.
Special Electrical Equipment:

Average

expense per year ( $400X2 + 35 ) ----Ventilating or exhaust fans $ 120 . Esti

$ 23

mated total span of useful life, 10
years. Number of times replacement
required (35 + 10 = 3.50 ) 3. Average
expense per year ( $ 120X3 + 35 ) = $ 10.
Oilburner $ 180.

Estimated total span

of useful life , 8 years. Number of
times replacement required (35+ 8 =
4.38) 4. Average expense per year
($ 180X4+ 35) = $21 ..

$31

Total Yearly Expense for Repairs,
Maintenance , and Replacements . $ 419

1524. Taxes and Hazard Insurance. Taxes and insur

ance are ordinarily referred to as fixed charges, because frequently
the amounts are comparatively constant. As a rule, the allowance for
taxes is equivalent to the taxes for the latest period. If it is pos

sible to forecast with certainty an impending change in taxes, the
expense item may be different from the amount actually devied upon
the property for the last period. The amount should include all
taxes on the property and recurring assessments, if any. A break
down of the item should be made. Special assessments are not to be
included as the existence of a special assessment lien is accounted for in

VALUATION OF RENTAL INCOME DWELLINGS
1524–1528

a lump sum adjustment as directed in Section 13.

In new construc

tion cases, taxes include the estimated tax on the completed improved
property.

1525. The allowance for insurance is the average annual
cost of such types of insurance protection as are customarily carried
in the locality where the property is situated, and for such total
coverage as is customary, appropriate, and adequate. If, in a given
case , it is concluded that the maximum recoverable loss from destruc

tion by fire is $ 12,000, the item for fire insurance should be for the
average annual cost of $ 12,000 coverage. If liability, windstorm , or
other hazard insurance is customarily carried by property owners

in the locality, then the premium expense for such insurance is used.
If the yearly cost is cheaper when policies are bought for a period
of years in advance, usually three or five, the item should bebased
upon the lower average yearly expense. It is important to determine
that the amount recorded is the figure applicable to one year and
not the total amount which would be needed to cover the entire term

of the policy.
ESTIMATES OF NET EARNINGS

1526. The estimate of net earnings during early years

is, of course, determined directly by deducting the estimated total
expenses of operation from the estimate of effective gross revenue.
A typical tabulation of the results appears below :
1st year
Effective Gross Revenue.
Estimated Total Expenses-

Estimated Net Earnings -

2nd year | 3rd year

$2, 297
1 , 400

$2, 674
1 , 400

$ 3, 008

$897

$ 1 , 274

$ 1 , 608

1 , 400

1527. Not only the probable amount of the net earning
expectancy, but its qualitative characteristics must be determined .
This is accomplished by analyzing the factors which indicate the cer
tainty, stability, possible and probable fluctuation, and duration of
the net income. This analysis is made by examining factors such as

those listed as features in the risk rating category, Rating of Earning
Expectancy. In fact, the Valuator should, at this stage of his work,
actually complete the Rating of Earning Expectancy.
1528. The estimate of net earnings is not complete until

it has been made to embrace the entire remaining economic life of the
building improvements. The specific predictions made for the en
suing 12 months, and sometimes for one or two additional years, are

UNDERWRITING MANUAL

1528

presumed to be within the estimating powers of the competent

Valuator, at least within the limits of plausible prediction. Beyond
this, however, recourse is made to more general forecasting and the
predicted probable net earnings are based on several assumptions,
as follows :

a. That the net earnings produced by the property will de
cline, on the average, during the life of the buildings.
This is equivalent to assuming that the property will
gradually deteriorate and obsolesce in spite of periodic
repairs and betterments.

6. That the decline in net earnings will result finally in a low
earning capacity which will not justify purchase of the
property at a price in excess of the value of the site. This

is equivalent to assuming that the building improvements
have a finite or limited economic life.

An actual estimate

of the remaining economic life is made in accordance with
the instructions in Section 13, Methods of Dwelling
Valuation .

c. That the net earnings are divisible into two portions: (a) the
return on land which is assumed to continue, without sub
stantial increase or decline, beyond the end of economic

life of the buildings and indefinitely into the future, and
( 6 ) the return on the building improvements which is
assumed to decrease gradually until it is nil at the end of
their economic life.

d . That the downward trending earnings attributable to the
building improvements will follow a plausible premise.
In the prescribed procedure the building returns are as
sumed to decline in accordance with the following mathe
matical premise :
That the building returns will be collected as annual installments
of net income at the end of each year, continuing for the economic

life of the building ; that the annual installments will approach
zero in the last year of economic life and will terminate with
that year's installment ; that the successive installments of build
ing returns, after the first year of maximum or long-term aver
age occupancy, will gradually decline, the annual amounts being
proportional to the corresponding yearly values of a level annuity

at 10% for a term equal to the remaining economic life of the
building.

This premise does not ignore the fact that wide fluctuations in net

earnings are to be expected. It is simply a standardized assumption
representing a plausible equivalent of future conditions which are

VALUATION OF RENTAL INCOME DWELLINGS

1528-1530

unpredictable in detail. As such , the premise presumes a future
decline which takes account of the future accrual of deterioration and
obsolescence .

1529. In the valuation of rental income dwellings, the

Valuator's quantitative estimates and assumptions with respect to net
earnings include :

A. Actual estimates of the net earnings for the ensuing twelve
months or for several years

b. An estimate of the remaining economic life of the building
improvements
C. An estimate of the returns on the land.

This estimate is

determined by multiplying an estimate of the value of the
land by the selected land capitalization rate.
1530. With these three sets of estimates made, the quan
titative estimate of net income is complete and ready for use in con
nection with the final process of capitalization to estimate the value

of the property. If the estimates of net earnings in early years are
as stated in Paragraph 1526, if the estimate of economic life of the
building is forty years, and if the returns attributable to the land are
estimated to be equivalent to $ 150 per year, then the future net earn

ings of the entire property are assumed, for purposes of valuation, to
be equivalent to the amounts in the following tabulation, although
they undoubtedly will fluctuate from year to year. It is not necessary
to convert these estimates into the following form which is here
presented solely to indicate, in figures, what the estimates and assump
tions mean .

tvoNet In

Net In- |
1
(
LIBY Year

non esisti

come
$ 897

16. - Anwet- 311, 510

1.
2.
3.

1 , 274

17 .

1, 608

18 .

4.

1 , 604

5 -----

1 , 600

6.
7.
8
9.

1 , 595
1 , 589

19 .
20 .
21 .
22 .
23 .

10
11

12----------14.20
15 .

-1
, 577
1 , 570
1 , 562

24 .
25 .
26 .

1 , 554

27

1 , 544
1 , 534
1 , 522

28 .
29 .
30 .

1 , 496
Ledio -91, 481
1 , 464

11 -2100

1 , 446
1 , 425

36.

1 , 403

37_

1 , 379

1, 254
1 , 214

OXU50160 1 , 171

--66 --- ,

cm

come

31.1L244-901 1,070
32
33
34 .
35

, 352
L1
1 , 322
1 , 289

---

TheNet In

come 112

38.San

1 , 013

Az

- 11-

39 . --- ...40

41. 11 caror
42.co.
43 .

949
879
802
718
625
523
410
286
150
150

150

Yearly there

1, 123 || after - I -----

150

UNDERWRITING MANUAL

1531-1533

1531. The following diagram illustrates the net earning
expectancy used in the above example :
$ 1608

12 74 -

897

150
0

FUTURE YEARS

3 TOTAL NET EARNINGS , IST, 2ND & 3RD YEARS, SPECIFIC ESTIMATES
BUILDING RETURNS, 3RD TO 40TH YEARS, BASED ON INCOME PREMISE
WWWULAND RETURNS, ALL FUTURE YEARS,ESTIMATED AT $ 150 PER YEAR.

Having made the estimates of net earning expectancy, the next step
in the valuation is the estimation of value by capitalization.
ESTIMATION OF VALUE BY CAPITALIZATION

1532. Capitalization is the mathematical process of esti
mating the value of the privilege of owning or of receiving a future
net income. After an income has been predicted and a rate of capi
talization selected, the income is capitalized by discounting it at
compound interest at the selected rate to secure the value. The esti

mates of net earning expectancy take several forms and each is sub
jected to the appropriate mathematical treatment indicated in Para

graphs 1540 to 1547 on the Mathematics of Capitalization.
1533. Steps in Capitalization Process. After the Val

uator has made the estimates of net earning expectancy, he takes the
following steps to complete the valuation :
a . He estimates the value of the land by comparison in accord
ance with the instructions in Section 13, Methods of
Dwelling Valuation.

6. He makes an estimate of the total replacement cost of the
property in new condition in accordance with the instruc
tions in Section 13.

c. He selects the land capitalization rate and the building capi
talization rate in accordance with the principles presented
in Paragraphs 1550 to 1555.

d. He determines the returns to land by multiplying his land
valuation by the selected land capitalization rate.

VALUATION OF RENTAL INCOME DWELLINGS

1533

e. He determines the building returns during the years from
the date of appraisal to and including the first year in
which he anticipates that the property will operate at
long -term average occupancy. This is accomplished by
deducting the yearly returns to land from the estimates
of yearly net earnings during early years.
f. He determines the present value of the building returns
ascribed for early years before reaching long -term aver

age occupancy by discounting the estimates of build
ing returns at the selected building capitalization rate. In
this process he uses discount factors selected from Table

I, shown in paragraph 1547. In cases where the esti
mate of net earnings indicates that the ensuing year is
the year of long -term average occupancy , this step does
not occur .

g. He determines the present value , at the selected building
capitalization rate, of the building returns ascribed to

all future years commencing with and including the first
year at maximum or long -term average occupancy. The
returns are presumed to commence with the building re
turns in the year of maximum occupancy, and decline in
accordance with the Income Premise described in Para

graph 1528. This series of net building returns constitutes

a declining annuity which reaches zero in the year follow
ing the termination of the economic life of the building.
The value of the series, as of the beginning of the year of
maximum occupancy, is found by multiplying the esti
mated building returns for the year of maximum occu
pancy by a factor selected from Table II, shown in
Paragraph 1547. The value of the series, as of the
appraisal date, is then found by discounting this figure
( the value of the series as of the beginning of the year of

maximum occupancy ), at the selected building capitaliza
tion rate, by using a discount factor selected from Table
I, shown in Paragraph 1547. If the estimate of net earn

ings indicates that the ensuing year is the year of maxi
mum or long -term average occupancy, this last step does
not occur, because the value of the series as of the year of
maximum occupancy is actually the value of the series as
of the date of appraisal.
h . The total valuation of the building is then found by adding
the results obtained in (f) and (9 ) .

UNDERWRITING MANUAL

1533-1535

į. The total valuation by capitalization of the entire property

is estimated by adding the land valuation found in (a)
to the building valuation found in ( h ) .
. The entire process already described is repeated a number
of times using reasonable variations in assumptions and
the figures are adjusted in accordance with the principles
presented in Paragraphs 1537 to 1539 until the Valuator

has formed his final conclusion with respect to the total
valuation .

1534. The foregoing method of estimating value by

capitalization is illustrated by two examples. The example given
in Paragraph 1535 uses a net earning expectancy typical of some new
construction cases where the appraisal is a valuation as of completion
of construction. It uses the same income figures as those which we

used as examples in the description of the estimate of net earnings.
The example given in Paragraph 1536 uses an earning expectancy
typical of existing and of those new construction cases where the net
income for the ensuing 12 months is expected to be at the long -term
average.

1535. In applying the method to cases where the predic
tion of net earnings embraces several early years, all the steps listed
in Paragraph 1533 are utilized . In the following example, the steps
are identified by letters to correspond to Paragraph 1533. The esti
mates of earnings are as follows:
1st year

Estimated Net Earnings ..

$897

2nd year 3rd year

$1 , 274

$1, 608

The third year is assumed to be the year of maximum or long-term
average occupancy.

a. Estimated Value of Land by Comparison .---

$ 2,500

6. Estimate of Total Replacement Cost of the Prop

erty in New Condition ---$19, 300
c. Selected Land Capitalization Rate_
6%
8 %
Selected Building Capitalization Rate
d. Estimated Yearly Land Returns:
Land Valuation, $ 2,500 x Land Capitalization
Rate, .06 -----

e. The building returns during the years from date of

appraisal to the end of the year of maximum or
long -term average occupancy are found as follows:

$150

VALUATION OF RENTAL INCOME DWELLINGS

1535

1st year
Estimated Net Earnings.
Estimated Yearly Land Returns .

2nd year 3rd year

$ 897

$ 1 , 274

$ 1 , 608

150

150

150

$747

$ 1 , 124

$ 1, 458

Estimated Building Returns in Early
Years .---

f. The property is expected to operate two years before reach
ing maximum occupancy . The first year's building return
of $ 747 is assumed to accrue at the end of the first year.
The second year's building return of $1,124 is assumed to
accrue at the end of the second year. Table I indicates
that an amount of 1 deferred one year at 8 % has a pres
ent value of .926 and that an amount of 1 deferred two

years at 8 % has a present value of .857. Hence the
present value of the building returns ascribed for early
years is found as follows :

1st year

Estimated Building Returns in Early Years .
Table I factors .-Present Value of Building Returns---

2nd year

$747
. 926

$ 1, 124

$692

$963

.857

g. The building returns for the period embracing the third year
to the end of the economic life of the building improve

ments are treated as an annuity commencing with $ 1,458 at

the end of the third year and declining in accordance with
the Income Premise .

The estimate of total economic life

is forty years. Hence, the declining annuity, which com
mences with the third year, runs for a period of 38 years.
It is not necessary to make any calculation or table show

ing the amounts of the building returns for any year beyond
the third year. The value of the annuity as of the begin
ning of the third year, that is, two years from the date
of appraisal , is found by multiplying the building return
which accrues at the end of the third year, $ 1,458, by the
factor for 8% , 38 years, in Table II, namely 10.77. The
result is $ 15,703. The value of the annuity, as of the date

of appraisal, is found by discounting this result for two
years. Table I indicates that an amount of 1 deferred two
years at 8% has a present value of .857. Hence, the pres

UNDERWRITING MANUAL

1535

ent value of the deferred annuity is found by multiplying
$ 15,703 by .857. The following shows these calculations:
Building Returns, 3rd year-

$ 1,458

Table II factor, at 8 % , for the present value of an annuity for 38 years
which declines, according to the Income Premise, to zero in the 39th
10. 77

year

Value of the annuity as of the beginning of the 3rd year, $ 1,458 x 10.77-- $15, 703
Table I factor, at 8%, for the present value of 1 deferred two years.---- 0.857
Present Value of the Building Returns included in the annuity, as of
$ 13, 457
date of appraisal, $15,703 x .857_

h . The total valuation of the building improvements is found
by adding the present values of the building returns for the
first year, the second year, and the remaining 38 years ,
thus :

Present Value of Building Returns for 1st year..
Present Value of Building Returns for 2nd year-

$ 692
963

Present Value of Building Returns for remaining 38 yrs_

13, 457

$15, 112

Total Valuation of Building Improvements ..

i. The tentative total valuation of property is estimated by
adding the land valuation found in (a) to the valuation of
the building, thus :
$ 2,500

Total Valuation of Land -----

Total Valuation of Building Improvements .

$15, 112

Total Valuation of Property----

$ 17, 612

j. The same process is then repeated several times using other
plausible estimates of earnings, land value, economic life,
and capitalization rates until the Valuator is satisfied
with the correctness of the final estimate. In all cases the

final results for land, building, and total valuations are
rounded off to the nearest $ 25, $ 50, or $ 100 depending on
the price range and are reported as follows :
Total Valuation of Property --Distribution of value estimate :

$ 17, 600

Land

$ 2,500

Main Building

15 , 100

Garages
Other Improvements---

If the distribution of the total valuation of the improvements is to

show more than the one figure, the total is divided between the
building, garage, or other items, approximately in proportion to the
estimated costs of replacement of the several items. In this example
the estimated replacement cost of the property is $19,300 and exceeds

VALUATION OF RENTAL INCOME DWELLINGS

1535-1536

the total valuation. The adjustments to be made, when the valuation
by capitalization gives a result in excess of the cost figure, are
described in Paragraph 1538.
1536. In applying the method to cases where the specific
prediction of net earnings embraces only the next 12 months (the
typical existing construction case ), all the steps listed in paragraph

1533 are utilized except (f) and the second calculation in (g) . The
result secured in (g) is the result required in (h) . The estimate of
net earnings during the year following the date of appraisal is $ 1,540
and is the estimated rate of earnings at long -term average occupancy .
$ 2,500
a. Estimated Value of Land by Comparison ---6. Estimate of Total Replacement Cost of the Property in New
$ 18,500
Condition .

c. Selected Land Capitalization Rate --Selected Building Capitalization Rate-

672 %
81 %

d. Estimated Yearly Land Returns :

Land Valuation, $ 2,500 x Land Capitalization Rate, .065 _----

$ 163

e. The building returns for the first year are found as fol
lows :

Estimated Net Earnings, 1st year.
Estimated Yearly Land Returns.-

$ 1,540

Estimated Building Returns, 1st year ---

$ 1,377

163

(9) and (h) . The building returns for the entire period from
the date of appraisal to the end of the economic life of the
building are treated as an annuity commencing with
$ 1,377 at the end of the first year and declining in accord
ance with the Income Premise.

The estimate of total

remaining economic life is 35 years. The value of the

annuity, as of the date of appraisal, is found by multiply
ing the building return which accrues at the end of the
first year, $ 1,377, by the factor for 812 % , 35 years, in
Table II, namely, 9.98. The following shows this calcu
lation :
$ 1, 377
Building Returns, end of 1st yearTable II factor , at 842 % , for the present value of an annuity
for 35 years which declines according to the Income
Premise -

9.98

Total Valuation of Building Improvements, $ 1,377 x 9.98 ---- $13, 742
1. Total Valuation of Land-

Tentative Total Value of Property ----

2,500

$16, 242

j. The same process is then repeated several times until the
Valuator is satisfied with the reasonableness of the final
estimate.

UNDERWRITING MANUAL

1537-1538

1537. Value Adjustments. The essence of valuation

by capitalization of prospective earnings is in the controls and ad

justments to which the valuation is subjected . Therefore, Valuators
make all calculations on work sheets, restudying both individual
estimates and general relationships between estimates before accept
ing any figures as final. The control of results is accomplished by
accepting, as final, that set of figures and conclusions which contains

the greatest number of plausible detailed estimates and relationships

in combination . Plausibility is indicated by substantial agreement
with the accumulated data on similar properties. The data are used
as the basis for the bracketing of estimates of items and of ratios
between items.

1538. The examination of all the estimates, for the
purpose of making the adjustments, follows a definite routine with a
number of successive steps, as follows :
a. After the effective gross revenue estimates, operating ex
pense estimates, and estimates of net earnings have been
completed in their initial form, they are reviewed for
correctness . Revenue reexaminations are accomplished by
assuming various plausible modifications in rental rates

and occupancy percentages in early years.

Reexamina

tion of operating expenses is handled similarly according
to the three estimating devices described in Paragraph
1513. Finally, the Valuator calculates the net earnings
in each of the early years under the various assumptions
and modifications. This gives him a number of tentative

estimates of net earning expectancy. There may be a
fairly great difference between the highest and lowest of
the tentative estimates, but ordinarily the majority of the
estimates will cluster close to some intermediate level of

earnings. The final estimates are then set up at approxi

mately the point of cluster. This may be substantially
higher or lower than the mid-point between the maximum
and minimum of the several estimates. It is rarely the
arithmetic average of all the estimates. The final esti
mate is selected on the basis of the frequency with which
the tentative estimates come out at figures which are
close to it.

b. After the estimate of value by capitalization has been com
pleted in its initial form , the computations are reviewed
for correctness. The reexamination is accomplished by

assuming various plausible modifications in the estimates of
remaining economic life, land valuation, and land and

VALUATION OF RENTAL INCOME DWELLINGS

1538

building capitalization rates. Different assumptions will
result in a set of different tentative total valuations.

There

may be a fairly great difference between the highest and
lowest of the tentative total valuations, but ordinarily the
majority of the estimates will cluster close to some inter

mediate point which is accepted as the final estimate. Its

selection as final is based on the frequency with which the
tentative estimates come out at figures which are close to it.
In making this adjustment of the initial estimate, it is
desirable to calculate the so -called over -all rate of return

and to make certain that it comes out at a plausible
level. The over-all rate is determined by dividing the esti
mate of net earnings in the year of maximum occupancy by
the total valuation . In typical cases, the over-all rate will

be higher than both the land and building capitalization
rates. In all cases, to be plausible, the over-all rate will
not be less than a figure which is 14 of 1 % lower than the
building capitalization rate.

c. After determining the final estimate of value by capitaliza
tion, the estimate is compared with the estimate of replace
ment cost of the property and of available market price.
Almost invariably the three estimates will differ. If the
difference is slight, say within 3% , no further adjustments
are necessary and the lowest of the three estimates is

adopted as the final total valuation of the property. If
the difference is somewhat greater but still small, say up
to 5%, and the building improvements are new or almost
new the Valuator makes a somewhat cursory reexamina

tion of the three estimates, and changes them if there are
reasonable grounds for doing so . In such cases, reason
able grounds consist of finding small adjustments which

are well within the limits of the bracketing used in arriv
ing at items in the estimates in the first place. If no
such grounds for adjustment are readily found without
straining of figures, the lowest of the three estimates is
adopted as the final total valuation of the property. If
the difference is substantial, in excess of 5% , the Valuator
proceeds as follows :

1. In cases where (a ) the estimate of cost of replacement
of the property exceeds the estimate of value by capi
talization , and ( 6 ) the building is in mid -life, the
Valuator accepts the estimate of value by capitaliza
tion as his final valuation unless it exceeds his esti

UNDERWRITING MANUAL

1538

mate of available market price, in which event re

view and adjustment of the capitalization estimate or
market price estimate, or both , are made until the

former does not exceed the latter. The capitalization
estimate is then reported as the value estimate. How

ever, in temporarily depressed markets the capitali
zation estimate may exceed the available market price
estimate and be selected as the final estimate of value.

The difference between the capitalization and replace
ment cost estimates is the amount of accrued depre
ciation as of the date of appraisal.
2. In cases where ( a) the estimate of cost of replacement
of the property exceeds the estimate of value by capi
talization by more than about 5% , and ( b ) the build
ing is new construction or in early life, the cost
estimate and the capitalization estimate are carefully
rechecked and adjustments are made, if judgment
indicates they should be. The Valuator then accepts
the lower of the two estimates as his final valuation

unless it exceeds his estimate of available market price,
in which event review and adjustment of the capi
talization estimate, or market price estimate, or both ,
are made until the former does not exceed the latter.

The capitalization estimate is then reported as the
value estimate. However, in temporarily depressed

markets, the capitalization estimate may exceed the
available market price estimate and be selected as
the final estimate of value. The difference between

the replacement cost and capitalization estimates is
defined as accrued depreciation. In the case of new
buildings it is a measure of overimprovement or
underimprovement.
3. In cases where the estimate of value by capitalization
exceeds the estimate of cost of replacement of the
property, whether new construction or existing con
struction in early or mid -life, the Valuator knows
that the capitalization estimate would be an over
valuation . If his income estimates are correct, in the

sense that the rental rates are immediately available
in the current rental market, it is also certain that the

divergence between the capitalization estimate and cost
estimate will invite competitive construction which
will drive rental rates to lower levels. He may con

VALUATION OF RENTAL INCOME DWELLINGS
1538-1541

clude that he has not properly estimated the risks sur
rounding the case, and that his capitalization estimate
therefore needs revision until it is not in excess of the

estimated replacement cost of property. The cost esti
mate is also rechecked for possible justified increases .
The final estimate of value may then be equal to
the replacement cost estimate.
1539. Completion of Forms. The following indicates
the correct method of filling out FHA Form No. 2015a. It will be
noticed that, aside from the adjustments described in Paragraphs
1537 and 1538, no absolute reconciliation need be made between the

the estimate of value by capitalization, the estimate of replacement
cost of property in new condition , and the estimate of available mar
ket price. The lower figure is reported as the valuation, but when

this figure is equal to the cost estimate rather than the value found
by capitalization , the figures supporting the latter estimate are re

ported as determined, and are not modified arbitrarily downward to
give the appearance of automatic agreement with the cost estimate
or reported available market price.
MATHEMATICS OF CAPITALIZATION

1540. In valuation by the capitalization process, Valu
ators utilize compound interest calculations to compute values of
predetermined income expectancies. These computations are made
by selecting the proper factors from interest tables and multiplying
the income expectancies by the factors. The tables are based on the

assumption that invested capital earns interest at a stipulated rate
and that such interest accrues in the form of a lump-sum addition
at the end of each year. It is also assumed , for convenience, that
the income for any given year accrues and is collected in a lump
sum at the end of the year. Interest is converted into capital
yearly ; hence, there is a compounding of interest on a yearly basis
when the incomes extend over more than one year.

1541. There are three such types of calculations used in
valuation by capitalization :
a . Present Value of an Amount: Single amounts of future
income are discounted at compound interest by the use
of Table I,> described below .

6. Present Value of a Declining Annuity : A declining annuity

is a series of periodic payments in which successive pay
ments are less and less. As applied to valuation, a declin
ing annuity is a series of yearly net incomes, accruing at
the end of each year, in which the successive yearly in

UNDERWRITING MANUAL

1541
NA Dora Na

OLJA

FEDERAL HOUSING ADMINISTRATION

Rental Income
Dwelling

00-001-03225

SUPPLEMENTARY REPORT OF VALUATOR

Bertel Beber )

1655 1. Nesterly Avenue........... City .... Wright City......... State .....Columbia
ESTIMATES OF OPERATING EXPENSES

Property address

ESTIMATES OF GROSS REVENUE
Rental value of unita

Renting and Administrative Expense:

Monthly rental valus

Advertising expense ...
Commissions....

Ban thu
During
at your

Daring
dyear

During

Alterations for tenants ..
Office salaries ..
Office expense ..

A-1

$ 65.00 8.65.00 5.60.00

A - 2

67,50 67.50 62,50

Legal and auditing expense ...
Telephone....
Expense of collections...
Management...

127

Miscellaneous...

TotalRenting and Administrative Experise. S...... 137.
...70...00 ...70.00.65.00
Regular Operating Expense:

Heating and ventilating expense......
B-2

72.50 17.50..67.50

Janitor .....
Lighting expense .....

310
90
12 .

Refrigerating exper:so ...
Water ...
Gas .......
Garbago and rubbish removal.
Protection ......
Grounds expense .....
Cleaning expense ..
Exterminating expense
Miscellaneous ...
Total Regular Operating Expense .

Repairs, Maintenance, and Replacements:
Repairs to structure ....
Subtotala...

$.275... 8..275... s. 255.
Effective cross revendo

Repairs to equipment and fixtures
Painting expense ...
Decorating expense ...

Total Yearly Rental Value

$2300..43300...$ 3060

Structural replacementa ...
Equipment replacements ..

15

427.

35..
81.
50
80.
20
7.

Miscellaneous....

Total Repairs, Maintenance, and Replace

Miscellaneous Revenue...

ments..

Total Revenue at 100 % Occupancy .. $ 3300 $3300...8-3060
Predicted Occupancier .
Effective Groes Revenue.

95. % ..... 90 % .....90.9
s 3135 .. $29.70... $.2754 .

Taxes and Hazard Insurance :
Taxes.

Insurance
Total Taxes and Hazard Insurance

337

422

38
459

Notes on revenue and expence items:

Units A-1 and B-l on north side of building and get very little sunshine .
Units B - l and B-2 on upper floor .
Rental demand very strong and decline in rental value in third year and in

occupancy ratio in second year anticipated due to expected rate of competitive
building .

Tenantspay for light , cooking fuel , and power for electric refrigerators.

2015 - Supplementary Roport of Valuator

VALUATION OF RENTAL INCOME DWELLINGS
1541

2015 — Supplementary Report of Valuator
Reting of Earning Expectancy
TRATURS

Total Renting and Administrative Expens.... ... 13.7... 10 %
Total RegularOperating Expenses...............427..... .31 %

Total Taxes and Hazard Insurance.........

...459.... .34 %

RATING
12

LS

12

x

Rentability of Units
Occupancy Percentage in
Competitive Buildings

3

X

Likelihood of Serious com
petitive Construction
Reliability of RentalMarket

4
10

1.X.X

Total Repair , Maintenanceand Replacements ...337.... 25. %

REJECT :

6

10

Data

10

Reliability of Expense Pro

100
100

Expense Summary

diction

Total Operating Expenses...
Effective Gross Revenue: 1st;

... 1360.... 100 %

15

Rating of Property

20;

3d year. $ _2754.....

( Insert figure for last year specifically estimated)

..49 .. %

Expense Ratio ..

x15
15

Rating of Lreation
12 18 20
Expense Ratio
Y
EXPECTANC
TOTAL RATING OP EARNING
Na

12
80

Near

Laduate of Net Karalaga :

Efectivo grow rovenuo...
Total operating expenses ...

1.2135 .
1360

Estimated Det earnings.....

1725 .

9.2970
.2260 .
2610 .

8.2754 .
1360 .
1394 .

Lotluation of Vała , by Capitalisation :

3 ...2..750

Valuation of land by comparison .
Land capitalisation rato ....

6%

Estimated yearly land returns....
Estimated building returne....
Building capitalisation rate...

8. %

8 ... 165.
1610

... 165..
1.229.

15.

10.77

Table II factor st budding capitalisation rate for ... 38.years ..
Value of annuity at beginning of lat ; 2d ; 3d year .
Table 1 lacton at building capitalisation rate..
Present values of building returne......
s. 14.0.72
Total valuation of building improvements..
Estimate of Total Value by Capitalization.

SSSSS

... 926
s . 1491

or S ...

or $ 10,236

... 857 .
s.1238 .

-... 85.7

S ... 12,343...

9.16,822 .
s.18,566..
8.17,500 ....

Estimate of Total Replacement Cost of Property.
Estimate of Avallable Market Price .....

ESTIMATE OF VALUE.- In my opinion the value of the property described above, assuming the contemplated
Improvements or new construction described in exhibita, if any , accompanying FHA Form No. 2004a , or assuming

the repairs or alterations or addition , if any, listed under item ( 15) on FHA Form No. 2015 have been completed, In......... 16.800.....
Distribution of value estimate : Land ....
S ....2,750 ....
@ ......50 . ......... per a lot,
Ir. It., o 4. ft.
Main Building....... 13.050 .
750 .
Garnge
Other Improvemente... -------. 250 .

Nons.- et sonry to transcribe estimatu la thu raport to lema 20 to 2 , Inclusive, and to Estirasle of Valus appearing on FHA Form No Wis.
REMARKS :

CERTIFICATION . - 1, the undersigned , have read section 812 (a) of the National Housing Act and do hereby certify that I have

carefully inspected this property ;that to the best of my knowledge and belief the statements made in this report are correct; that I have
no personal Interest, present orprospective,in theproperty, applicant, or proceeds of the mortgage; that inmy opinion the decisions set
forth herein are justified ; and that I have never Inspeeted this property beforejempe
(WDD And for bom )

Dari

January 2 , 1938 .

(Signed)
Valuator.

REMARCO :

Approved u mbmitted.

Approved us nodded by mo .

John Doe
Slas. O Pee,

O Per Diem .

Disapproved .

CERTIFICATION: -1, the undersigned ,do hereby certify that I have no personal Interest, present or prospective, in the property ,
applienat,or proceeds of the mortgage.

( Signed )

Dan Japuaryba 1938.

Henry. Ron
Chial Valuator.

UNDERWRITING MANUAL

1541_1543

stallments decline in accordance with the Income Premise

described in Paragraph 1528. The building returns com
mencing with the year of maximum long -term average
occupancy and running to the end of the economic life of
the building are presumed to approximate, on the average ,
such a declining annuity. The initial values of such an
nuities are ascertained by discounting them at compound

interest by the use of Table II, described below .
c. Perpetuities: A perpetuity is an income which is expected

to continue indefinitely into the future. In valuation ,
land returns are assumed to be a series of equal yearly
net incomes, accruing at the end of each year, and con
tinuing perpetually. In reality, land returns will increase
or decrease. The assumption of level returns is adopted
as the most plausible probable expectancy. Tables are not

required to determine the present valuesof perpetuities.
1542. Present Value of an Amount. The present value

of an amount due at some given future time may be considered as

being the sum which, if invested today at the selected interest rate,
will accumulate at compound interest to the amount at the future
date. The table giving the present values of 1 due at future dates is
in the following form :
Years deferred

1 ..
2 .
3..
4.

5.

7%
0. 935

8 %

763

0. 926
857
794
735

. 713

681

.873

.816

.

9%
0.917
. 842

. 772
708
. 650

To determine the present value of an item of income of $ 1,000 due
two years from now, at 8% , the amount, $ 1,000, is multiplied by the
factor .857 and the result is $ 857.

1543. Present Value of a Declining Annuity . The
present value of a declining annuity, of the type which follows the
Income Premise described in Paragraph 1528, may be considered as
the sum of the present values of all the installments of income of

which it is composed. Or it may be considered as the sum which , if
invested today at the selected rate, will accumulate in such a manner
that the income installments in the series may be paid when due, the
last installment exactly exhausting the remaining portion of the
investment and accumulation . The table giving the present values of

VALUATION OF RENTAL INCOME DWELLINGS

1543_1544

declining annuities, commencing one year from now with an income
of 1 , is in the following form :
Length of Annuity in years
1.

7%

8%

0. 94

0. 93

1.
1.
2.
4.
12.

..
.
.
10 .
48 .
49 .
50..

39
84
72
77
91

12. 99
13. 06

1.
1.
2.
4.
11.
11.
11.

38
81
66
60
58
64
69

9%
0. 92
1. 36

1. 79
2. 61

4. 44
10. 47
10. 52

10. 56

To determine the present value, at 9 % , of a declining annuity which
commences one year from today with an income item of $ 1,000 and

runs for a period of 50 years, the first year's income, $ 1,000, is multi
plied by the factor 10.56 and the result is $ 10,560. To determine the
present value, at 8 %, of a declining annuity which commences one
year from today with an income item of $ 2,000 and runs for 10 years,
the first year's income is multiplied by 4.60 and the result is $ 9,200.
1544. In cases where the declining annuity commences
at a date later than one year from the present time, its present value
is less than the figure secured by the above process. In such in
stances, the initial value of the declining annuity is determined as
described in Paragraph 1543. Then the initial value is treated as a

single item of income due at the beginning of the first year of the
annuity and its present value is determined by the process described
in Paragraph 1542. For example, assume that the declining an
nuity commences in the third year with a payment of $ 2,000 at the
end of that year and runs for 48 years. The initial value of the

annuity, at 8%, is 11.58 x $ 2,000, or $ 23,160. This is the value of
the annunity at the beginning of the first year of the annuity, that is,

the beginning of the third year. This date is two years from the
present time. Thus, for all practical purposes the $23,160 may be
considered as a single item of income due two years from now. The
present value of the deferred annuity is therefore determined by

multiplying $23,160 by .857, the factor at 8 % giving the present value
of an amount of 1 deferred two years. The result is $ 19,848. These
calculations may be summarized as follows:
Building Return for 3rd year ---

Table II factor for present value of declining annuity, at 8%, running
years
for
48

---

$ 2,000

11.58

Initial Value of building returns of 3rd to 50th year, both inclusive, as
of end of 2nd year, 11.58 x $ 2,000 ----

Table I factor for present value, at 8 % , of1 deferred two years_

$ 23, 160
.857

Present value of the deferred annuity, .857 x $23,160.

$ 19, 848

UNDERWRITING MANUAL

1545-1547

1545. Perpetuities. The present value of a perpetuity,

such as land returns are assumed to be, may be considered as being
the sum which , if invested today at the selected interest rate, will

earn interest in such a manner that the income installments in the
series may be paid when due without impairment or increase of the
principal amount. Tables are not used . The present value of a per
petuity is found by dividing the amount of the yearly income by the
capitalization rate . To determine the present value, at 6% , of a
perpetuity of $120 per year, in which the first $120 is due one year
from now, $ 120 is divided by .06 and the result is $ 2,000.
1546. Inasmuch as the valuation process prescribed for
rental income dwellings requires the establishment of land value by
a process of comparison rather than by capitalizing estimated land

returns, the foregoing operation, namely, the direct capitalization of
a perpetuity, is not used . Instead , the Valuator first determines the

land value, and then computes the amount of yearly income attributa
ble to the land, that is, what perpetuity is required to support the land
value. In other words, he starts with the $ 2,000 valuation of the land
by comparison, and determines the land returns by multiplying the
$ 2,000 by the land capitalization rate, 6 % , and secures the figure of

$120 per year. This is to determine what amount must be deducted
from the estimate of total net earnings to arrive at the amount of the
building returns. Havingmade the deduction, he is justified in using
the land valuation in the total valuation .

1547. Interest Tables. Tables of compound interest
functions are used for the above purposes. Table I gives the present
values of the amount 1 deferred for from 1 to 10 years, at various

rates from 7% to 12% . Table II gives the present values of declin
ing annuities which run from 10 to 60 years, at various rates from
7% to 12% .

1

VALUATION OF RENTAL INCOME DWELLINGS

1547

Table I. - THE PRESENT VALUE OF ONE

Yrs.

1

2
3.
4.
5.
6.
7.
8.
9.
10 .

7%

74 %

8%

9% 10%

844 %

0.935 0. 930 O. 926 10. 922 0.917 0.909
.873 . 865.857 .850 1.842.827
. 816
. 805
. 794 1. 783
772.751
. 708.683
· 763
. 722
. 749 · 735
. 713.697 .681 1. 665.650.621
666
.623

. 582
. 544
. 508

648

630

613

603
. 561
.522
. 485

584
540
.500
. 463

. 565
. 521
· 480
. 442

596
547
502
460

• 565

. 513

12 %
0.893
. 797
. 712
. 636

. 567
. 507
.

452

. 467

404

424

. 361

. 422.386

. 322

.

1547

UNDERWRITING MANUAL

Table II .- THE PRESENT VALUES OF DECLINING ANNUITIES

3WOON

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6.
7

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Yrs .

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10
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12

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VALUATION OF RENTAL INCOME DWELLINGS
1547

Table II. - THE PRESENT VALUES OF DECLINING ANNUITIES — Con .

Years

35 .
36 .
37 .
38 .
39 .
40 .

iii!

31 .
32 .
33 .
34 .

7%
10.
10.
11.
11.
11.
11.
11.
11.
11.
12.

74
92
09
26
42
57
72
85
99
11

6 8$ % 84 %60 611

742 %

10%

9.
10.
10.
10.
10.

9.
9.
9.
9.

9. 98

9. 57

8.
8.
8.
8.
8.

10. 55

10. 09

9. 67

8. 91

10. 69
10. 87

10. 19
10. 29
10. 38

9. 76
9. 84
9. 93

8. 98
9. 05
9. 12

11. 52

10. 97

10. 47

10. 00

9. 18

7. 85

10. 55
10. 63

10. 08
10. 14
10. 21

9. 24
9. 29
9. 34

7. 98

10. 27
10. 33

9. 39
9. 43

8. 01
8.
8.
8.
8.
8.

10. 90
11.
11.
11.
11.

04
17
29
41

10. 77

12.
12.
12.
12.
12.

23
34
45
55
71

11. 62
11. 72
11. 81

11. 90
11. 99

11. 31
11. 38

46 ..
47
48 .
49 .
50 .

12. 74
12. 83
12. 91

12. 07
12. 14
12. 21

11. 45
11. 52
11. 58

12. 99

12, 28
12. 35

11. 64

13. 06
13. 13

12. 41

11. 74

13, 20

12. 46

13. 26
13. 32

12. 52

11.
11.
11.
11.

56 .
57 .
58 .
59 .
60 .

13. 43
13.
13.
13.
13.

48
53
58
62

35
43
49
56
61

9. 61
9. 74
9. 96

30
45
61
76

41 .
42 .
43 .
44 .
45 .

13. 38

7.
7.
7.
7.
7.

87
02
16
30
42

10.
10.
10.
10.

11. 06
11. 15
11. 23

51 .
52 .
53 .
54 .
55 .

45
55
65
74
83

12 %

11. 69

9. 48

10. 70
10. 77
10. 83

11
24
35
46

10.
10.
11.
11.
11.

89
95
00
05
10

10.
10.
10.
10.
10.

38
43
47
52
56

9.
9.
9.
9.
9.

11.
11.
11.
11.

14
19
22
26

60
63
67
73
75

9. 64

9. 75

11. 29

10.
10.
10.
10.
10.

12. 66
12. 70
12. 74

11. 96

11. 33

10. 78

11. 99
12. 03

10. 80

12. 78

12. 06

12. 81

12. 09

11.
11.
11.
11.

12. 56
12. 61

79
84
88
92

36
38
41
43

10. 82
10. 84
10. 86

9.
9.
9.
9.

47
51
55
58
61

66
69
71
73

9. 77
9. 79
9. 81
9. 82

7. 67
7. 72
7. 77
7. 81

7. 92

7. 95
7. 98

04
06
08
21
10

UNDERWRITING MANUAL
1548-1549

1548. Provision for Future Depreciation . It is evi

dent that whatever value is ascribed to the building improvements
must be considered as depreciable over the remaining economic life
of the building. The building returns must therefore provide not
only for the interest return on the value of the building, but also

for the return of the capital investment in building presumed to be
made by a purchaser who buys the property at a price equal to the
valuation. Future depreciation is not included in the estimates of
expense. Under the prescribed valuation procedure the value of the
building is set at the figure representing the capital investment on
which the predetermined building returns can pay interest at the
building rate and return the total investment in installments over

the economic life of the building.
1549. This result is obtained automatically by the use of

the declining annuity process. The building returns, under the
Income Premise, are just sufficient to provide for the interest return

and for the return of the value of the building. This is illustrated by
the following tabulation in which the remaining economic life is 10

years. The predicted building returns at the end of the first year
are $ 1,500, the building capitalization rate is 812 % .
End of Year

Building

Interest

Returns

at 842 %

Capital
Returned

Building Valuation
1.
2
3.
4.
5.
6.
7.
8.
9

10 .

$ 1,500.00
1 , 404. 39
1 , 302. 55
1 , 189. 44
1 , 060. 60
923. 36
775. 45
606. 88

$576. 30

422. 16
223. 22

49. 16
17. 46

497. 79
420. 72

345. 77
274, 06
207. 20

146. 33
92. 85

$ 923.
906.
881.
843.
786.
716.
629.
514.
373.
205.

70
60
83
67
54
16
12
03
00
76

Unreturned
Balance

$ 6, 780.00
5, 856. 30
4 , 949. 70
4 , 067.
3, 224,
2, 437.
1, 721.
1,092.
578.

87
20
66
50
38
35

205. 35

In the above calculations, the Valuator has estimated the building
returns in the first year to be $ 1500. Next he determines the valua
tion of the building by multiplying the $ 1500 by the Table II factor

for 812 % , 10 years. This factor is 4.52, and the resulting valuation
is $6,780.00. In practical valuation he stops at this point. The above
tabulation is made only to demonstrate that the future building re

turns do provide for both the interest return and the complete return
of the value ascribed to the building. The computation commences

by determining the interest return in the first year. In that year
there is $ 6,780.00 invested. It must earn 812 % , or $ 576.30. The re

VALUATION OF RENTAL INCOME DWELLINGS
1549–1551

mainder of the building return during the first year, $ 1500.00 minus
$ 576.30, or $ 923.70, is available as a return of capital. It is there

fore deducted from the original valuation of $ 6,780.00, leaving
$ 5,856.30 invested during the second year. This amount must earn at
the rate of 81,2 % , or $ 497.79, during the second year. Under the In
come Premise the building return in the second year is $ 1,404.39 and
there remains $ 906.60 to reduce the outstanding amount of the invest
ment. This operation continues through the years until, in the last
year, the final installment toward the reduction of investment is just
sufficient to retire the then remaining balance. During the 10 year
period the building returns have been just sufficient to pay an interest
return of 872 % per year on the principal amounts which remained
invested and, in addition, to return the entire initial investment, or

building valuation, in installments over the remaining economic life
of the building.
DETERMINATION OF CAPITALIZATION RATES

1550. General Level of Capitalization Rates.

Capi

talization rates are the percentages of return used to convert prede
termined income expectancies into estimates of value. The determi
nation of proper capitalization rates requires the utmost care and
is one of the most important steps in the capitalization process be

cause of the great difference in result produced by seemingly slight
variation in the rate used . A proper capitalization rate is one which
is sufficiently high to attract investment of capital and is appropri
ate to balance the advantages and hazards of the risk. The determi
nation and selection of capitalization rates is based primarily on

probability. A high rate of capitalization is proper when uncertainty
characterizes the quality of predictions or when the hazards and
risks are great. Low rates apply where the probabilities indicate
relative certainty and safety. The definiteness with which the char
acteristics of the earning expectancies can be forecast is a factor in
the selection of proper capitalization rates. Thus, the reliability of
the data is, itself, a factor which greatly affects the rate .
1551. The rates of capitalization applicable to real estate

investments in rental income dwellings arise from the position of
real estate in general and rental income dwelling properties in par
ticular in the general list of investments available to persons with
investment funds. The availability of different types of investments

to the particular group of purchasers interested in the type and size of
properties for which the capitalization rate is sought will necessarily

control the general level of correct applicable rates. It is not proper
to compare the merits of investments not related by size, amount of

UNDERWRITING MANUAL

1551-1554

capital required , marketability, popularity, safety, and other char
acteristics. Inasmuch as the rate applicable to a given risk is a
market phenomenon, an analysis of the various hazards, as inter
preted by average investors, is necessary . It is necessary to select
specific kinds of typical, staple, real estate investments to ascertain
the general level of applicable rates. A limited number of instances
of sales does not suffice to establish proper capitalization rates. The
proper level of rates is indicated only by the general average accept
able rate of return sought by a large number of investors.

1552. An individual capitalization rate should be consid
ered to represent an average of a number of different degrees of in
vestment risk . Thus, investment in the first earned portion of the net

income would be safer than in the last earned portion. Therefore,
markets demand higher rates of return on investments in equities
than in mortgages. As a consequence, over-all rates of capitaliza
tion applicable to real estate valuation lie between acceptable rates
of return on mortgage investments and acceptable rates of return on

equity investments. Furthermore, the accepted rate of return on in
vestments in land is lower than the accepted rate of return on invest
ments in buildings because the land returns are more certain and of
indefinite duration, i. e., perpetuities, whereas the returns imputable

to buildings are subject to uncertainty and to total disappearance. In
this sense it may be said that the land returns are considered to be the

first earned portion of the total net income. This is clearly seen in
cases involving ground leases and leasehold valuations. Further
justification for ascribing lower capitalization rates to land than to
buildings is found in the recognition that land has, in general, greater

variety of possible uses and is, therefore, a safer investment, and may

have speculative potentialitiesaswell.
1553. The current rate of return is defined as the net

earnings in any year divided by the value of the property as of that
year. In rental income dwelling properties, the over -all rate of return

is expected to lie between 8% and 15% . Usually, it is from 8% to
10 % if no unusual conditions prevail. The land capitalization rate is

usually close to 6 % ; the building capitalization rate is usually 8%
to 9 % . These specified rates of capitalization are averages which
have been applicable in most parts of the Unitel States for a number
of years and are here presented solely to describe the approximate in
vestment position of this class of real estate and to provide Valuators
with a criterion for the selection of the general level of capitalization
rates applicable to valuation of rental income dwellings.
1554. Selection of Rates .

The actual selection of the

land capitalization rate and the building capitalization rate consists

VALUATION OF RENTAL INCOME DWELLINGS

1553

of considering the factors in the particular case to determine modifi

cations of the general criteria set up in the foregoing paragraph.
These factors embrace every element which increases or reduces the

uncertainty or risk which attaches to investment in the property as
compared with investment in the most typical classes of rental income
residential properties. The following list of factors suggests the
nature of the considerations required in the selection of rates :
a . Regional modifications : The suggested basic rates of 6%
for land and 8% for building are subject to modification
to take regional differences into account. In general, the
more recently settled portions of the country, and the
more rapidly growing sections, require the use of higher
rates than in older and more stable regions, especially
when accompanied by excessive real estate speculation.
b. Modifications for Economic Background Areas : Location

of a property in a large population center usually justifies
the use of lower rates than may be properly applied in
less populous centers. Higher rates are applicable in areas
where wide variations in rental values and occupancies oc
cur in different seasons of the year than in areas where
comparative stability exists through all seasons.
c . Quality Modifications: The suggested basic rates are also
subject to modification to take account of the differences
in the qualities of different kinds and grades of properties
and locations. Differences in structural quality, age, and
utility of buildings and differences in the advantages of
locations require modifications.

d . Modifications for Income Factors : Differences in the prob
able stability of future net incomes require modifications
of the basic rates suggested. High expense ratios indi
cate the desirability of higher capitalization rates and
low expense ratios permit lower rates. Poorer quality,
greater age, when combined with shorter economic life,

lack of adaptability to different uses, and poorer locations
require use of higher rates.

e. Modifications for Differences in the Reliability of Data :
Uncertainty in the making of forecasts, from any source ,
requires the use of higher capitalization rates. Where
data, of suitable character to justify confidence in the pre
dictions based on them are unavailable, the uncertainty
introduced is felt by the market as well as the Valuator
and higher rates are applicable.

UNDERWRITING MANUAL

1555_1558

1555. The Chief Valuator should study the area under
his jurisdiction and determine the general level of rates applicable.
That is, he should determine the regional modification of the basic
rates herein suggested. The other four types of modifications are
made, from case to case , by the Valuators and include the elements

which are reflected directly in the Rating of Earning Expectancy.
The Valuator should establish the Rating of Earning Expectancy
in accordance with the instructions given in Section 12 and use the
rating as a partial basis for the selection of land and building capi
talization rates. If the Rating of Earning Expectancy is low ,

capitalization rates should be higher than the modified basic rates
determined by the Chief Valuator. If the rating is high , capitaliza
tion rates should be lower than the modified basic rates. When the

Rating of Earning Expectancy is at an intermediate point, the modi

fied basic rates will usually apply without further modification.
FURNISHED APARTMENTS

1556. In some localities it is customary to rent some

multi-family units on a furnished basis. In instances where this is
true, Valuators may find it necessary to adapt the procedure de
scribed in the preceding portion of this Section .
1557. Where it is common practice to rent apartment

units on a furnished basis, the Valuator may find it feasible to utilize
any of three basic assumptions, namely :
a. He may make his revenue and expense and capitalization
estimates on the usual basis of operation as an unfur
nished property, as already described in this Section . This
is to be done whenever it is possible to use this basis.
6. He may make the estimates on the basis of the rental obtain
able by the owner from a lessee of the entire property who
would furnish it and operate it as a furnished apartment
property. This is to be done, if possible, where the first
basis cannot be used .

c. He may make the estimates on the basis of the rentals
obtainable for the apartment units after they have been
furnished properly, assuming management and operation
by a competent owner. This is to be done only when
neither the first nor the second basis can be utilized.

1558. If the basic assumption contemplates lessee opera
tion of the property, the procedure is identical with that followed in
cases where the basic assumption is that the owner, or a manager
in his employ, operates the property. The revenue and expense

VALUATION OF RENTAL INCOME DWELLINGS
1558–1559

estimates will differ under the two assumptions. The occupancy

ratio will be higher on the basis of lessee operation , and the expense
estimate lower as there will be fewer items due to the fact the lessee

must pay most of the various expenses of operating and maintaining

the property. Conditions assumed in the hypothetical lease would
largely govern the estimate. The capitalization rates applicable in
case of lessee - operation should also be a little lower than in cases
where owner operation is the basic assumption .

1559. If the property is to be valued on the basis of
owner operation and as a furnished property, additional considera
tions enter into the Valuator's calculations. Revenue and expense
estimates are somewhat different.

Certain items in the estimates

for unfurnished properties must be increased if the operation is
changed to a furnished basis. These would include taxes, insurance,
repairs, replacements, labor charges, management costs, and ad
ministrative expense. Some additional items would be introduced .

They are dealt with below . It must also be recognized that opera
tion of the property is in the nature of a business enterprise in
which the owner- operator assumes an additional risk over and above
that which he would experience as an operator of an unfurnished
property or as a lessor to a lessee who would assume the burdens

and expense of operation. The estimates of expense involved in
operation must provide for the following items in addition to those

already discussed in paragraphs in this Section :
a . An adequate return upon the value of the furnishings and
on the operating capital.
6. Recovery of the amount ascribed as value of the furnish
ings, to be effected out of yearly revenues and fully
accomplished during the estimated remaining useful life
of the furnishings.
From this it is apparent that the Valuator must take the following
steps:

a. Ascribe a value to the furnishings.
6. Estimate the probable total and probable remaining useful

life of the furnishings.
c. Estimate the annual amount required to keep the furnish
ings in good repair and to make necessary replacements.
d . Estimate the salvage value of the furnishings as of the end
of their useful life.

e. Determine the annual amount to be charged against income
in order to recover the value ascribed to the furnishings
during their estimated remaining useful life.

UNDERWRITING MANUAL
1559-1561

f. Determine what is an adequate return upon the value of
the furnishings and operating capital in view of risk,
and management burdens assumed in the enterprise.
1560. Furniture Valuations. Usually, a value equal to
cost is ascribed to suitable furnishings which must be put into
vacant apartment building in order to make it productive of revenue.
This is logical because the furnishings will not be installed unless
an adequate return on their cost can be obtained. If no such return

can be obtained, the furnishings can be withdrawn and placed in
service elsewhere. Furnishings already in use are valued by ( 1 )

estimating the cost of new furnishings of the same kind and quality;
(2) estimating the probable total and probable remaining useful

life of the furnishings in use ; (3) ascribing a value to the furnish
ings equal to the amount derived by multiplying the cost of new

furnishings of the same kind and quality by the ratio of probable
remaining to probable total useful life. For example, assume that
each of a number of different articles of furniture is ascribed a

total useful life of 10 years, that each of the articles will have a
remaining useful life of 7 years, that the total cost of new articles
of the same kind and quality is $ 9,400. These assumptions indicate
that all the articles have been found upon inspection to be in equally
good state of repair. The value ascribed to the entire group would
be calculated thus :
a. Cost of new furnishings of same kind and quality
0. Ratio of remaining useful life to total useful life ( 7-10) .

$ 9, 400

c . Estimated value of furnishings ----

$ 6 , 580

.7

It is to be noted that the value ascribed is a "value in use " and not

the amount obtainable in a sale of the furnishings as second hand
or used goods. In ascribing values, articles having the same esti
mated total and estimated remaining useful lives are treated in
groups and the results added to obtain a grand total for the furnish
ings involved .
1561. Useful Life Estimate. Estimates of the probable
total and probable remaining useful life of furnishings must be

based upon experience data relating to articles of the specific kind
and quality under appraisal. The character of the use which the

articles will probably experience in the specific property where they
are installed also influences the estimates,as well as the actual physi
cal condition of the articles. Relatively short total useful lives
characterize all furnishings used in rental properties because they
are generally subjected to rather severe wear. Obsolescence also

plays an important part because furnishings must be in currently
favored styles if rentals are to be maintained at profitable levels.

VALUATION OF RENTAL INCOME DWELLINGS

1562-1564

1562. Furniture Repairs and Replacements. During
their useful life, furnishings must be kept in repair. Adequate
amounts to offset such costs must be provided in the expense esti
mates. Replacements must also be made of articles which get

broken or stolen and allowance must be made accordingly for these
contingencies.

1563. Recovery of Furniture Investment. Furnishings
are wasting assets. Therefore, the investment in them or the value
ascribed to them must be recovered. This necessitates an appropriate
charge against income. To determine the charge the Valuator takes
the following steps :
a . He estimates the amount probably receivable in a sale of

the furnishings at the end of their useful life in the
property under consideration. This is their salvage value
as of that time.

6. He deducts this salvage value from the value in use as
cribed at the time of appraisal.
c . He divides the remainder thus obtained by the estimated

remaining useful life, thereby obtaining the annual
charge which must be made against income to enable
full recovery of the value ascribed at the time of
appraisal.
These steps are illustrated in the following :
Value in use of furnishings at date of appraisal.Estimated salvage value as of end of useful life_
Remainder

$ 6,580
$ 600
$ 5, 980

Annual charge against income, assuming 7 years of remain
$ 854
ing useful life ( $ 5,980 : 7 ).

In making calculations , articles assigned the same remaining useful
lives are treated in groups and the results of the computations re
lating to each group are added together to get the final figure.
Thus, there might be groups of items each having estimated remain
ing useful lives of 5, 6, 7, or more years and separate calculations
would be made for each group .

1564. Adequate Return on Value of Furnishings. The
furnishings represent most of the capital necessary to the establish
ment of the operating furnished apartment enterprise. The operator
of the enterprise must take the risk of having some of his furnishings
stolen or destroyed by irresponsible tenants from whom no recovery
or damages is feasible. He must deal with tenants whose tenure is
generally for only relatively short periods. He must assume the risk
of rapid dissipation of his invested capital through the occurrence

of obsolescence through a change of public favor as to furniture

UNDERWRITING MANUAL

1564–1566

styles, or the refurnishing with new articles of other apartment prop
erties which compete with his enterprise. He must assume a burden
of management which is greater than in the case of operating on an
unfurnished basis. Furthermore, he must pay all expenses and

charges common to the operation of an unfurnished property before
he can credit any returns to himself for his managerial services and
for his capital invested in furnishings. Under this combination of
circumstances, it is plain that the rate of return on the value of or

investment in furnishings should be substantially higher than that
applicable to the real estate investment. A return of from 9 % to
12% is not unreasonable or unusual. The Valuator calculates the
return as follows:
Value ascribed to furnishings_--

$ 6,580
$ 658

Return on $6,580 at 10 % ( $6580 x .10 ) ---

1565. Return on Operating Capital. Some capital may
have to be available in the form of cash at all times to enable con

tinuous operation and meeting of current bills. Since this capital
is in the form of cash and can be easily conserved or withdrawn
from the enterprise, a relatively low rate of return is applicable, say
4% or 5 %. Thus, if $ 2,000 of operating capital is necessary , the
charge against income at 5 % would amount to $ 100. This deduction
from income is made only in those cases where the required operating
capital is substantial in amount.
1566. To illustrate the additional steps necessarily intro
duced when the valuation relates to a real estate property which
must be treated as an operating furnished apartment enterprise, the

following calculations are shown :
Revenue at 100 % occupancy
Assumed long -term average occupancy

$ 22, 150
88 %

Estimated effective gross revenue.
Estimated expense of operation :

$ 19, 492

Repairs, maintenance, and replacements of furnishings . $ 250
All other items of expense ----

9, 610
9, 860

Estimated net earnings of operating furnished property-

$ 9, 632

Capital charges on account of furnishings and operating capital :
Annual amortization charge to effect recovery of value

ascribed to furnishings during their remaining useful
life

$ 854

Annual return on value ascribed to furnishings at
10% ( $ 6,580 x .10 ) -----

Annual return on operating capital at 5% ( $ 750 x .05)
Total ..

658
38

$ 1,550

VALUATION OF RENTAL INCOME DWELLINGS

1566

Estimated net earnings of real estate ---Returns on land valuation at 6% ( $ 15,000 x .06 ) -

$ 8,082
900

Returns of building improvements.
$ 7 , 182
Valuation of building returns at 842 % , 40 year remaining
economic life, as per income premise ( $ 7,182 x 10.47 ) .
$ 75, 196
Land Valuation ....

Estimate of value of real estate by capitalization ..

$ 15,000
$ 90, 196

The estimate of value by capitalization of the operating furnished
apartment house enterprise would be the sum of the values ascribed
to the real estate and the furnishings and the operating capital or
$97,526. The Valuator would report the value of the real estate, not

of the operating furnished apartment house enterprise.

PART IV
SECTION 16

METHODS OF DWELLING COST ESTIMATION

CONTENTS
Paragraphs
1601–1602
1603-1614
1608_1609

Purpose of Cost Estimation .
Basis of the Cost Estimate---

Items Included -Equipment and Accessories ---

1610

Items Subject to Rapid Deterioration and Obsolescence_
Items of Unreasonable or Excessive Cost-----

New Materials and Methods of Construction-

1611
1612
1613–1614

1615-1619
1615-1616

Prescribed Methods of Cost Estimation --Selection of Method ----Steps in Integrated Square Foot Method ..
Steps in Inplace Unit Method.

1617-1618
1619
1620-1621
1622-1623

Components of the BuildingDetermination of Calculated AreaMeasurement of Components-

1624

Determination of Square Foot Cost in the Integrated Square Foot
Classification of Buildings ..
Selection of Basic Square Foot Cost-

1625-1638
1626–1628
1629

Materials and Size Adjustments.-

1630–1638

Method .

Determination of Square Foot Cost in the Inplace Unit Method ----- 1639_1641

Determination of Final Square Foot Cost---Quality Adjustment --Locality Adjustment .

Determination of Total Replacement Cost-

1642-1648
1643-1645
1646-1648
1649–1650

Effective February 1938
Federal Housing Administration

PART IV

SECTION 16

METHODS OF DWELLING COST ESTIMATION

PURPOSE OF COST ESTIMATION

1601. The Valuator is required to make an estimate of
the total cost of replacement of property in accordance with the in
structions given in Section 13, Methods of Dwelling Valuation . This
estimate constitutes the approximate upper limit of possible valua
tion. The total cost of replacement of property is distinguished
from the estimate of the cost of replacement of building improve
ments. The former includes the latter. Therefore, the estimate of
the costs required to replace building improvements in new condi
tion serves to control, in part, the estimate of value.
1602. This section and Section 17, Application of Cost

Estimation Methods, prescribe the methods to be employed in deter
mining the estimate of cost required to replace building improve
ments . In these sections, the words " Cost Estimate" refer to the

estimate of Cost Required to Replace Building Improvements in New
Condition, not to the estimate of the total cost of replacement of
property.
BASIS OF THE COST ESTIMATE

1603. Estimates of the cost required to replace building
improvements in new condition shall be made by either Architectu
ral Inspectors or Valuators for use in connection with the valuation

of the real estate pledged as security for mortgages submitted for
insurance. Estimates of replacement cost shall be made on the basis
of fair costs which would have to be met by an individual lot owner

who would secure suitable drawings and specifications, obtain com
petitive bids, and contract with a responsible builder for the
construction of one dwelling only .
1604. The estimate shall be based upon replacement of

the physical improvements in new condition . In a case where alter
ations or additions to the improvements are to be made, the cost esti

mate shall be based on replacement of the improvements in new
condition as they would exist with the proposed alterations or addi

tions incorporated. However, in the event the buildings include ex
cessive or wasteful use of materials or details, excessive ceiling heights

UNDERWRITING MANUAL

1604_1607

or room sizes, attention shall be called to this fact under Estimate of

Cost Required to Replace Building Improvements in New Condition
on FHA Forms No. 2014 or 2015.

1605. The required cost estimates differ in few particu
lars from those ordinarily made by contractors bidding for work.
The differences result solely from differences in the purposes for which
the estimates are made. Contractors' cost estimates are usually made
by determining the quantities of materials, equipment, labor, and

superintendence required, and then pricing these quantities at prede
termined current prices modified for anticipated changes in condi
tions. The cost estimates made for the purposes of the Federal Hous

ing Administration are similar in this respect, except that the profi
ciency of the contractor, subcontractors, and workmen is assumed to
be only ordinary and equivalent to the typical degree of competency

available in the community. Contractors ordinarily make allowances
for such items as overhead, insurance, and profit. They consider
available supplies of material and labor as well as the location of the
project. The quantities are usually grouped by trades in the order
in which the work will be done in constructing the building. The
cost estimate made for the Federal Housing Administration is similar
except that normal conditions are assumed to apply and the quanti
ties are measured in combinations which permit a reasonably accurate
estimate to be made without particular regard to the sequence fol
lowed by the various trades in the construction operation. Con
tractors take probable weather conditions into consideration in their
estimates. The Administration makes no particular modification of
estimates because of probable weather conditions.
1606. The items included in contractors' estimates differ

somewhat from the items included in the Federal Housing Adminis
tration's estimates. Contractors' bids embrace only the cost of the
work the contractor proposes to undertake. His estimate represents
the amount which he is willing to accept in payment for the con

struction of the building at the time and place indicated , and under
the conditions specified. The amount which he is willing to accept
depends, in part, upon his eagerness to secure work. This amount
usually does not include architectural service and frequently does not
include walks and drives, special equipment, and various other items.
The cost estimate used by the Federal Housing Administration must
include those items necessary to complete the physical improvements
as indicated in paragraphs 1608 to 1612.
1607. The estimate is invariably predicated upon the

ability and experience of the estimator and is not entirely the result
of a mathematical computation. Cost estimates are usually based

upon past building operations under conditions which may differ

METHODS OF DWELLING COST ESTIMATION

1607-1609

greatly from those under which the subject building will be con
structed. It follows that the estimator must call upon his experience
in practical building operations to recognize the probable variations
which will occur between one job and another.
1608. Items Included. The estimate shall include the

cost of all materials, labor, sub -contracts, builder's overhead and
profit, permits, inspection fees, and architectural service entering into

the cost of construction of the following :
a. Main building, including porches, built-in garages and
attached terraces supported on foundation walls
b. Garage, attached or detached , and other accessory buildings
c. Walks, drives, and terraces not supported on foundation
walls

d. Private sewage disposal, water supply, and electric generat
ing plants
The allowance for builder's overhead and profit is the customary

local and current charge for the type and class of building under
consideration.

Suitable allowances shall be made for workmen's

compensation, social security, and liability insurance where these

items are a part of the cost of the building construction. The allow
ance for architectural service shall be calculated on the basis of the

percentage customarily charged in the locality for this type of work

at the time the estimate is made. If the building is of the type for
which plans are ordinarily purchased outright, no more than the

purchase price ordinarily charged for such plans shall be included .
1609. The estimate shall not include the following :

a . Savings due to quantity production of buildings or unusual
efficiency of builder or workmen

6. Deductions for accrued deterioration , obsolescence, and
depreciation
c. Carrying charges during construction and cost of financing
d. Structures of temporary character or structures not per
manently affixed to the ground

e. Landscaping, including shrubs, trees, grass, retaining walls,
and finish grading of site
f. Chattels, that is, equipment and accessories which are not,
legally, part of the realty

In interpreting the meaning of a above, when the main building is
one of a number of row houses separated only by party walls, the
proportionate cost attributable to the subject building as a part of
an operation embracing several houses is used as the basis of esti
mation. Items listed under e above, while not included in the Esti

UNDERWRITING MANUAL

1609–1613

mated Replacement Cost of Building Improvements, are considered
in the Cost of Replacement of Property as described in Section 13.

1610. Equipment and Accessories.

Some dwellings

contain great amounts of mechanical equipment and accessories
which are provided by the builder to create sales appeal. Determi
nation as to whether certain equipment or accessories are chattels or
parts of the realty depends on local custom and state laws. To
assist the Chief Architectural Supervisors who must make this de

cision, the Underwriting Division, Washington, D. C., has supplied
Underwriting staffs with opinions from the Legal Division concern
ing the items to be construed as parts of the realty or as chattels in
the different jurisdictions.

1611. Items Subject to Rapid Deterioration and Ob
solesence. Certain items of equipment and accessories may be sub
ject to rapid deterioration and obsolescence as a result of the wear

ing out of moving parts, changes in design, and anticipated reduc
tions in initial and operating costs. Therefore, such items, although
included in the total estimate at full cost, are separately listed on
FHA Form No. 2014, to indicate to the Valuator that special treat
ment of the amounts may be necessary in establishing the estimate of
value. If possible, the probable rate of future depreciation should be
indicated under " Remarks."
1612. Items of Unreasonable or Excessive Cost.

Oc

casionally properties incorporating unusual features, but of conven
tional construction, will be offered for consideration. These prop
erties reflect the individual desires, hobbies, and idiosyncrasies of the
owner to such an extent that the living utility provided may not be
proportionate to the replacement cost. The estimated cost of these

features shall be included as individual items in the replacement cost
estimate and expressed as a separate lump -sum item and indicated

on FHA Form No. 2014 under the heading, Other Improvements.
Typical examples are as follows:
a . Objects of art and museum pieces incorporated in the build
ing construction

6. Excessive development of service features in proportion to
habitable area of house

c. Excessive provision for hobbies, such as laboratories, con
servatories, private art galleries, and swimming pools
d. Construction materials of unusual or unjustifiable perma

nence and excessive cost, obviously inconsistent with the
size and character of the dwelling

1613. New Materials and Methods of Construction .

New materials and methods of construction which have not been gen
erally used in dwellings may be subject to wide fluctuations in cost

METHODS OF DWELLING COST ESTIMATION

1613-1616

over comparatively short periods of time. To meet this condition the

cost of the subject building shall be estimated according to the draw
ings and specifications, except that conventional materials and
methods of construction shall be assumed for the new materials and
methods of construction . The substituted conventional materials and
methods of construction shall offer the same structural soundness,

relative resistance to fire, to use , and to the elements, the same insula
tion value, and maintenance costs as the units they replace. In the
event this substitution increases the thickness of the walls or parti
tions, the size of the building shall be correspondingly increased so
that the house will contain the same finished area as the building it
replaces. This cost establishes the Maximum Allowable Estimate of

Cost Required to Replace Building Improvements in New Condition.
Where it is obvious that the cost of the actual, existing, or contem

plated improvements will exceed this estimate, the cost of the actual
improvements need not be determined . The words "Maximum Allow

able” are inserted before " Estimate of Cost Required .--------- ," on
FHA Form No. 2014.

1614. Some new construction methods may permit econ
omies which will result in contract prices lower than the Estimate

of Maximum Allowable Cost Required to Replace Building Improve
ments in New Condition as described above.

In these cases the final

estimate shall be governed by the probable actual costs and not by
the cost of conventional types of construction of equivalent char
acter.
PRESCRIBED METHODS OF COST ESTIMATION

1615. Selection of Method .

The cost estimate shall be

obtained by one of the two prescribed methods. A majority of the

cases presented for consideration are handled by the Integrated
Square Foot Method. The remaining cases are handled by the In
place Unit Method. The basis for selection of method is the com

plexity of the problem presented. Typical properties for which
suitable cost data have been compiled are estimated by the In
tegrated Square Foot Method. If this method cannot be applied
for any reason , recourse is had to the Inplace Unit Method.
1616. The prescribed Integrated Square Foot or Inplace
Unit methods are considered to be best adaptable for the purpose

of obtaining uniformity throughout all the Federal Housing Ad
ministration offices, and for statistical purposes. No methods except
the prescribed Integrated Square Foot and Inplace Unit Methods
shall be used without the written permission of the Underwriting
Division, Washington , D. C. Such permission will be granted only
if circumstances and conditions of an unusual character indicate

UNDERWRITING MANUAL

1616

STEPS IN COST ESTIMATION
INTEGRATED

SQUARE FOOT

INPLACE UNIT METHOD

METHOD
COST DATA

COST DATA
HANDB
OOK

DETERMINE WHICH

HANDBO

OK

METHOD IS APPLICABLE
DETERMINE

PART 1

B.

AL

CALCULATED AREA

CLASSIFY SUBJECT BUILDING

A.

PART 2

DETERMINE THE NUMBER OF INPLACE
UNITS IN EACH COMPONENT

SELECT APPLICABLE BASIC
с

SQUARE FOOT COST FROM

SELECT APPLICABLE INPLACE
UNIT PRICES FROM COST

COST DATA HANDBOOK, PART 1

DATA HANDBOOK , PART 2

C.

MULTIPLY THE SELECTED INPLACE
UNIT PRICES BY THE NUMBER OF D.
UNITS IN EACH COMPONENT TO
OBTAIN COST PER COMPONENT
ADD COSTS OF 27 COMPONENTS
COS DAT
HANTDB A
OOK

TO OBTAIN TOTAL WITHOUT
OVERHEAD AND PROFIT

PARTI

D.

MAKE NECESSARY MATERIALS
AND SIZE ADJUSTMENTS TO
OBTAIN SQUARE FOOT COST

ADD AN ALLOWANCE FOR
OVERHEAD AND PROFIT

CALCULATED AREA TO OBTAIN
SQUARE FOOT COST

MAKE NECESSARY LOCALITY ADJUSTMENT
TO OBTAIN SQUARE FOOT COST
MULTIPLY FINAL SQUARE FOOT COST

G.

BY CALCULATED AREA TO OBTAIN
COST OF MAIN BUILDING

J.

H.

DETERMINE COST OF GARAGE

K.

DETERMINE COST OF OTHER
L.

1.

IMPROVEMENTS

DETERMINE ALLOWANCE FOR
J.

M

ARCHITECTURAL SERVICE
ADD MAIN BUILDING , GARAGE , OTHER

Kк

F.

DIVIDE TOTAL OBTAINED IN F BY

E. MAKE NECESSARY QUALITY ADJUSTMENT H.
F.

E.

IMPROVEMENTS AND ARCHITECTURAL
SERVICE TO OBTAIN
TOTAL REPLACEMENT COST

N.

G.

METHODS OF DWELLING COST ESTIMATION
1616-1617

the necessity or strong desirability of the use of a method other
than those prescribed.
1617. Steps in Integrated Square Foot Method. This
method of estimation proceeds in the order of the following listed
steps:

a . The calculated area of the main building is determined in

accordance with the instructions in paragraphs 1622 to
1623

6. The building to be estimated is compared with the classifi
cation of buildings and is identified according to classifi

cation criteria as falling in one of the established classi
fications. The classification of buildings and the classifi
cation criteria are described in Paragraphs 1625 to 1628.
If the building fails to classify because no basic square

foot costs have been supplied for the type, the Integrated
Square Foot Method is not used and the estimate is made
by the Inplace Unit Method . If it comes under the estab

lished classifications, the Integrated Square Foot Method
is applied

c. The basic square foot cost applicable to the subject building
is selected from Part 1 of the Cost Data Handbook .

In

structions covering the compilation of cost data and its
recordation in cost data handbooks are given in Section
19, Construction Cost Data. The method of selecting the
applicable Basic Square Foot Cost from the handbook is

described in paragraph 1629
d . The Basic Square Foot Cost is then adjusted, if necessary,
by making materials and size adjustments in accordance
with the instructions given in paragraphs 1630 to 1638.
These adjustments comprise additions to and deductions

from the Basic Square Foot Cost to take account of dif
ferences in materials, size, and shape of the subject build
ing as compared with the basic specifications used in the
Classification of Buildings. After the Materials and Size
Adjustments, if necessary , have been made, the resulting
figure is the square foot cost
e. The Square Foot Cost is then modified to take account
of the differences in cost, due to the quality variations
between the subject building and the basic specifications
which are used in the Classification of Buildings. This
process is called the quality adjustment, and is made by

applying a Quality Adjustment Percentage to the Square
Foot Cost

UNDERWRITING MANUAL

1617-1618

f. The next step is to make a further modification to take into
account the differences in cost of erecting buildings in
different localities. This process is called the locality ad
justment and is accomplished by applying a Locality Ad
justment Percentage to the Square Foot Cost already
adjusted for quality.
g. After the Quality Adjustment and the Locality Adjust
ment have been made, the resulting figure is the final
square foot cost applicable to the subject building. The
Final Square Foot Cost is multiplied by the number of
square feet in the Calculated Area to secure the cost of
main building

h. The cost of replacement of garage is then determined
į. The next step is to determine the cost of other improve

ments such as walks, driveways, accessory buildings, and
items of special equipment not reflected in the Final
Square Foot Cost

j. The sum of the costs obtained in g, h, and i ordinarily
constitutes the basis on which architectural service, if
any, is computed .

Therefore the next step is to deter

mine the allowance for architectural service

k. The estimated costs of Main Building, Garage, Other Im
provements, and Architectural Service are then totalled

to obtain the estimate of cost required to replace building
improvements in new condition. This figure is the total

cost estimate used for Federal Housing Administration
purposes , and correct entries are made on FHA Form
No. 2014 or FHA Form No. 2015

1618. In some cases involving existing construction, it
will be found that the replacement cost of building improvements
is considerably higher than that portion of the valuation ascribed
to the building improvements. This occurs most frequently in cases
involving building improvements, the value of which has been
greatly affected by deterioration or obsolescence, or both . When such
cases are encountered, the Valuator will not be required to prepare
FHA Form No. 2052, Cost Estimate - Integrated Square Foot
Method , but may use the selected basic square foot cost as the Final
Square Foot Cost without adjustment or modification. When this
procedure is employed , the Valuator is required to make an appro
priate statement on FHA Form No. 2015, Report of Valuator,
explaining the absence of FHA Form No. 2052.

METHODS OF DWELLING COST ESTIMATION
1619

1619. Steps in Inplace Unit Method. This method
proceeds in the order of the following listed steps :
a. The calculated area of the main building is determined in

accordance with the instructions in paragraph 1622 to
1623

6. The number of inplace units in each component part of the
building is measured or estimated . Components are those
integral assembled parts of a building which are suscepti
ble to separate examination with respect to costs, such as
excavation, exterior walls, or plumbing. An inplace unit
is used as a basis of measurement and refers to the com
pleted and finished aspect of a component or element of

a component. As a consequence, many inplace units
embrace assemblies of diverse things

c. Inplace unit prices applicable to the components of the sub
ject building are selected from Part 2 of the Cost Data
Handbook

d. The Inplace Unit Prices are multiplied by the correspond
ing number of units of each component to obtain the costs
of the individual components.
e. The costs of components are added to obtain the total cost
of components, not including overhead or profit.
f. An allowance for overhead and profit is added to the above
estimate to obtain a total

g. This total obtained in f is then divided by the number of
square feet in the Calculated Area to obtain the square foot
cost

h. The Square Foot Cost is then modified to take account
of the differences in cost due to quality variations be
tween the subject building and the quality assumed in

establishing the inplace unit prices. This process is called
the quality adjustment and is made by applying a Quality
Adjustment Percentage to the Square Foot Cost.

Cost

Data Handbook , Part 1, is used
i. The next step is to make a further modification to take into
account the differences in cost of erecting buildings in

different localities. This process is called the locality ad
justment and is accomplished by applying a Locality

Adjustment Percentage to the Square Foot Cost already
adjusted for quality. Cost Data Handbook, Part 1, is
used

j. After both the Quality Adjustment and Locality Adjust
ment have been made, the resulting figure is the final
square foot cost applicable to the subject building. The

UNDERWRITING MANUAL

1619–1621

Final Square Foot Cost is multiplied by the number of
square feet in the Calculated Area to secure the cost of
main building

k. The cost of replacement of garage is then determined
1. The next step is to determine the cost of other improve

ments, such as walks, driveways, accessory buildings, and
items of special equipment not reflected in the Final
Square Foot Cost

m . The sum of the costs obtained in j, k, and l ordinarily
constitutes the basis on which architectural service, if any,
is computed. Therefore the next step is to determine the
allowance for architectural service

n. The estimated costs of Main Building, Garage, Other Im
provements, and Architectural Service are then added to

secure the estimate of cost required to replace building
improvements in new condition . This figure is the total
cost estimate used for Federal Housing Administration
purposes and correct entries are made on FHA Form
No. 2014
COMPONENTS OF THE BUILDING

1620. Both the Integrated Square Foot Method and the
Inplace Unit Method of cost estimation consider a building to be
comprised of a number of component parts. Components are those
integral assembled parts of a building which are susceptible to
separate examination with respect to costs. These components com
prise the parts of the building which are separately subject to vari
ations in cost according to the character, sizes, and quality of
materials specified for a particular building.
1621. In cost estimation the components of a building
are used in accordance with the established grouping given below .
In order to secure uniformity and accuracy, the indentifying refer
ence numbers set before the components of the building in this

paragraph shallbe maintained throughout the cost estimating pro
cedure in all offices. As a further step toward uniformity, each
component shall include all incidental elements properly associated
with it, as indicated under each component. The 27 components
include all elements of cost of the building except certain items
which are included separately in the estimate summary as described
in paragraphs 1649 and 1650. No deviation from this division of
the estimate, numbering of the components or inclusion of associated

elements is permitted, because uniformity in procedure is essential
to accuracy and to the utilization of cost data. The components,
each with its associated elements, are as follows:

METHODS OF DWELLING COST ESTIMATION
1621
1. Excavation :

Basement
Trench walls
Pier

Grading of unexcavated portions under first floor con
struction

2. Foundations :
a. With Basement :

Wall footings, basement walls, including damp
proofing
Basement floor

Basement stairs, windows, doors, columns or piers

including footings, girders, areas, tile drains, coal
bin partition and coal chute
b. Without Basement :

Wall footings, trench walls, curtain walls, piers
including footings, and girders
3. Chimney :

Single flue with required enclosing masonry and founda
tion

4. Fireplace :

Fireplace including complete foundation , masonry , Alue,
hearth , lining, damper, facing, and mantel
5. Exterior Walls :
All items of construction and exterior finish of the exterior

walls including interior dampproofing or furring where
used, but not including plaster base or plaster or other
interior wall finish materials

6. Floor Framing :

Structural floor framing, but not including subflooring,
finish flooring, or plaster base and plaster or other
ceiling finish . Concrete slabs, self -supporting, sup
ported on joist framing, or those laid on the ground
in structures without basements are included in this

component. Monolithic cement finish is considered
part of the slab
7. Subflooring :

ring. Sleepers
Subflooring, but not including finish floo
n
included in
and floor fill over floor constructio

this component

are

UNDERWRITING MANUAL

1621

8. Finish Flooring :

Building paper , wood flooring, sanding, scraping, and
finishing
9. Partition Framing :

Structural framing including furring or nailing strips,
but not including plaster base and plaster or wall finish
materials

10. Ceiling Framing :

Structural ceiling framing including furring or nailing
strips, but not including plaster base and plaster or
other ceiling finish materials
11. Roof Framing :

Structural roof framing including roof sheathing or
shingle lath
12. Roofing :

Roof covering materials, together with felt, if any, in
cluding all flashings, valleys, hip and ridge coverings
13. Gutters and Downspouts :

Gutters and downspouts, including shoes, splash blocks,
dry wells, or connections to drains
14. Plaster Base and Plaster :

Lath and plaster, wallboard or other wall and ceiling
materials, but not including decorations or coverings
15. Decorating :

Finish or coverings applied to wall and ceiling surfaces,

but not including finish on doors, windows, trim, floors,
or cabinets

16. Interior Doors and Trim :

Interior doors including trim, hardware, and finish

Trim for cased openings including finish
Running trim , base, floor mould , and picture mould , in
cluding finish
Closet shelves and hook strips
17. Windows :

Frames, sash , glass, hardware, interior trim , and finish
18. Entrance and Exterior Detail :

Main entrance door with side and transom lights, and all
other exterior doors including glass, hardware and fin
ish. All added exterior architectural treatment, includ

METHODS OF DWELLING COST ESTIMATION

1621

ing additional entrance steps, exceptional chimney, half
timbering, unusual cornice and porch detail, louvers,
and shutters
19. Cabinets and Interior Detail :

Kitchen cabinets, medicine cabinets, bookcases, china
closets, wardrobes, and other special cabinet work, in
cluding glass, hardware, and finish
20. Stairs :

All stairs except basement or exterior stairs, including
balustrades and finish

21. Special Floors and Wainscot :

Special flooring and wainscoting such as used in kitchen,
bathrooms, and lavatories
22. Plumbing :

Plumbing fixtures complete with fittings, piping for

water, soil, waste and vent lines, gas piping, hot water
equipment, water softeners, sewer and water supply
connections up to public utilities or to private equip

ment ; but not including private sewage disposal or
water supply plants
23. Heating :

Typical complete heating plant and appurtenances, but

not including unusual fuel burners or conditioning
equipment of the character referred to in paragraph
1611

24. Electric Wiring :

Items such as service connection, wiring, outlets and
switches, but not including private electric generating
plant
25. Lighting Fixtures :
All lighting fixtures
26. Insulation :

Any insulation which is additional to sheathing or plaster
base
27. Miscellaneous :

Items not otherwise readily classified under other com
ponents, such as screens, storm -sash , caulking, weather

stripping, basement garage, finished rooms in base
ment, finished rooms in attic, termite shields, wood

preservation, and special basement waterproofing

UNDERWRITING MANUAL
1622-1623
DETERMINATION OF CALCULATED AREA

1622. Both the Integrated Square Foot Method and the
Inplace Unit Method of cost estimation require the determination
of the Calculated Area of the building. Calculated Area is the
number of square feet in a building measured in accordance with
a standard set of rules and used as a basis for comparing the costs
of constructing buildings. The prescribed rules for the determina
tion of Calculated Area are as follows :

a . To be Included and Calculated in Full :

The square foot area of finished floors above the basement,
including bays, oriels, dormers, light shafts and stair
wells, utility rooms, vestibules, enclosed porches, open
porches within the main wall line, and built-in garages.
In computing these areas, measurements shall be taken
to the outside surfaces of exterior walls or partitions
enclosing the areas and no deductions shall be made for
stair - wells or light shafts. In structures without base
ments, the area included is that above foundations.
b . To be Included and Calculated in Part :

1. Open porches outside of main wall line, at one-half of
actual area

2. Attached masonry terraces supported on foundation
walls, at one - quarter of actual area
C. Not to be Included in Calculated Area :

1. Finished rooms in basement
2. Finished rooms in attic
3. Basement garages

4. Attached or detached garages
5. Masonry terraces without foundation walls
1623. While the five items listed above under c are

excluded from the calculated area , they are not omitted from the

cost estimate. The following definitions apply to the interpreta
tion of the above rules :

a. Attached garage is one having one or more walls common
to the walls of the main dwelling, but without living
quarters above. However, where one story dwellings
predominate and the garage is of construction compara
ble in quality with the main house, and forms an integral
part of the architectural design , the garage may be con
sidered as "built - in "

METHODS OF DWELLING COST ESTIMATION

1623-1624

6. Built -in garage is one located above the basement level

within the main walls of a house, and which has living
quarters above, except as provided in a above
C. Basement garage is one located in a basement
MEASUREMENT OF COMPONENTS

1624. Quantity measurements in terms of Inplace Units
are taken from drawings or from the building itself, in the case of
existing construction .

Overall outside dimensions are used to de

termine areas .

In computing areas of walls, partitions, floors or
roofs, no deductions are made for openings occasioned by doors,

windows, cased and uncased openings, stair wells, shafts, louvers,
vents, or chimneys. The cost of quantities not deducted compen
sates for the cost of forming the openings. Likewise, the cost of
excess quantities, included by using outside dimensions for exterior
walls and by measuring partitions through intersections to outside
of exterior walls or intersecting partitions, compensates for the cost
of forming the corners and intersections. Excess quantity due to
measuring basement floor to outside of basement wall compensates
for the cost of excavation beyond walls, back -filling and footing exca
vation. The cost of excess quantities, obtained by measuring half

story ceilings to outside of enclosing partitions and partitions under
sloping portion of roof at full ceiling height, compensates for the
cost of waste in cutting and the additional labor required in form
ing the intersections. Measurements are taken for each of the
components or elements as follows:
1. Excavation :

a . Basement: Measured in cubic yards, equals the product
of the area within outside surfaces of basement walls

and the average depth from natural grade to under
side of basement floor.

b. Trench Wall : Measured in cubic yards, equals the
product of the wall thickness plus one foot and the

depth from grade to underside of footing, by the
total of the exterior dimensions of the trench wall.
This element includes excavation for curtain walls

where they occur.

c. Pier : Measured in cubic yards, equals the total of the
products of each pier footing area and the depth
from grade to underside of footing.
d. Grading of Unexcavated Portions: Measured in cubic

yards, equals the product of the unexcavated area and
the average depth below natural grade.
+

UNDERWRITING MANUAL

1624

2. Foundations :

a . Footings : Measured in lineal feet, equals the total of
the exterior dimensions of the walls or piers having

footings.
6. Basement Walls : Measured in square feet, equals the
area of the outside surface of the walls from the top
of the footings to the underside of first floor con
struction.

This element includes bench walls but

does not include non - bearing partitions. Non -bear
ing partitions are included under Component No. 27.
c . Trench Walls : Measured in square feet, equals the area
of the outside surface of the walls, from the top of
the footing to the underside of first floor construction .

This element includes curtain walls and piers where
they occur .
d. Basement Floor : Measured in square feet to the out
side surfaces of basement walls .

e. Basement Essentials : Estimated as a lump sum amount
to include basement stair, basement sash and doors,

floor girders, lally columns or piers, coal bins or
similar items not otherwise listed.
Chimney
3.
:

Measured in lineal feet from underside of footing to

top of chimney. No deduction is made for any por
tion common to foundation or exterior walls.

4. Fireplace :

Estimated as a lump sum amount to include complete
foundation , masonry, flue, hearth, lining, damper,
facing, and mantel.
5. Exterior Walls :

Measured in square feet, equals the area of the outside
surface of the walls, from underside of first floor
construction to the intersection with roof surfaces.

Walls of gables and dormers are included . Party
walls are measured in square feet, to include both
party walls and listed separately from the exposed
exterior walls. The unit cost for the party wall is
halved in estimating, so as to include only that cost
applicable to the subject structure.

6. Floor Framing :
Measured in square feet with dimensions taken to outside
of exterior walls or to outside edges where walls do
not occur .

METHODS OF DWELLING COST ESTIMATION

1624

7. Subflooring :
Measured in square feet with dimensions taken to outside

of exterior walls or partitions enclosing the areas.
8. Finish Flooring :

Measured in square feet, with dimensions taken to out
side of exterior walls or partitions enclosing the
areas. Where no wall or partition occurs the meas
urement is taken to outside edge.
9. Partition Framing :

Measured in square feet, with a height from the finish
floor to the finish ceiling and a total length measured
through all intersecting partitions to the outside of
exterior walls or cross partitions. No reduction in
height is made for enclosing partitions under sloping
portions of roof.
10. Ceiling Framing :
Measured in square feet to the outside of exterior walls
or enclosing partitions under sloping roof. No de
duction is made for sloping portions under rafters.
Where no wall or partition occurs the measurement
is taken to outside edge.

11. Roof Framing :
Measured in square feet of roof area to include the over
hang at eaves and gable ends. Areas of dormer roofs

and the triangular parts of connecting roofs are not
added, nor are the openings occasioned by the dormers
deducted .

12. Roofing :

Measured in square feet, equals the total area of the roof
framing. When more than one type of roof covering
occurs, each type is measured separately in the same
manner as described for roof framing. Flashings
and counter - flashings, valleys, saddles and ridge caps

are not measured separately, as their cost is included
in the unit cost of the roofing.

13. Gutters and Downspouts :

Measured in lineal feet, each separate run being meas
ured to the nearest foot. Shoes, splash blocks, dry
wells, or connections to drains are estimated as indi
vidual items and expressed as a lump sum amount.

UNDERWRITING MANUAL
1624

14. Plaster Base and Plaster :

Measured in square feet as the sum of the following
items: (a) total area of the exterior walls and party
walls, between floor and ceiling levels of each finished
story and half-story ; ( b ) twice the area of the par
tition framing where finished on both sides ; (c) area

of the enclosing partition framing under sloping
portions of roof ; and (d ) area of all ceilings.
15. Decorating :

Measured in square feet, equals the decorated area of walls
and ceilings.
16. Interior Doors and Trim :
a. Interior Doors : Measured as a number of units com

plete with standing trim , hardware and finish .
Units are based on average size and type.
6. Cased Openings: Measured as a number of units of
standing trim with finish .
C. Running Trim : This item includes base and picture
mould complete with finish and is measured in lineal

feet, equals the sum of : ( 1 ) perimeters of all fin
ished stories, (2) twice the lineal feet of partitions
finished on both sides, (3) lineal feet of partitions
finished on one side.

From the total obtained a de

duction is made for door openings.
d . Closet Shelving : Estimated as a lump - sum amount

including hook strips.
17. Windows :

Measured as a number of units complete with frame,
sash, glass, hardware, interior trim and finish.
18. Entrance and Exterior Detail :

a. Entrances : Estimated as individual items and expressed
as a lump sum amount, to include all exterior doors,

frames, glass, added architectural features, finish and
hardware .

6. Exterior Detail : Estimated as individual items and ex

pressed as a lump sum amount, to include such items
as entrance steps, added architectural features, ex
ceptional chimney, half-timbering, unusual cornice
and porch detail, louvers and shutters.
19. Cabinets and Interior Detail :

Estimated as individual items and expressed as a lump
sum amount to include such items as kitchen cabinets,

METHODS OF DWELLING COST ESTIMATION

1624

medicine cabinets, bookcases, china closets, ward
robes and other special cabinet work , including glass,
hardware and finish .

20. Stairs :

Estimated as a lump sum amount including all stairs
above first floor, complete with balustrades and finish .
21. Special Floors and Wainscot :
Estimated as individual items and expressed as separate

lump sum amounts equal to the difference between the
cost of the special materials and the cost of the finish
flooring or wall material that is replaced. This ap
plies to various special materials used for flooring and
wainscoting for kitchens, bathrooms, lavatories,
shower stalls and other spaces.

22. Plumbing :
Estimated as individual items and expressed as lump
sum amounts for :

a . Fixtures for one bath , kitchen and laundry com
plete with all piping for water, soil, waste and

vent lines, gas piping, hot water equipment,
sewer and water -supply connections up to public
utilities or to private equipment. Private sew
age disposal or water supply plants are not in
cluded in this element.

6. Fixtures for additional bathroom including tub,
lavatory and water closet with connections car

ried to the basic plumbing.
c. Stall shower complete with all fixtures, accessories
and connections to the basic plumbing.
d. Lavatory, including lavatory fixture and water
closet, with connections to the basic plumbing.

e. Other plumbing fixtures complete with connections
to the basic plumbing.
23. Heating :

Estimated as a lump sum amount for complete heating
equipment of customary type. This sum includes ap
purtenances, but shall not include the cost of un
usual fuel burner or cooling equipment of the char
acter referred to in paragraph 1611.
24. Electric Wiring :

Measured as a number of outlets for lighting fixtures,
switches and convenience receptacles. Service panel,

UNDERWRITING MANUAL

1624_1627

power outlets and bell wiring are estimated as sepa
rate lump sum amounts.
25. Lighting Fixtures :

Estimated as a lump sum amount.
26. Insulation :

Measured in square feet, separately for walls and ceilings
where insulation is additional to sheathing or plaster
base .

27. Miscellaneous :

Estimated as separate lump sum amounts for items such

as screens, storm sash, caulking, weatherstripping,
basement garage, finished rooms in basement, finished

rooms in attic, termite shields, wood preservation and
special basement waterproofing.
DETERMINATION OF SQUARE FOOT COST IN THE INTEGRATED
SQUARE FOOT METHOD

1625. After the Calculated Area has been determined ,

the building to be estimated is compared with the Classification of
Buildings and is identified according to classification criteria as fall
ing in one of the established classifications. This makes it possible
to select a Basic Square Foot Cost from the Cost Data Handbook ,
Part 1. The selected Basic Square Foot Cost is then adjusted, if
necessary , in accordance with the instructions in Paragraphs 1630 to
1638. Where no deviations from basic specifications occur, no adjust
ments are necessary .

1626. Classification of Building. The classification of
buildings is used to identify a structure for which an estimate is
to be made and to select the applicable cost data from the handbook .

The first step in classifying a building is to ascertain whether it is
sufficiently typical to be comparable to a reasonably large number
of similar buildings, and, as a consequence , to be capable of estima
tion by the Integrated Square Foot Method . The use of the Inte
grated Square Foot Method is feasible only when the cost data have
been derived from buildings of the same classification as the build
ing to be estimated .

1627. In order to secure accuracy in estimation and to
provide a basis for cost comparison, buildings are classified on a uni
form basis according to the following criteria :

a . Type : detached, semi-detached, row house, end row house
3. Number of family units
c . Number of stories

d. Calculated area

METHODS OF DWELLING COST ESTIMATION

1627-1628

In general, no further subdivision of classifications is necessary as
to the number of rooms, shape of the house, extent of porches or the
materials specified. However, additional classification criteria may

be advantageously set up for buildings having like characteristics, if
they occur frequently enough. Roof design is usually characteristic
of each particular classification of building and consequently does
not, in general, make further subdivision of classifications necessary.
Customary practice in a locality likewise determines the presence or
absence of basements in typical buildings.

1628. A precise understanding of classification criteria
is essential to insure a proper application of the compiled cost data.
Therefore, certain of the classification criteria require careful defi
nition. The definitions used apply to cost estimation only and
should not be confused with other definitions of the same items used

for purposes of local interpretation. The following definitions
apply to the classification of buildings :
a . Full story is one in which the finish floor extends to the ex
terior walls and the ceiling is of required height but does
not drop below the heads of full height windows.
6. Half -story is one in which the rooms are located partly un
der the slope of the main roof and the finish floor does
not extend to the exterior walls because of insufficient

headroom beyond the enclosing partitions. This defini
tion is conditioned on the fullest use of the area for fin

ished rooms. If less area is utilized, the space becomes an
attic with finished rooms.

The presence or absence of

plumbing or heating equipment in the space does not affect
this definition .

C. Attic is the unfinished space immediately beneath the roof

which is not utilized or is only partially utilized for
finished rooms.

d . Basement is usually an enclosed usable space having full
headroom below the main floor level of the building.

This definition is not altered by the presence of one or
more finished rooms.

e. Family unit, as defined for cost estimation purposes, is that
portion of a dwelling designed primarily for the use of
one family, provided with independent sanitary and
cooking facilities and an entrance which is not through
the living quarters of another unit.

f. Detached building is a building in which no exterior walls
are common to any other building.

UNDERWRITING MANUAL

1628–1631

g. Semi-detached building is one of two adjoining buildings
standing independently of others and having a common
party wall .
h. A row house is one of four or more buildings in which two
walls are common to adjoining buildings.
¿. An end row house is one which is located at the end of a

group of four or more row houses and may differ in plan,

window arrangement, and extent of exterior walls, from
the other houses in the group by virtue of its location.
Where only three houses occur in a row, separate classi
fications are set up for the end houses and for the center
house.

1629. Selection of Basic Square Foot Cost. - After

the subject building has been classified, an applicable Basic Square
Foot Cost is selected from Part 1 of the Cost Data Handbook . Basic

square foot costs of typical buildings, derived according to basic
specifications, are tabulated in Part 1 of the Cost Data Handbook
under various classifications and for usual exterior wall constructions

in each classification. The applicable Basic Square Foot Cost is
selected from these tabulations under the proper classification and in
the column indicated by the calculated area of the subject build
ing. The figure thus selected is the Basic Square Foot Cost to be
used for the subject building. The basic square foot cost of a build
ing is the integrated cost, per square foot of livable floor area , of all
components of the main building but not including porches or at
tached terraces. Inasmuch as the character of porches and terraces

ordinarily corresponds with the character of the main building, it is
assumed that their costs per square foot are in the same ratios to the
selected basic square foot cost as the fractional parts at which their
actual areas are included in the Calculated Area. Porches and ter
races are not considered in Basic Specifications or in the Classifica

tion of Buildings. Therefore, peculiarities of these items do not
necessitate making adjustments to basic square foot costs.
1630. Materials and Size Adjustments. When the

subject building does not substantially conform to the selected typi
cal building and its basic specifications, it is necessary to make adjust
ments to the Basic Square Foot Cost to account for deviations in the

character, sizes, or grades of materials and in the shape or size of the
structure. These adjustments comprise additions to and deductions
from the Basic Square Foot Cost and are jointly described as
Materials and Size Adjustments.

1631. Ordinarily a subject building deviates from the
selected typical building in only a few items, but those deviations

METHODS OF DWELLING COST ESTIMATION

1631-1633

which do occur may relate to any of the 27 components of the build

ing and may occur in any of the following items:
a . Alternate materials and equipment
b. Alternate grades of materials and equipment
C. Added exterior and interior detail
d . Added miscellaneous items

e . Added mechanical and electrical equipment
f. Basement garage and finished rooms in basement or attic
g. Insulation
h. Addition or omission of basement

i. Depth of excavation
j. Height of exterior walls
k. Perimeter of building

In general, the adjustments for the last three items will be used only
in unusual cases.

If such adjustments occur frequently enough,

separate classifications are developed. Such exceptional cases will
frequently warrant estimation by the architectural section.
1632. Adjustments of Basic Square Foot Cost to com
pensate for deviations of a subject building from the selected typical
building and its basic specifications are computed according to pre
scribed rules and are made by using one or more of the following :
a . Component Unit Adjustments, as described in Paragraphs
1633 and 1634

6. Lump Sum Adjustments, as described in Paragraph 1635
c . Perimeter Adjustments, as described in Paragraph 1636
d . Exterior Wall Height Adjustments, as described in Para
graph 1637

The first two types of adjustment are most frequently used . The
adjustments listed under c and d are used only occasionally in cases
where substantial deviations from the selected typical building occur

in connection with the height of exterior walls and perimeter of
building

1633. Component Unit Adjustment is defined as the dif
ference in cost, per square foot of calculated area, due to a deviation
from the basic specifications for a component part of the building.
These adjustments, which are for commonly encountered deviations,
are available in conjunction with Basic Square Foot Costs in Part
1 of the Cost Data Handbook . These adjustments are tabulated sepa

rately for each increment of area on each classification sheet. Com
ponent Unit Adjustments are used to compensate for deviations in
the following items: ( a) alternate materials, ( 6 ) alternate grades of
materials and equipment, (c) addition or omission of basement, and

(d) insulation. When an alternate material is encountered for only

UNDERWRITING MANUAL

1633-1636

a part of a component or element, the adjustment is computed as a
fractional part of the Component Unit Adjustment for the alternate
material as tabulated in Part 1 of the handbook .

The fraction used is equal to the measurement of the alternate
material divided by the total measurement of the component.
1634. When a Component Unit Adjustment is not avail

able in the handbook for a particular deviation from basic specifi
cations, the adjustment is estimated as a lump-sum amount equal
to the difference between the estimated costs of the alternate and

the basic items. This applies to deviations that affect a component
as a whole or in part.

1635. Lump sum adjustment is defined as the differ
ence in cost, expressed in dollars, between a subject component and

the corresponding basic component. For commonly encountered de
viations, these adjustments are available in Part 1 of the Cost Data

Handbook , and are tabulated under each classification of typical
buildings in conjunction with Basic Square Foot Costs. For less
commonly encountered deviations Miscellaneous Unit and Lump
sum Costs are tabulated separately in Part 1 of the handbook. For

certain items which are variable in extent according to each subject
specification, Lump Sum Adjustments may not be available in the
Cost Data Handbook, and therefore they are to be computed as lump
sum amounts equal to the difference in cost of such items above or
below any allowances included in the Basic Square Foot Cost ac
cording to basic specifications. Lump-sum Adjustments are used to

compensate for deviations in items such as the following: (a) added
exterior and interior detail, ( 6 ) alternate equipment or grades of
equipment, (c) added mechanical or electrical equipment, (d) base
ment garage and finished rooms in basement or attic, and (e) added

miscellaneous items designated as elements of Component No. 27 .
The lump sum adjustments are totalled and the amount so obtained
is converted into a cost adjustment per square foot of Calculated
Area .

1636. Perimeter adjustment is necessary when the

perimeter of the subject building is, because of irregularities in plan,
substantially different from the perimeter of the basic building. The

perimeter adjustment is computed as a lump -sum amount equal to
the product of the deviation in perimeter, measured in lineal feet,
and the cost per lineal foot of exterior wall construction. The cost
per lineal foot of exterior wall construction is tabulated separately
for each type of exterior wall construction on each classification
sheet in Part 1 of the handbook . The basic perimeter is tabulated
for each classification of building under the applicable floor area
column of Basic Square Foot Cost.

METHODS OF DWELLING COST ESTIMATION

1637-1641

1637. Wall height adjustment is necessary where the

height of the exterior walls of the subject building is substantially
in excess of the exterior wall height of basic building. This adjust
ment is computed as a lump -sum amount equal to the product of
excess surface of wall, measured in square feet, and a unit cost of the
particular exterior wall construction . The excess wall surface is
equal to the excess height multiplied by the subject perimeter.
1638. When the Materials and Size Adjustments de
scribed above have been made, the resulting figure is the Square Foot
Cost used to determine the Final Square Foot Cost.
DETERMINATION OF SQUARE FOOT COST IN THE INPLACE UNIT
METHOD

1639. The Inplace Unit Method, an adaptation of the
quantity survey method, is designed to reduce the number of compu
tations. This is accomplished by considering each component part
of the building as an integral assembly of associated elements erected
in place. In general, components are measured in units of surface

or length . Certain components and elements not conveniently re
duced to such units are measured in units of assembled items.

In

place unit prices applicable to the units used in measuring the com
ponents are multiplied by the corresponding number of units in each
component to obtain the assembled cost of the individual compo
nents. This requires the actual measurement of the components in
the subject building. Inplace unit prices include the cost of materials
with allowances for waste and the cost of erection, but do not include
an allowance for overhead and profit.
1640. After the numbers of inplace units in each com
ponent part of the building are measured, inplace unit prices appli
cable to the components of the subject building are selected from
Part 2 of the Cost Data Handbook . Then the inplace unit prices
are multiplied by the number of units in each component. These
computations result in the costs of components. The costs of all
components are then totalled .

1641. An allowance for overhead and profit is then
determined . Overhead and profit allowances are determined on the

basis of percentages ordinarily included in contract bids in the terri
tory. Included in overhead and profit are allowances for fire, tor
nado, public liability and workmen's compensation insurance, and
social security only where these items are customarily included by
the contractors in the territory. The allowance for overhead and
profit is added to the Total Cost of Components to obtain a total
which is then divided by the number of square feet of Calculated

Area in order to convert this amount into a Square Foot Cost. The

UNDERWRITING MANUAL

1641-1648

Square Foot Cost in the Inplace Method is directly comparable to
the Square Foot Cost obtained in the Integrated Square Foot method
and is used in exactly the same manner to determine the Final Square
Foot Cost.

DETERMINATION OF FINAL SQUARE FOOT COST

1642. After the Square Foot Cost has been determined
in either the Integrated Square Foot Method or in the Inplace Unit

Method, the next step is to determine the Final Square Foot Cost by
making the Quality and Locality Adjustments.
1643. Quality Adjustment. — Quality Adjustment,
where necessary, is made by applying a percentage described as the
Quality Adjustment Percentage to the Square Foot Cost. Recom
mend limits are tabulated in Part 1 of the Cost Data Handbook.

1644. The quality adjustment percentage represents the
difference in the quality of construction in the subject building as
compared with the quality of construction to which the Basic Square
Foot Costs are applicable. The quality adjustment recognizes vary

ing degrees of workmanship under identical specifications and that
careful workmanship may cost more than inferior but acceptable
workmanship .

1645. The quality adjustment percentage is determined

by comparing the quality of the subject construction with the quality
of construction to which the Basic Square Foot Costs are applicable
and selecting a percentage to make the adjustment.
1646. Locality Adjustment.-- All Inplace Unit Prices
and Basic Square Foot Costs are based upon prices and costs in a
city selected as the base at the time the basic cost data are established

and compiled in the cost data handbooks. Final Square Foot Costs
for other cities or economic background areas are obtained by the
application of Locality Adjustment Percentages to the Square Foot
Costs already adjusted for quality. Locality Adjustment Percentages
for all important localities in the territory are tabulated in Part 1 of
the Cost Data Handbook .

1647. The locality adjustment percentage expresses the
relationship between the cost of a building constructed in the se
lected base city and the cost of an identical building constructed
in another city within the cost data territory. The use of the local

ity adjustment percentages obviates the necessity for providing com
plete independent basic cost data for each city or economic back
ground area within the territory. Detailed instructions for deter
mination of these percentages are contained in Section 19.
1648. Major changes in cost level are provided for by
revisions of basic cost data. Minor changes are provided for by

METHODS OF DWELLING COST ESTIMATION
1648-1650

revisions of the locality adjustment percentages. Temporary or
seasonal fluctuations are disregarded.
DETERMINATION OF TOTAL REPLACEMENT COST

1649. After both the Quality Adjustment and Locality
Adjustment have been applied to the Square Foot Cost obtained
either in the Integrated Square Foot Method or in the Inplace Unit
Method , the resulting figure is the Final Square Foot Cost applicable
to the subject building. The Final Square Foot Cost is multiplied
by the number of square feet in the Calculated Area to obtain the cost
of main building. Then estimates are made of the separate costs

required to replace improvements other than the main building, such
as garage, accessory buildings, walks, and driveways. An allowance
is determined for special equipment such as described in paragraph
1611 which is not reflected in the Final Square Foot Cost. An allow
ance is also determined for items of unreasonable or excessive cost

such as described in paragraph 1612 which are not reflected in the
Final Square Foot Cost.

1650. The total of the costs of main building, garage, ac
cessory buildings, walks, driveways, and the items described in para
graphs 1611 and 1612, ordinarily constitutes the basis on which archi
tectural service, if any, is computed. The allowance for architec
tural service when determined as described in paragraph 1608 is
added to the foregoing total. The resulting figure is the Estimate

of Cost Required to Replace Building Improvements in New Condi
tion. This resulting amount is the total cost estimate used for
Federal Housing Administration purposes and correct entries are
made on FHA Form No. 2014 or FHA Form No. 2015 .

PART IV
SECTION 17

APPLICATION OF COST ESTIMATION METHODS

CONTENTS

Description of Examples -Description and Use of Estimate Forms_

Paragraphs
1701–1703
1704_1709

Application of Integrated Square Foot Method ..
Classification of Subject Building

1710-1724
1710

Cost Data Handbook ------

Selection of Basic Square Foot Cost.
Materials and Size Adjustments...
Determination of Square Foot Cost_Determination of Final Square Foot Cost_
Determination of Total Replacement Cost

Application of Inplace Unit MethodMeasurement of Inplace Units---Selection of Inplace Unit Prices -Determination of Square Foot Cost_
Determination of Final Square Foot Cost_
Determination of Total Replacement Cost-

1711-1717
1718

1719
1720
1721-1722
1723-1724

1725-1732
1726
1727
1728
1729_1730

1731–1732

Effective February 1938
Federal Housing Administration

PART IV

SECTION 17
APPLICATION OF COST ESTIMATION METHODS

DESCRIPTION OF EXAMPLES

1701. This section of the Manual illustrates in detail the

process of making estimates of replacement costs, in accordance with
the instructions contained in Section 16. For this purpose , illustra
tive drawings and specifications are used . The material and erection
costs used in the examples throughout this section are assumed , and
are not actual costs. These examples are more complicated than
cases ordinarily presented for mortgage insurance .
1702. The building which is used as an example in this
section may be considered as either a proposed or an existing struc

ture. In the case of an existing building, the dimensions shown on
the drawings would be obtained by actual measurement at the site.
Likewise, the materials and equipment described in these specifica
tions would be noted from actual observation. Therefore, the follow
ing examples apply equally to drawings and specifications for a

proposed building and to an existing structure. The examples and
text which follow make reference only to the drawings and
specifications.

1703. Before undertaking an estimate, it is necessary to
determine which method is applicable and best suited to the subject
building. This is accomplished by an inspection of the subject draw

ings or existing structure to determine whether the Basic Square Foot
Costs are applicable. If so, the Integrated Square Foot Method is

used, and the estimate is made on FHA Form No. 2052. If not, the
Inplace Unit Method is used, and the estimate is made on FHA Form
No. 2053.
DESCRIPTION AND USE OF ESTIMATE FORMS

1704. Two forms are provided for making cost estimates,
FHA Form No. 2052, Cost Estimate - Integrated Square Foot
Method, and FHA Form 2053, Cost Estimate - Inplace Unit Method.

UNDERWRITING MANUAL

1704
PDA vorm Nu . Dom
Mestod by 1900

FEDERAL HOUSING ADMINISTRATION
( re

COST ESTIMATE - INTEGRATED SQUARE FOOT METHOD
(Property address )

( BUL )

(City )

COMPUTATION OF CALCULATED AREA
AREA

DEMERSON

TRACTION

Born tet)

TORAL

CALCULATED AREA
TAMILY UN

MODIFICATION OF SQUARE-FOOT COST
$

Square foot oost...
%
%

Quality adjustment
Locality adjustment
PINAL SQUARE Foot Cost
( Contractar's Bame,

NENDE OP STORIES

Detached
Semi-detached
Row

1

1

2

1%

End row

4

8

Sq. ft

CALCULATED ARRA

Down )

SUMMARY OF REPLACEMENT COST
Sq. ft. @
Sq. ft. @

Main building
Carage

Other improvements:
Accessory buildings
Walka

Drivewayı.
Additional mechanical equipment

8q. ft. ©
Sq . ft. @
Sq : it. @

Items of excessive cost
Sewage disposal

Water supply
SUBTOTAL $
$

Architectural service

ETMATE OF Cost REQUIRED TO REPLACE BUILDING IMPROVEMENTI
DATE

New CONDITION

ESTIMATED DT .

n
10
a

2052 - Cost Estimate - lotegrated Square Foot Method

APPLICATION OF COST ESTIMATION METHODS
1704
2069 – Coul Eatimate - Integrated Square foot Method
CALCULATED AREA

8q. ft.

BASIC SQUARE Foot Coet
Type of exterior wall
Pas SQUARE FOOT

ADJUSTMENTS
CONTORET

LOMP BUN

Add ( + )

BILAXATION

Dod . ( - )

1. Excavation

2 Foundations

2. Chimney

A Fireplace
8. Exterior walls

Height adjustment

Perimeter adjustment
6. Floor framing
7. Subflooring
8. Finish fooring
2. Partition framing
10. Ceiling framing
11. Roof framing

12. Roofing
13. Gutters and downspouta
14. Plaster base and plaster
16.
16.
17.
18.

Decorating
Interior doors and trim
Windows
Entrance and exterior detail

19. Cabinete and interior detail
20. Stairs
21. Special floors and wainscot
Bath foor
Bath wainscot
Kitchen

22. Plumbing
Additional bathroom
Stall shower
Lavatory
Toilet
23. Heating

24. Electric wiring
25. Lighting fixtures
20. Insulation
Wails

Celling
37. Miscellaneous

TOTAL LUMP SUM ITEMS
TOTAL ADDITIONS AND DEDUCTIONS

Net ADDITION OR DEDUCTION

ADD ( + ) DED. ( - )
SQUARE Foer Cost

UNDERWRITING MANUAL
1704
TEA Porra No 2009
( Baised Tabrises 1900

FEDERAL HOUSING ADMINISTRATION
COST ESTIMATE - INPLACE UNIT METHOD
( City )

(Property address)

(B

)

COMPUTANON OF CALCULATED AREA
AREA

DDSORD

TOTAL

வலை

quan feat )

CALCULATED ARSA
TAKILT UT

MODIFICATION OF SQUARE-FOOT COST
Bquare foot oost

Detached
Semi- detached
Row
End tow

%

Quality adjustment.
Locality adjustment
Foxal BoaRX Foor Cost

NUMBER O DOS

1
15

2
3
4

CALCULATSD ABSA

( Contraesar's Blow )

Sq. ft.

SUMMARY OF REPLACEMENT COST
Sq. ft. @
Sq. ft.

Main building

Garage
Other Improvements :
Accessory buildings
Walks
Driveways

Sq. ft .

Sq. ft
Sq . ft. @

Additional mechanical equipment

Items of excessive coat

$

Sewage disposal

$

Water supply

$
$

SUDTOTAL $

Aron rectural service

$

ESTIMATE Or Coot REQUIRED TO REPLACE BUILDING IMPROVEMENTS IN New CoxpITION

Data .

$

ESTIMATED BY

4

2053 — Cost Estimate - Inplace Unit Method

APPLICATION OF COST ESTIMATION METHODS

1704
2052 Coat Latimate- Laplace Unit Method
CALCULATED AREA
COMPONENT

EINLANATION

QUANTITY

Sq. ft.

UX Pa Cost or COMFONEXT

1. Excavation
2 Foundations:
Footing
Walls

Basement floor
Basement essential

2. Chimney

4. Fireplace
8. Exterior walls

6. Floor framing
7. SubBlooring

8. Finlah flooring
2. Partition framing
10. Ceiling framing
11. Rool framing

Sheathing
12. Roofing
18. Gutters
Down.spouts
14. Plaster base and plaster

18. Decorating
16. Interior doors

Running trima
17. Windows

18. Entrance
Exterior detall
19. Cabinets
Interior detail

20. Btaire
21. Special floors
Special wainscot
22. Plumbing :
Extra bathroom
Stall shower

Lavatory
Tode

23. Heating
24. Electric wiring

Service panel
25. Lighting fixtures
26. Insulation :
Wall
Calling
27. Miscellaneous

TOTAL COST OF COMPONENTS
CONTRACTOR'S OVERHEAD AND Paorte
TOTAL

SQUARU Foor Cost

UNDERWRITING MANUAL
1704-1707

The face sides of these forms are arranged identically for entries

of certain case data, and for determining the Estimate of Cost
Required to Replace Building Improvements in New Condition .
FHA Form No. 2052 is used in the Integrated Square Foot Method,
as shown and described in paragraphs 1710 to 1724, and the reverse
side is ruled especially for the adjustment of a selected Basic Square
Foot Cost. FHA Form No. 2053 is used in the Inplace Unit Method,
as shown and described in paragraphs 1725 to 1732. The reverse
side is ruled especially for the computation of Component Costs

and to obtain the Square Foot Cost. Space is provided on the face
side of both forms for applying Quality and Locality Adjustments.
Space is provided also on the face side of both forms for computing

the costs of Main Building, Garage, Other Improvements and Archi
tectural Service, and to obtain the Estimate of Cost Required to

Replace Building Improvements in New Condition.
1705. Inasmuch as both estimate forms are arranged

identically on the face side, the entries and computations on the face
side are treated in the same manner for both methods of cost esti

mation . Nevertheless, it is necessary first to select the proper form
according to the method to be used .
1706. Space is provided on the face side of the forms

for the following entries: (a) serial number, ( 6) property address,
(c) diagram or rough sketch, (d) computation of calculated area , (e)

classification of building, (f) quality and locality adjustments, (9)
name of contractor, ( h) summary of replacement cost, (i) date of
estimate, and (i ) signature.

1707. An illustration of the computation of Calculated
Area follows:
COMPUTATION OF CALCULATED AREA
DH001

FIRST FLOOR
BAY

PORCH
STOOPS

SECOND FLOOR
REAR DORMER
FRONT DORMERS

24-9" X 30'- 6 "
3.0" X 6 ' - 6 "
8'6 " 12 ' - 0 "
164-0 " X6-05 + ( 3'- 0 "x4'- 0 )
16-6 " X 30 '- 6 "
3.3" X 26-0 "
3-3" X 3.0

AREA

humon

TOTAL

quan

755
102

36

.5

.25

210
1
5
9
5 10 3

85
10

2

CALCULATED AREA

MODIFICATION OF SQUARE -FOOT COST

PAMELY UMT

20

| 4 4.3

NUMBEROF BTW

The above computation of the Calculated Area of the subject building
is made in accordance with the instructions contained in Section 16 .

The fractions, expressed in decimal form and entered in the " Frac
tion” column, apply to those areas which are included in the calculated
area in part. The areas of the two front dormers are equal, and this
is indicated by entering " 2" in the fraction column.

APPLICATION OF COST ESTIMATION METHODS
1708–1713
1708. The reverse side of FHA Form No. 2052 is used

for making adjustments to a selected Basic Square Foot Cost. The
reverse side of FHA Form No. 2053 is used for entering the measure
ments of components, applicable inplace unit prices, the resulting
costs of components, and for obtaining a Square Foot Cost.
1709. The Square Foot Cost, after having been deter
mined on the reverse side of the appropriate form , is transferred to
the face side and then adjusted for quality and for locality to obtain

the Final Square Foot Cost. Computations are then made to deter
mine the estimated costs of the main building, garage, other improve
ments and architectural service. Appropriate entries are made in
the Summary of Replacement Cost on the face side of the form .
APPLICATION OF INTEGRATED SQUARE FOOT METHOD

1710. Classification of Subject Building. The subject

building is identified with one of the classifications listed in Part 1
of the handbook. This identification reveals that the subject build
ing is classified as detached , one-family, 172 story, 1,400 to 1,500 square
feet. This classification enables correct selection of the applicable

Basic Square Foot Cost and the Component Unit Adjustments.
1711. Cost Data Handbook.

Part 1 of the handbook

contains cost information necessary for the estimation of a building
by the Integrated Square Foot Method . This data is tabulated for
ready reference under the following headings :
Basic Specifications
Basic Square Foot Costs

Component Unit Adjustments
Miscellaneous Costs

Quality Adjustment Percentages

Locality Adjustment Percentages
1712. Basic Specifications comprise an outline of the
materials with descriptions of character and grades customarily used
in typical buildings. Separate basic specifications are provided for
each of the basic types of buildings: detached, semi-detached, row
and end -row . The materials are described by their character, sizes
and grades, or by the lump -sum amounts normally allowed for them.
The specifications are arranged in the same order as the numbered com
ponents of a building, and the descriptions of customary materials
are grouped under the components to which they refer.
1713. Basic Square Foot Costs are tabulated separately,
to two decimal places, under each classification for usual exterior
wall constructions. They are also tabulated according to the various

calculated areas which are typical for each classification . In gen

UNDERWRITING MANUAL

1713

SUBJECT SPECIFICATIONS

Footings . Concrete.

Footing Drain . 4 " agricultural tile.
Foundation walls .

Columns.

10 '' poured concrete.

4 " diameter steel pipe with cap and base.

Girders.
Basement floor. 3' ' concrete with monolithic finish .
Exterior brick veneer . Face brick.

Chimneys. Brick chimneys, flue lining, cement cap , refractory brick
fireplace lining, cast iron damper, throat, ash -dump and
cleanout doors.

Rough lumber. Joists, studs, plates, rafters of No. 1 common Y. P.,
sheathing, sub - flooring, and roof boards of No. 2
common Y. P.

Exterior trim & millwork . No. 2 white pine, 134 " thick doors.
Interior trim . Stock trim , 138" thick doors, white pine.
Windows.

D. H. stock white pine.

Basement sash . Standard quality steel.
Floors. Clear white oak throughout except kitchen to be linoleum
Tile

over yellow pine or fir .
Tile floor and wainscot in bathroom .
Linoleum finished floor in kitchen.

Stairs.

Pine treads and risers to basement.

Oak treads and pine risers to second floor.

Roofing. 210# asphalt composition shingles, rear dormer 40 # tin .
Sheet metal. Copper valleys, gutters, flashing , and downspouts.

Lath. 2.3#, paper -backed metal lath.
Plaster.

2 coat work .

Exterior paint. a. Wood - priming coat and 2 regular coats.
0. Sheet metal- 1 coat lead and oil and 2 regular
coats.

Interior paint. a. Walls and ceilings - 1 coat size, 2 coats semi- flat.
b. Woodwork - 1 coat flat, 2 coats enamel.
c . Floors - stain and fill, 2 coats varnish or equiva
lent finish .

Finish hardware. Medium grade.
Electrical. BX wiring - Fixture allowance $ 50.00 .
Plumbing. Copper water piping, cast-iron soil pipe, medium grade
fixtures and fittings.

Enamel iron sink , vitreous china

lavatories and enameled iron double shell tub, syphon
action closets, cement laundry trays — 30 gallon auto
matic hot water heater,

Heating. Automatic, forced warm -air furnace, oil burner.
Accessories.

Medicine cabinet in bathroom .
Parcel receiver.

Kitchen ventilating fan .
Cabinet in basement hall.
Kitchen cabinets.

Refrigerator, electric or gas.
Weatherstrip . All exterior doors and D. H. wood windows.
Insulation . Rock wool batts on uppermost ceiling and exterior walls.
Recreation room. Ceiling plastered on metal lath, exterior walls

plastered over waterproof bond coat, 2'' gyp
sum block partitions, painted walls, ceilings
and floor,

APPLICATION OF COST ESTIMATION METHODS
1713

CEILINO

ASINALT

SANGLES

COPPER GUTTER

2ND FLOOR

ASPHALT SINGLES

LD.S.

QSH

IST FUOOR
BRICK
GRADE

BASLMENT FL.

FRONT

ELEVATION

30-6 "

3-10 "

IT,
01-

HEATER

RECREATION ROOM

JOIST r *x19 "-16 " O.C.
COLUMN

o'x1301
FLUS

LAUNDRY AND
HEATER ROON
CRV38,01x.9

PLASTER VALLO AND
CEILINO , CEMENT PL .

CEMENT FLOOR

8-10

BASEMENT

PLAN

0.C.

UNEXCAVATED

UNDERWRITING MANUAL
1713

30 '- 6 "
3-8
CCN . FL . llo

PORCH

.04,21

KITCHEN

CEN . FL

ORCP
LINOLEUM FL
TJ
RANGE

13-0
LIVING

ROOM

CEM STEP

OAK FL .

DINING

ROOM

FLAGSTONE

TERRACE
OAK FL .

10 ' - 6 "

CEN. FL .

6 ' - 0"

FIRST FLOOR PLAN

26-0
COPPER ROOF

BED ROOM

MC

BATH
TILE

ASPHALT

10

1-101

1

IOAK FL .

ACCESS

SNINGLES

A HALL

18
'-10
"

BED ROOM
BED ROOM
OAK FL.

OAK FL .

10 ' - e '

119

Əө

AT

SECOND FLOOR PLAN

APPLICATION OF COST ESTIMATION METHODS

1713

LILASMINO

TIN ROOP
CEILING

COPPER GUTTERS
• DOWNSPOUTS
SONO

SIDING
COPPER GUTTER
0_DOWNSPOUTS

ORICK

ORADE

BASEMENT

SIDE

ELEVATION

SHRUGS

-2x6 RAFTER
SHCATHING

FLOWERS

+
LAWN

222

AGRICULTURAL
DRAIN TILS

PLOT

PLAN

LOT 50 ' x 125

WALL

SECTION

UNDERWRITING MANUAL

1713-1719

eral, two or more sheets are required for each classification to pro
vide for the usual areas in increments of 100 square feet. Eight
columns appear on each sheet, each column being captioned by the
area to which the Basic Square Foot Costs are applicable. The
tabulations also indicate the basic perimeters established for each
area increment and the cost per lineal foot of each type of exterior
wall. The basic wall height established for each classification is shown
at the top of each sheet and it is applicable to all areas tabulated on
the sheet.

1714. Component Unit Adjustments are tabulated , to two

decimal places, in conjunction with Basic Square Foot Costs under
each classification. These adjustments are arranged in columns for
the respective area increment. Some adjustments are indicated as

lump sum amounts, if lump sums are more readily applicable.
1715. Miscellaneous Costs are available for those ele
ments for which cost data has not been otherwise tabulated. These

miscellaneous costs include contractors' overhead and profit, and are
either lump sum amounts or unit costs of the elements erected in place ,
complete.

1716. Quality Adjustment Percentages are confined
within the limits tabulated as the recommended upper and lower
limits of Quality Adjustment Percentage. These limits are estab
lished for various important cities and localities in the territory.
1717. Locality Adjustment Percentages are tabulated
for the base city and all other important cities and localities in the
territory. If necessary, these percentages are tabulated separately
for more than one type of exterior wall construction .
1718. Selection of Basic Square Foot Cost. The ac

companying illustration shows the tabulation of Basic Square Foot
Costs for detached , one-family, 112 story buildings. The column
headed 1,400 to 1,500 is chosen because it corresponds to the calculated
area of the subject building, which is 1,443 square feet. In this column ,

opposite “ Face Brick Veneer”, is found the Basic Square Foot Cost,
$ 3.64, applicable to the subject building. This basic square foot cost is
then entered at the top of the right hand column on the reverse side
of FHA Form No. 2052. An entry, "Face Brick Veneer”, is made

on the blank line opposite Type of Exterior Wall. Necessary adjust
ments to the basic square foot cost are next made according to instruc
tions in the following paragraphs.
1719. Materials and Size Adjustments. As the next
step, the subject drawings and specifications are compared with the
applicable Basic Specifications to determine deviations from the

established typical building and basic specifications. Although few
adjustments are ordinarily necessary, a subject building has been

APPLICATION OF COST ESTIMATION METHODS
1719

selected to include a variety of deviations from basic specifications
for the purpose of illustration. In order to obviate possible over
sight, the necessary Materials and Size Adjustments are made in a

sequence corresponding to the numbering of the components of a
building
CLASSIFICATION
Detached
Type
Family
Stories 1
Area in Square Feet
900 1000 1100 1200 1300 1400 1500 1600
Exterior Wall Construction
1000 1100 1200 1 1300 1200 15001 1600 1700
Basic Square Foot Costs
Frame Shingled or Sided
* 5.37 3.46 3.42 3.38 3.35 3.32 3.29
3.263.22
Frame Stucco on Metal Lath 6.33 3.53 3.493.45 3.43 3.39 3.35
3.32 3.29
Common Brick Veneer
47.47 3.65 3.62 3.58 3.55 | 3.493.49
3.46 3.43
Common. Brick gm Mall
*8.17 3.67 3.64 3.60 3.37 3.51 3.51
3.28 3.45
3.62 3.58
Face Brick Veneer
3.67 12.64
* 7.75 3.80 13.77 3.733.70
Face Brick 12 " Nall

FEDERAL HOUSING ADMINISTRATION
Insuring Office

Metropolitan City

* Cost per lineal foot of exterior wall including foundation
107
100 103
195 98
Basic Tall Height LOVAN
Component Unit Adiustments.
Basic Perimeter

25 % Basement
50 % Basement
2 - Foundation
12 Brick
Foundation LOR Concrete
- Fireplace
8- Clear White Oak Floor
Z
13 - Gutters - D'nspoutg - Copper_
+
14 - Metal Lath
7
22 - Extra Bath - Complete
L23 - Hot Water Heat
26 Insulation 4 " RW - Walls
Ceilings

.19

. 20

.2.5.16
.34 31
.061.06
.

.21

22

.17

.17

30
05

28
.05

.22
.18
.27
.04

111 11118

110

.23
.18

226
.04

.23
..29
.25
03

.24
219
..22
.03

$ 90./8100_3100 . $ 110 . 4120. $ 120.8150 . $ 160 .
2021.02

07 1.06

02
06

.121.12

.26 1.24
151.14

.26
13

.13 1.12

.22

‫ܩܝ‬3‫ܩܝܓ‬3‫ܝ‬

.03

.02

02

02

02

02

.05
10
.24

04

0 %

.03

02

.22

.08
30

.08

.22

12

12

12

12 .

03

03

10
03

10
.03

30
12
20

03

Miscellaneous Costs
4 " Footing Drain -Lineal Foot
Sewer Connection - Lineal Foot
Shingles

210 # Asphalt - Square Foot
Squiere Foot
Clear Red Cedar
Heavy Asphalt - Square Foot
Standard Slate_- Square Foot
Shutters - per pair
Wall Sq . Ft .
Kitchen Cabinet
Floor Sq . Ft.
Kitchen Cabinet
Tile Floor

Tile Wainscot
Extra Lavatory
Extra Closet Combination
Copper piping
per fixture
Laundry Trays

Weatherstripping - per door
Weatherstripping per window
Standard Linoleum on Pine Floor

40 # Tin Roofing - Square Foot

1.063 Copper Screens - per dndos
.90 Copper Screens per door
Galvanized Screens per door
11 Galvanized Screens. per erindo
Square foot
OZ Linen Cabinets
15
Garages
5.501 car Frame

1.2012 car Frame
1.551 cer B. V.
1.0012 car B.V.
1.2011 car Frame

3.00
8.00

5.00
2.00
1.00

Detached

250.00
325.00
B00.00

Detached

100.00

Detached
Detached

160.00
Attached
32.001 car B. V. Attached
200.00
, 18
40.00 | 4 " concrete walks square foot

2.00.5" concrete drive - square foot.
20.00
6.00 kitchen fan

2.75
.11
.28

.22

22.00

UNDERWRITING MANUAL

1719

BASIC SPECIFICATIONS

2. Foundations. Frame Construction – 8 " concrete block wall.
Brick Veneer - 10 "' concrete block wall.

3. Chimney. Complete with flue lining.

4. Fireplace. Single flue complete with flue lining, hearth , damper,
stock mantle.

5. Exterior Walls. Refer to Exterior Wall Construction on basic
square foot cost sheet.

6. Floor Framing. No. 2 Y. P. 2 x 8 and 2 x 10—16 " 0. C. , depend
ing on floor area .

7. Sub - Flooring. No. 2 Y. P. 1x 6 , laid diagonally.

8. Finish Flooring. 1316 x 242 select Red or White Oak. Paper
Sand - Fill - 2 coats shellac - wax.

11. Roof Framing. No, 2 Y. P. 2 x 6 and 2 x 8, depending on span .

12. Roof Covering.

16 " Clear Red Cedar Shingles. Edge Grain .

13. Gutters and Downspouts. 26 gauge G. I.

14. Plaster Base and Plaster . Wood or gypsum lath ; standard two
coat work .

15. Decorating. Walls and ceilings painted.
16. Interior Doors and Trim . Stock white pine, doors 198 ".

17. Windows. Stock D. H. - Wood.
19. Cabinets and Interior Detail. Kitchen cabinets Wall type
feet ; floor type

32

25 feet. Med

icine cabinets.

21. Special Floor and Wainscot. Standard ceramic tile floor and
wainscot in bathroom .

22. Plumbing. Double shell recess tub, pedestal lavatory , closet com
bination. D. D. B. Apron front sink, laundry trays,
range boiler - gas fired. Iron Piping.

23. Heating. Gravity warm-air furnace, hand fired.
24. Electric Wiring. BX Cable ; Average number of outlets.
25. Lighting Fixtures. $35.00 to $ 80.00 allowance, depending on floor
area .

26. Insulation .

None.

APPLICATION OF COST ESTIMATION METHODS

1719

The methods of making the adjustments are described in the same
sequence, as follows:

1. Excavation . No adjustment
adjustment is necessary.
2. Foundations.

a. Subject specifications call for 10" poured concrete base

ment walls, and the applicable basic specifications in
dicate 12'' concrete block walls.

The handbook shows

the Component Unit Adjustment for 10 " poured con
crete walls as : $ 0.04. This adjustment being addi

tional is entered in the “ plus” column opposite
Component #2, and a notation is entered under

" Explanation.”
b. Subject specifications call for a tile drain, around the
foundations, connected to the sewer. This element is
not included in the applicable basic specification as

it is additional. The handbook designates the basic
perimeter as equal to 110 lineal feet, and the hand
book shows a cost of $ 0.065 per lineal foot for 4 "
tile drain installed complete with crushed stone. The
plot plan indicates that the distance from the house

to the sewer is 40 feet, and the handbook shows a cost
of $ 0.90 per lineal foot for a 4 " cemented glazed tile
drain connection to sewer, including excavation and

backfilling of trench . The adjustment is computed
as follows:
Tile drain : 110 lin. ft. @ $ 0.065
Sewer conn :

40 «

@

0.30

Total --

$ 7.15
= 36.00

$ 43. 15

The result of this computation , to the nearest dollar,
is entered in the " lump -sum ” column on the line
opposite Component #2 and a description of the tile

drain is noted under " Explanation .”
C. Subject specifications for other elements of the base

ment are substantially the same as basic specifica
tions, and no further adjustments are necessary for
Component # 2. The extra cost of the stairs at
tributable to the finished room in basement is included

under Component #27.
3. Chimney. No adjustment is necessary .

4. Fireplace. Since basic specifications do not include a fire
place, this component is additional. The handbook shows

a component unit adjustment of $ 140 for a fireplace as
described. This adjustment is entered in the "Lump
sum ” column.

UNDERWRITING MANUAL

1719
5. Exterior Walls.

a . The Basic Square Foot Cost was selected for " Face

Brick Veneer ” as called for in subject specifications.
An inspection of the subject drawings reveals that
the gable and dormer walls are of wood siding and
not face brick veneer. The areas of wood siding
and brick veneer are estimated as follows:
Height

Length

Gables.-

24' 9 "
35' 6 "
9'0"
11'0"

Rear dormer .
Front dormers .

Bay -----

X
X
X
X

6'0" X 2 =
5' 6 "
4' 6" X 2 =
5' 6 "

Area of wood siding
Front..
Rear.

30'
22 '
24'
11 '

Ends .

Bay ..

6"
8"
9"
3"

297 sq . ft.
195
81
61

634 sq . ft.
X 11'4"
X 11 ' 4 "
X 10' 4 " X 2
X 3' 0 '

Area of face brick veneer ..

346 sq . ft.
257
512
34

1,149 sq. ft.

The gable wall of porch is disregarded in this calcula
tion as it is not included in the basic square foot cost.
Total area of exterior walls:

1,149 + 634

1,783 sq . ft.

The handbook designates the following Basic Square
Foot Costs for exterior walls : Face Brick Veneer,

$ 3.64, Frame and Siding, $ 3.29. The difference,
$ 3.64- $ 3.29 = $ 0.35, is equal to the difference between

the costs of the two types of wall. The adjustment
is computed thus :
634

$0.12

$0.35 X

1,783

The fraction used is the area of alternate exterior

wall divided by the total area of exterior wall. The

computed adjustment, being a deduction, is entered in
the “minus” column opposite Component #5, and a
notation is made under "Explanation.”
6. The subject building shows a height of exterior wall as
11'4 " , and the handbook designates the basic wall
height applicable to the classification as 10'4" . The

height of exterior wall is measured from the under
side of first floor construction to the intersection of the
outside surface of the wall with the roof surface.

APPLICATION OF COST ESTIMATION METHODS
1719

The excess height is 1'0 " . The excess wall surface
is equal to 1'0 " X 110'6 " = 111 sq . ft., the dimen

sion 110'6 '' being the perimeter of the wall. The
handbook shows a cost per square foot for exterior
walls of " Face Brick Veneer" as $ 0.59 and the adjust

ment is computed as follows:
$ 0.59 X 111

$ 65.49

The computed adjustment, being additional, is en
tered in the lump sum column and a notation is made
under " Explanation .”
o . Inasmuch as the subject building is rectangular in
shape and is of usual outline, its perimeter is not in
excess of the basic perimeter and no adjustment is
necessary .

6. Floor Framing. No adjustment is necessary.
7. Subflooring. No adjustment is necessary.
8. Finish Flooring. Subject specifications call for clear white
oak flooring except in kitchen and bathroom , and
basic specifications provide for select red oak
throughout except in bathroom . The handbook shows
the component unit adjustment for clear white oak
flooring as $ 0.02. The adjustment, being additional,
is entered in the “ plus” column, with a notation made
under " Explanation ." The adjustment for linoleum
and yellow pine floor in kitchen is made under Com
ponent #21.

9.
10.
11.
12.

Partition Framing. No adjustment is necessary .
Ceiling Framing. No adjustment is necessary.
Roof Framing. No adjustment is necessary .
Roofing. The subject building shows 210 lb. asphalt
shingles on sloping roofs, and tin over flat dormer roof.
Basic specifications call for edge grain red cedar shingles
throughout. The handbook designates the following costs
per square foot for roofing : 210 lb. asphalt shingles, $0.11 ;
edge grain cedar shingles, $ 0.07; and tin, $ 0.28. The
adjustments are computed as follows:
Front..
Rear .

Rear
Rear .

Rear Dormer ...

16'
16'
2'
1'

6"
6"
9' '
6"

X 31 ' 0 "
X 2' 6 " X 2
X 26' 0 " .
X 26' 0 "

9' 9' ' X 26' 6 "

512 sq.10 ft.
83

72
39

706 sq . ft. - shingles
258 sq. ft . - tin

UNDERWRITING MANUAL

1719

The area of roof over bay is not significant and is there
fore disregarded. The additional cost of 210 lb. asphalt
shingles over wood shingles is : $ 0.11- $ 0.07 = $ 0.04. The
additional cost of tin over wood shingles is : $ 0.28- $ 0.07 =
$ 0.21. The adjustments are computed as follows :
$ 0.04X 706 = $ 28. 24

Asphalt shingles.
Tin --

0.21 X 258 = 54. 18

These computed adjustments, being additional, are en
tered as lump sum amounts opposite Component # 12,
and notations are made under " Explanation.”
13. Gutters and Downspouts. Copper is specified for sheet
metal work , whereas galvanized iron is called for in the

basic specifications. The handbook designates a Com
ponent Unit Adjustment of $ 0.04 per square foot of
calculated area, in the " add” column, for copper gutters
and downspouts. The adjustment is entered in the “plus”
column of the estimate form , with a notation entered un
der " Explanation ."

No further adjustment is necessary

inasmuch as both subject drawings and basic specifications
call for splash blocks.

14. Plaster Base and Plaster. Subject specifications call for
2.3 lb. paper backed metal lath, and basic specifications
designate 3/8 '' gypsum lath as a plaster base . The hand
book shows a Component Unit Adjustment of $ 0.09.
The adjustment is entered in the “ plus” column, and a
notation is made under " Explanation."
15. Decorating. No adjustment is necessary inasmuch as both
the subject and basic specifications call for the same treat

ment of all interior walls and ceilings. Finishes specified
for woodwork and floors, and exterior painting are not
considered under this component.
16. Interior Doors and Trim . No adjustment is necessary

inasmuch as only minor deviations from the basic speci

fications are indicated for the trim, hardware, and finish .
17. Windows. No adjustment is necessary.

18. Entrance and Exterior Detail. — The subject building indi
cates shutters on the front and side windows of the first

story. This element is additional to the requirements of
the basic specifications for this classification. The cost
of this additional item is computed as follows :
Shutters.

5 pairs @ $ 5.50 = $ 27.50

The unit cost is selected from the handbook and the result

of the computation, taken to the nearest dollar, is entered

APPLICATION OF COST ESTIMATION METHODS
1719

in the " lump sum ” column. A descriptive notation is
made under “ Explanation .”
19. Cabinets and Interior Detail.

a . The subject drawings show a greater quantity of cabi
nets in the kitchen than is called for by the basic

specifications. The number of surface square feet of
cabinets of each type shown in the kitchen of the
subject building is determined , and the numbers
of surface square feet designated in basic speci
fications for each type is deducted to obtain the net
additional area of each type on which the adjustment
is computed. The computation for this adjustment
follows :
Width

Heigth

Wall type, 12' ' deep : 3' 6" X 11 ' 6 " = 40 sq. ft.
Basic Area

32

8 sq. ft.

Additional Area

Floor type, 20 " deep : 2' 6 " X 12' 0 " = 30 sq . ft.
Basic Area

25

Additional Area

5 sq. ft.

The handbook shows the following costs per surface
square foot of kitchen cabinets installed complete with
glass, finish and hardware : Wall type 12'' deep, $ 1.20
and floor type 20 " deep, $1.55. These unit costs are
applied to the additional areas, thus :
8 sq. ft. @ $ 1.20
5

60

$9.60

@ $ 1.55

7.75

Total.--

$ 17.35

The result is taken to the nearest dollar, $ 17.00, and

entered in the " lump sum ” column.

Appropriate

notation is made under " Explanation ." The amount

of this adjustment may be estimated directly on the
basis of experience and in such event, the computa
tions may not be necessary .

6. The subject specifications call for a cabinet in the base
ment which is additional to basic specifications. The
cost of the cabinet, $ 35.00, is selected from the hand
book and entered in the "lump sum " column. A de

scription is noted under " Explanation .”

UNDERWRITING MANUAL

1719

20. Stairs. No adjustment is necessary.

21. Special Floors and Wainscot.

a. No adjustment is necessary for the bath floor or bath
wainscot, inasmuch as both the subject and basic speci
fication call for tile.

b. Linoleum over pine flooring is specified for the kitchen
and this item is additional to the basic specifications.
The area covered by linoleum is computed as 9'0 " X
13'4" plus 2'6' ' X 5'0'', which equals 133 sq . ft. The
handbook designates the additional cost of linoleum
and pine flooring, of a quality assumed in the absence
of exact description, as $0.11 per sq . ft. The adjust
ment is computed, thus: 133 sq. ft. @ $ 0.11 = $ 14.63.
This amount is entered in the " lump sum" column

as $ 15.00, with an appropriate notation under
“ Explanation . "
22. Plumbing. The subject drawings indicate a lavatory in the
basement and the subject specifications call for copper
water piping, both of which are additional to the basic
specifications. The additional costs of these items are
computed as follows :
1 Vitreous china tank and closet combination --

1 Enameled iron apron front, corner lavatory--Cost of lavatory complete----

Copper water piping for 7 fixtures @ $ 2.00 ----

The unit costs are selected from the handbook .

$ 40.00
32.00

$ 72.00
$ 14.00

The

additional cost of copper piping, $14.00, is entered in the
“ ump sum ” column opposite Component #22. The addi
ditional cost of lavatory plumbing is entered in the “ lump

sum ” column opposite “ Lavatory." Descriptions of both
items are noted under “ Explanation.”
23. Heating. The subject building indicates an automatic,
forced circulation, warm air heating system with an oil
burner. In the absence of detailed specifications, a unit
cost corresponding to the type of heating equipment
assumed is selected from the handbook . The unit cost of

the customary type of heating equipment is also selected
from the handbook. The difference between the two costs

is the cost of additional mechanical equipment which is
computed as follows :
a. Automatic, forced circulation , warm air, oil burning unit,
including 275 gallon fuel tank, and supply and return
ducts

$ 835.00

APPLICATION OF COST ESTIMATION METHODS
1719
b. Gravity warm air, hand - fired , coal burning unit, including
$ 283. 00
supply and return ducts_-C. Cost of additional heating equipment.--

$ 552.00

The cost of the specified heating equipment, as assumed in
(a) above, is the total cost of the equipment called for,
but no entry for this amount is made. The cost of usual

heating equipment, $ 283.00, in ( 6 ) above, is already re
flected in the basic square foot cost, and no adjustment is
made on the reverse side of the form. However, the cost

of additional heating equipment, $552.00, in (c) above, is
entered directly in the Summary of Replacement Cost on
the face side of FHA Form No. 2052 on the line opposite

“ Additional mechanical equipment.”

24. Electric Wiring. The subject drawings indicate power out
lets for the range, oil-burner, and laundry machines.
These are additional to the basic specifications. Unit
costs are selected from the handbook and the adjustment

is computed thus: 3 outlets @ $ 10.50 = $ 31.50. This
amount taken to the nearest dollar, is entered in the

" lump sum " column opposite Component # 24 with a nota
tion under " Explanation .”
25. Lighting Fixtures. The subject specifications call for an
allowance of $ 50.00 for lighting fixtures and the allowance
provided for in the basic specifications is $ 40.00. The ad
justment is computed as the difference between the two

allowances, thus: $50.00- $ 40.00 = $ 10.00. This amount
is entered in the " lump sum" column and a notation is
made under " Explanation .”
26. Insulation . Subject specifications call for the insulation of

walls and ceiling, which is additional to the basic specifi
cations. The handbook designates the following Com
ponent Unit Adjustments for insulation : Walls, $0.10 and
Ceiling, $0.03. These adjustments are entered in the " plus"
column on the lines opposite “ Walls ” and “ Ceiling" under
Component #26, and descriptions of the types of insula
tion are entered under " Explanation ."
27. Miscellaneous. Inasmuch as the adjustments necessary

under this component include those required for elements
“not otherwise readily classified under other components”,
the subject drawings and specifications are carefully re
viewed for necessary adjustments not previously made.

Observation reveals the following items which are addi
tional to the basic specifications; parcel receiver, kitchen

UNDERWRITING MANUAL

1719

ventilating fan, mechanical refrigerator, weatherstrips
for all window and door openings above the basement,
and a recreation room in the basement. These miscellane

ous items are handled in the following manner :
a. The cost of parcel receiver, designated in the handbook
as $ 8.00, is entered in the " lump sum" column under

Component # 27, with an explanatory notation .
6. The cost of the kitchen ventilating fan is selected from
the handbook, and is entered directly in the Summary
of Replacement Cost on the face side of FHA Form
No. 2052, on the line opposite “ Additional mechanical

equipment.” The cost of the mechanical refriger
ator is not included in this estimate, inasmuch as it is
assumed here to be a chattel.

c . The cost of weatherstripping is computed from the
number of openings so equipped as shown on the
drawings, and the unit costs designated in the hand
book, as follows :
16 windows @ $ 2.75 = $44.00
3 doors
@ 6.00 = 18.00

$ 62.00

Total.

The computed cost of this element, $ 62.00, is entered
in the "lump sum ” column under Component # 27,
with a descriptive notation.
d . The additional cost of the recreation room is estimated
as the total of the costs of individual elements.

Indi

vidual costs are computed as separate products of
measured quantities of the elements and unit costs
selected from the handbook .

The total additional

cost is computed as follows:
Metal lath and plaster on ceiling:
13 '
3'
5'
3'

0"
0"
6"
6"

X 23' 0 " .
X 5' 0 "
X 7' 6'
X 5' 0 " .

-

299 sq. ft.
15
41
18

373 sq. ft. @

$ .078

$ 29. 09

Plaster and waterproof bond coat on exterior walls :
63 ' 6 " X 7' 3' ' = 460 sq. ft . @

$.053

24. 38

$.046

22. 03

$ .062

18. 41

Plaster on gypsum block partitions:
66'0" X

7' 3' '

479 sq. ft. @

2' ' gypsum block partitions:
41 ' 0 " X

7' 3 " =

Carried forward .

297 sq . ft. @

93. 91

APPLICATION OF COST ESTIMATION METHODS
1719-1720

Brought forward . ----

$ 93. 91

Decorating, 1 coat size and 2 coats flat paint:
13'
3'
5'
129'
3'

0"
0"
6"
6"
6"

239 sq. ft.

X 23 ' 0 " .
X 5' 0 " .
X 7' 6 "
X 7' 3 '
X 5' 0 " .

15
41
939
18

1,312 sq. ft . @

$ .038 =

49.86

$.04
$ 17. 50
$.16

14. 92
35.00

Floor painting, 2 coats:
13' 0 " X 23' 0 "

3' 0 " X

5'0"

5' 6 " X
3' 6 " X

7' 6 "
5'0"

Interior doors :
Floor base:

Electric

299 sq . ft.
15
41

18
373 sq. ft. @
2
@
130 lin . ft. @

20. 80

outlets, addi

tional:

17

$ 1.75 =

29. 75

=

27. 30

Additional cost of closed
stairs over customary
basement stairs:

13 risers @

( $ 3.50 – $ 1.40 )
Additional cost of base

ment windows;
Basement areaways :
Iron gratings over areas:

$ 107.50- $ 42.00

( Estimated )
14 sq. ft . @ $ 1. 00

Additional cost of recreation room..

65. 50
80. 00
14 , 00

$431 . 04

The additional cost, $ 431.00, is entered in the "ump
sum ” column on a line under Component #27, and a
notation is made under " Explanation .” After several
detailed estimates of costs of finished rooms in base

ments have been made, it will be possible to estimate
such costs directly as lump sum amounts.
1720. Determination of Square Foot Cost. After all
necessary adjustments have been computed and entered on the re

verse side of FHA Form No. 2052, they are combined into a single
square foot cost adjustment as follows:

a . All amounts in the " lump sum ” column are totalled , taking
into account any deductions that are indicated . The cal
culated area computed on the face side of the estimate
form is entered in the space provided in the upper right
hand corner of the reverse side. The total of the lump
sum items is divided by the number of square feet of

UNDERWRITING MANUAL
1720

calculated area , to convert the total into a square foot
cost adjustment which is entered in the “ plus” column.
2052 — Cost Estimate - Integrated Square Foot Method
CALCULATED Area 14 4 3
Type of exterior wall

FACE BRICK VENEER

BABIC SQUARE Foot Cost

Sq. ft.
3.64

Po BQUAES og

ADJUSTMENTS
LOMP SUN

Add ( + )

EXPLANATION

Coro

Ded . ( - )

1. Ezesvation

2. Foundations

10

POURED CONCRETE

4 " FOOTING

DRAIN

.04
43.00

3. Chimney

140.00

4. Hrepiace
5. Exterior walls

Eeight adjustment

.12 .

WOOD SIDING - 2 ND STORY

65.00

I'- 0 " ADDITIONAL

Perimeter adjustment
6. Floor framing
7. Subiooring
8. Finish flooring

.02

CLEAR WHITE OAK

9. Partition fraining

10. Ceiling framing
11. Rool framing

12. Roofing

210 # ASPHALT SHINGLE
TIN , REAR DORMER

13. Gutters and downepouts
14. Plaster base and plaster

COPPER
METAL LATH

28.00
54.00

.04
.09

15. Decorating
16. Interior doors and trim
17. Windows

18. Entrance and exterior detail

19. Cabinety and interior detail

SHUTTERS

28,00

EXTRA KITCHEN CABINETS

17.00
35.00

BASEMENT CABINETS
20. Stairs

21. Special floors and wainscot
Bath floor
Bath wainscot

Kitchen
22. Plumbing
Additional bathroom
Stall shower
Lavatory
Tollet

LINOLEUM - PINE FLOOR

15.00

COPPER WATER PIPING

1400

BASEMENT

72.00

23. Heating
24. Electrio wiring
25. Lighting fixtures
26. Insulation
Walls
Ceiling
27. Miscellaneous
WEATHERSTRIPPING

RECREATION ROOM

3 POWER OUTLETS
ALLOWANCE

$ 50,00

32.00
10.00

10

MINERAL WOOL BATS

.03

PARCEL RECEIVER
16 WINDOWS , 3 DOORS
IN

BASEMENT

8.00
62.00
431.00

TOTAL LUMP Sux ITEMS
1054.00
TOTAL ADRITIONS AND DEDUCTIONS
NET ADDITION ON DEDUCTION

.73

1.05
.12
ADD (+ ) DED
SQUARE Foot Cost

.93

4.57

APPLICATION OF COST ESTIMATION METHODS

1720-1721

The computation is made as follows :
$ 1,054.00
$ 0.73

1,443

6. All adjustments in the “ plus ” column, including the con
verted total of the lump sum adjustments in (a) above,

are added together to obtain the Total Additions, $ 1.05.
Likewise, all adjustments in the “minus ” column are
added together to obtain the Total Deductions, $0.12.
c . The difference between the total additions and the total

deductions, $0.93, is the net square foot cost adjustment
and is entered in the right hand column on the line oppo
site " Net Addition or Deduction ”. The word, “ Deduct",
on the same line, is crossed out to indicate that the net
adjustment is added.
d . The net addition, $ 0.93, is now combined with the selected
Basic Square Foot Cost and the result is the Square Foot
Cost. This result, $ 4.57, is transferred to the space pro
vided for " Modification of Square Foot Cost" on the face
side of FHA Form No. 2052.

1721. Determination of Final Square Foot Cost. The
character and grades of materials specified for the subject building
are reflected in the Square Foot Cost. However, for the purpose
of this example, it is assumed that the quality of construction found
or likely to be found in the completed structure would represent a
saving of 2 % in cost, due to less costly construction than was as
sumed in the development of the Basic Square Foot Cost.

There

fore, 98 % is selected as the applicable Quality Adjustment Per
centage, it being within the recommended limits designated in the
handbook . The selected percentage is entered in the space pro

vided for “ Modification of Square Foot Cost” on the face side of
FHA Form No. 2052, and the Square Foot Cost is modified accord
ingly. The result is entered in the space opposite the Quality
Adjustment Percentage.
CALCULATED AREA

MODIFICATION OF SQUARE -FOOT COST

square foot cont ...
9@
Quality adjustment.
Locality adjustment
Poral Squaü Foor COBT ...................... 3
(Contraer' 29394,

known)

PALE UNIT .

4.57
4.48

Detached
Semi-detached
Row

Х

1
2

X

NUMBER O Broane
1

1%

X

8

Eod row

CALCULATED AREL

SUMMARY OF REPLACEMENT COST

1443

Bq. ft,

UNDERWRITING MANUAL

1722 1723

1722. After the quality adjustment has been made, the

resulting square foot cost is next adjusted for locality. Locality
Adjustment Percentages are available in the handbook where they
are tabulated for all important cities and localities in the territory.
Where necessary , they are tabulated separately for different types of
exterior walls. This tabulation reveals the Locality Adjustment

Percentages applicable to the city in which the subject building is to
be erected, as 95 % for frame structures and 97% for brick veneer

structures. Inasmuch as the subject building is predominantly brick
veneer, 97% is selected as the Locality Adjustment Percentage. The
selected percentage is entered in the space provided for " Modifica
tion of Square Foot Cost ” on the face side of FHA Form No.
2052. The square foot cost already adjusted for quality is then
modified by the locality adjustment percentage. The result is the

Final Square Foot Cost which is entered in the space provided.
1723. Determination of Total Replacement Cost.
Items included in the Summary of Replacement Cost on the face

side of FHA Form No. 2052 are arranged in the following order:
a . Main building
6. Garage, other than built- in

c. Other improvements, including accessory buildings, walks
and terraces laid on the ground, driveways, additional
mechanical equipment, items of excessive cost, private
water-supply, sewage disposal and electric generating
plants, and other elements not reflected in the Final
Square Foot Cost
d . Architectural Service
MA

wye

bna rov

rWI MOA...

( Contractar am

1443

CALCULATED AR

Enova )

84. At

SUMMARY OF REPLACEMENT COST
Main building
10
Cange
Other improvements:

14 4 3
Bq. ft. @
200 Bq. ft.

X 20.

hemory building.TERRACE

Walke < 3'X212 + .52'x132...
Driveways(7 X62.21ClQ'X18'2

78
89
614

Sq. ft. @
Sq. ft. @
8q . ft.

Additional mecbanical equipment KITCHEN FAN

AUTOMATIC FORCED WARM AIR
BURNER

25
.18
... 22

4,35
1.25

6

21717 lolo
12_15 lololo

20.00
$

16.00
135.00

$

574.00

( $ 22.00 )

AND QIL .

( $ 552.00 )

Items of excessive cost
$

Sowage disposal
Water supply

SUBTOTAL $
Architectural service

LIMITED SERVICE .

ESTIMATE or Cost REQUIRED TO REPLACE BUILDING IMPROVEMENTS IN NEW CONDITION

DATE

ESTIMATED BT.

2052 - Cost Estimato Integrated Square Foot Method

1415 lol
115

APPLICATION OF COST ESTIMATION METHODS

1724_1726

1724. In order to complete the estimate of total replace
ment cost, it is necessary to make the following computations and
entries :

a. The cost of main building is obtained by multiplying the
Final Square Foot Cost by the number of square feet in
the Calculated Area, and entries are made in the spaces
provided .
6. The cost of garage is computed from the estimated area
and a unit cost obtained from the handbook .

c. Costs of accessory -buildings, walks, terraces, and driveways
are computed separately from estimated areas and unit
costs obtained from the handbook .

d . The costs of additional mechanical equipment which have

been entered directly in the summary of replacement cost
are only the additional amounts for items specified for the
subject building, in excess of allowances included in the
Basic Square Foot Cost. The additional amounts have

been computed as described in paragraph 1719 under Com
ponents # 23 and # 27 , and their combined total has been
entered in the total column.
e. The allowance for Architectural service is determined ac

cording to the instructions contained in Section 16. It is
assumed for this example that limited architectural serv
ice is usually obtained for similar houses in the particular

locality, and that the customary charge for suchservice in
the locality is $ 150. This amount is entered in the " Total "

column on the line opposite “ Architectural service", and a
qualifying notation is made.
f. The total of all costs included in the summary of replace
ment cost is the Estimate of Cost Required to Replace
Building Improvements in New Condition .
APPLICATION OF INPLACE UNIT METHOD

1725. For the purpose of illustrating the application of
the Inplace Unit Method , it is assumed that tabulated Basic Square
Foot Costs are not applicable to the subject building and therefore
the Integrated Square Foot Method cannot be used. The following

example of the application of the Inplace Unit Method employs the
same drawings and specifications for the subject building which were
used above to illustrate the application of the Integrated Square
Foot Method .

.

1726. Measurement of Inplace Units .

In order to

assure the inclusion of all elements shown on the drawings or specifi
cations, the measurements of the number of Inplace Units are made

UNDERWRITING MANUAL

1726

in a sequence corresponding to the numbering of components of a
building. The reverse side of FHA Form No. 2053, Cost Estimate
Inplace Unit Method , is used to record the measurements of Inplace

Units. In general, measurements for length and height are taken
to the nearest 3 inches, and areas are taken to the nearest square foot.
An example of making the measurements in accordance with instruc
tions contained in Section 16, Methods of Dwelling Cost Estimation ,
is described as follows :
1. Excavation .

a. Basement :
Length

Width

Main .---

24 '
3'
1'
2'

Bay
Areas .
66

9"
0"
6"
6"

X 30' 6 " X
X 6' 6 " X
X 5' 0 " X
X 5' 0 " X

Depth

6'
6'
2'
2'

6"
6"
6" X 2
6" X 2

2' 6 " X 4' 0 " X 4' 3' ' X 2
2' 6 " X 19' 6 " X 4' 3' '
Total..

4,908 cu . ft .
66

127

38
63
85
207

5,428 cu. ft .

5,428 cu . ft. X 1/27

201 cu. yds.

6. Trench Wall :
Porch .---

Depth
Width
Length
1 ' 9 " x 28' 8 " X 2' 6 "

Rear Stoop-Front Stoop .

1'6" X
1'6" X

3'0" X 2'6"
4'0" X 2' 6 " X 2

Total...

125 cu . ft .
11 "
60
30
166 cu. ft .

166 cu. ft. X 1/27 = 6 cu. yds.

The computed yardages are entered separately on lines
under Component #1, and descriptions of the classes
of excavation, as basement and trench, are entered
under " Explanation ".
2. Foundations.

a. Footings :
Front.. 30 ' 6 "
Sides .-- 24' 9' X 2
Rear -- 19' 6 " + 3' 6' '

31 lin . ft .

Bay---- ( 1 ' 0' ') x 2 + (2' 9' ') x 2 + 3' 8 "

11
29

Porch ..

8' 6 "

Total.--

+ 12' 0 " + 8' 6 "

50
23

144 lin . ft .

This measurement is entered in the " Quantity " col

umn opposite " Footings”, and a descriptive notation
is made under " Explanation ". No measurement is
made for the chimney footings as they are part of
Component #3, or for column footings which are

part of (e) , Basement Essentials, of this component.

APPLICATION OF COST ESTIMATION METHODS

1726

b. Basement Walls :
Height

Length

114' 0' ' X 7' 3' '

827 sq. ft.

The length used above is the total of the measure

ments used in computing footings under (a) , exclud
ing the length of porch footings. The measurement

for basement walls is entered in the “ Quantity " col

umn opposite “Walls”, and a description is noted
under " Explanation ". No measurements are made at
this time of the chimney, which is part of Component
#3, or for interior partitions, which are part of
Component #9.
c . Trench Walls :
6 ' thick walls:

Length

Helgbt

Areas ( 1'6" + 5'0" + 1 ' 6' ') X 2' 6 '' X 2

40 sq. ft .

66

(2' 6 "
(2' 6 ' '
(2' 6 "
+ 3'

+ 5'0" + 2' 6' ') X 2' 6 " X 2 = 50
+ 4'0" + 2' 6' ') X 4' 3 " X 2 = 77
+ 3' 9 " + 6'0" .
96
9 " + 3'6" + 3'0 ' ') X 4' 3' '

Stoop

4' 0 "

X 3' 6' ' X 2
X 3' 6 "
X 5' 3 "

3' 0 "

3' 0 "

28
11
16

318 sq. ft .
g " thick walls :

Porch (8' 6 " + 12' 0 " + 8' 6'') X 3'0"

87 sq . ft.

The measurements for 6'' thick and 9 " thick trench

walls are entered separately in the “ Quantity ” column

opposite “Walls”, and descriptions are noted under
“ Explanation ".
d . Basement Floor :
24' 9' ' x 30 ' 6 "
3 ' 0 " X 6' 6' '

755 sq . ft.
20

Total.---775 sq . ft.

This measurement is entered in the " Quantity " column

opposite “ Basement Floor", and a description is noted
under " Explanation ".
e. Basement Essentials :

This element is measured as a lump-sum amount equal to
the total of the separate costs of the individual items.
The cost of each item is computed as the product of

UNDERWRITING MANUAL

1726

a measured quantity and an inplace unit price selected
from Part 2 of the Cost Data Handbook , as follows:
Closed stair, pine treads & risers. 13 risers @ $3.25
Steel sash - 3 light.-

6 " X 10' ' girder ...

$ +2.25

6.40

32.00

@ 13.15
.28
20 lin . ft. @

65.75

5 units
5

1-6

@

5.60

60

6" X 8"

14
1 unit
-110 lin . ft. @
40

Lally column & footing
Tile drain .-Drain conn. to sewer .

.23
4.90
.06
.80

3.22
4.90
6.60

32.00

Area gratings (1'0" X 4'0' ') X 2
+ (2'0" X 3'0' ') ------

14 sq . ft. @

Total.-

.90 =

12.60

$204.92

This amount is entered as $ 205.00, in the column
headed “ Cost” opposite Basement Essentials, and a
brief description of the element is ' noted under

“ Explanation ".
3. Chimney :

Measurement is taken from the underside of footings to

top of chimney. For the subject building, the meas
urement is 31' 1 " . This measurement, taken to the

nearest foot, is entered in the “Quantity" column. No

description is necessary under " Explanation ", because
this component includes only the chimney construc
tion necessary for the heating plant.
4. Fireplace :
This component is estimated as a lump sum amount for
the fireplace, including complete foundation, ma
sonry, flue, hearth, lining, damper, facing, and man
tel. Regardless of the fact that the subject drawings

call for a combined, two flue chimney , the cost of this
component is calculated on the basis of a separate

chimney for fireplace only. The cost of the fireplace,
amounting to $ 125.00 is selected from the handbook
and is entered in the " Cost” column .
5. Exterior Walls :
a. Brick Veneer :
Length

Front
Rear .
Ends.at

Bay .
Total..

30 '
22 '
24'
11 '

6"
8"
9'
3"

Height

X 11 ' 4 "
X 11 ' 4 "
X 10 ' 4 " X 2
X 3' 0 "

346 sq . ft.
257
512
34

1,149 sq . ft.

APPLICATION OF COST ESTIMATION METHODS

1726

6. Wood siding :
Height
6'0" X 2
5' 6 "
4' 6' ' x
5' 6 "

Bay----

Length
24 ' 9 "
35' 6 "
9' 0 "
11 ' 3 "

Porch Gable .--

12 ' 0 " X 5'0" x 23

Gables.
Rear dormer ..
Front dormer ..

X
X
X
X

Total...

297 sq. ft.

3

195
81
61
30

664 sq. ft.

The measurements for brick veneer , 1149 sq . ft. and for
wood siding, 664 sq. ft. are entered separately in the
“ Quantity " column, and descriptive notations are
made under " Explanation ”. No deduction is made for
that portion of exterior wall covered by porch roof
construction .

6. Floor Framing :

a. Wood joist construction :
24 ' 9' ' x 30' 6 " X 2 = 1,510 sq. ft.
3' 0 " X

20

6'6 "

Total...

1,530 sq. ft.

No deductions are made for stairwell or chimney
openings.
b. Concrete slabs:
Porch.
Front stoop ...
Rear stoop .

8' 6 " X 12' 0 " .
4'0" X 6'0"
3'0" X 4' 0 " .

Total .

102 sq. ft.
24
12

138 sq. ft.

The totals of the measurements of wood joist con
struction and concrete slabs are entered separately in
the " Quantity " column, and descriptive notations are
made under " Explanation ".
7. Subflooring :
First floor .

Bay ----Second floor ....
Rear dormer .
Front dormers .
Total.--

24' 9 " X 30 ' 6 "

3'0" X 6' 6 "
16' 6 " X 30' 6 ' '

3 ' 3' ' X 26'0"
3' 3 " X

3' 0 " X 2

755 sq. ft.
20
503
85
20

1 , 383 sq. ft .

This measurement is entered in the “ Quantity "
column and a notation is made under “ Explanation ".

In measuring the subflooring of the second floor no

UNDERWRITING MANUAL

1726

deduction is made for the stairwell opening or for
the unfinished area in back of the enclosing partition
at stairwell.

8. Finish Flooring :

The measurement of this component is identical in this
example with the measurement for Component #7,

" Subflooring ”, inasmuch as subflooring is indicated
for both floors and the same finish flooring is specified

throughout. Therefore, the measurement is taken as
1383 sq . ft. and entered in the “Quantity” column
opposite Component # 8. A description of the finish
flooring is entered under " Explanation ". The lino
leum over yellow pine, specified for the kitchen, and
the tile as specified for bathroom , are measured and
described under Component #21.
9. Partition Framing :

a. Wood stud framing, plastered on two sides :
First story ---Second

66

Height
Length
80' 6 " X 8' 0 " .
93' 4 " X 7'6 "

Total.--

644 sq . ft .
700

1 , 344 sq. ft.

No deductions are made for the areas of chimney,
fireplace and door openings.

6. Wood stud framing, plastered on one side :
48 ' 8''X7' 6 "

365 sq . ft.

The enclosing partitions of the second story, which
are finished on one side only, are taken at full ceiling
height, and the total length includes the lengths of
sides of dormers. The lengths of dormer fronts are

not included because the area of the enclosing parti
tions located there approximately balance the excess
areas included along dormer sides.

c. The total of wood stud partition framing is taken as
the sum of ( a ) and ( 6 ) above, 1344 + 365 = 1709 sq. ft.
d. 2'' gypsum block :
41' 0 " X 7' 3 "

297 sq . ft.

The partitions enclosing the finished room in base
ment are measured without deduction for openings.
The measurements derived in ( c) and (d) above are
entered separately in the " Quantity " column, and de
scriptive notations are made under " Explanation ".

APPLICATION OF COST ESTIMATION METHODS

1726

10. Ceiling Framing :
16 ' 6 ' '
3' 3"
3' 3 "
3'0"
8' 6 "

Second floor..
Rear dormer .Front dormers..

Bay --Porch .

x 30' 6 "
= 503 sq . ft.
85
X 26' 0 "
X 3' 0 " X 2
20
20
X 6' 6 "
102
X 12' 0 "

Total...

730 sq. ft.

This measurement is entered in the " Quantity " col
umn, and a notation is made under " Explanation ".
11. Roof Framing :

a. Rafter framing :
Front
Rear ...

Rear dormer .

Bay-

16 '
16'
2'
1'
9'
3'

6"
6"
9"
6"
9"
6"

X
X
X
X
x
X

7' 6 " X

Porch .

31 ' 0 "
2' 6 "
26' 0 "
26' 0 "
26' 6 '
11'3"

512 sq. ft.

.
X 2

X 12

83
72
39
258
20

8' 6 " X 2

128

.

Total.

1 , 112 sq . ft.

The measurement for rear dormer is taken from its
intersection with the main roof to the eaves of the

dormer, allowing for the overhang at the sidewalls
of the dormer. The measurement of the roof over

the bay is computed as the product of half the slope
dimension and the perimeter of the bay.
6. Roof sheathing :
The measurement for this element is taken equal to

the area of the rafter framing, 1112 sq. ft.
These measurements are entered separately in the
“ Quantity ” column and descriptive notations are
made under " Explanation".
12. Roofing :
The total measurement of roofing is identical with the
measurement of roof framing. Three classes of roof

covering are specified and the separate quantities of
each class are computed as follows:
Total area of all roofing 1112 sq. ft.
Area of roof over
bay .

20 sq . ft.

copper.

1092 sq. ft.
Area of roof over

rear dormer .---

258 sq . ft.

tin .

834 sq . ft.

210 # Asphalt shingles.

UNDERWRITING MANUAL

1726

The areas for roofs over bay and rear dormer are

taken equal to corresponding areas of roof framing
under Component #11.

These measurements are

entered separately in the “Quantity" column, and
descriptive notations are made under " Explanation ".
No measurements are made of flashings, counter
flashings, valleys, ridges and saddles.
13. Gutters and Downspouts :
a. Gutters :
(31'0" X 2) + 26'0" + 12'0" + (9'0" X 2 ) = 118 lin . ft .

1. Downspouts :
(12' 0'' X 4) + 4'0" + 9'0" + (6'0" X 2 ) =

73 lin . ft .

These measurements are entered separately in the
“ Quantity " column, and notations regarding sizes,
shapes, and materials are made under " Explanation ".
0. Splash blocks :
Four @ $ 0.75 = $3.00

This amount $ 3,00 is entered in the column headed
“ Cost ”
14. Plaster Base and Plaster :

a . Metal lath and plaster :
Length
Height
102 ' 8 " X 8'0'
11 ' 3 " X 7'0"
16' 0 " X 7 ' 6 " X 2 =

Exterior walls :

First story
Bay --Gables .

821 sq . ft.
79
240

Dormer fronts.- (26'0" + 3'0"
240
+ 3 ' 0' ') X 7' 6 "
Partitions plastered on
1344 sq . ft.
X 2 = 2688
two sides .--

26

Partitions plastered on
365

one side ...

Ceilings of first and sec
ond stories ...

1383
5816
Length

Height

Basement ceiling--- 13' 0" X 23' 0' '
3'0" X
5' 6 " X
3' 6 " X
Total...

5 ' 0' '
7' 6 "
5' 0 " .

299
15

41
18 -

373

6189 sq . ft.

APPLICATION OF COST ESTIMATION METHODS
1726

The lengths of first story walls and bay are taken
from the dimensions used for element (a) of Com

ponent #5. The areas of partitions are taken from
measurements of elements (a) and (b ) of Component
#9. The total area of first and second story ceilings

is equal to the area of the finish flooring, Component
# 8, inasmuch as the areas of ceilings are the same
as areas of the finish flooring in the same story. The
dimensions for the gables, dormer fronts, and base
ment ceiling are taken from the drawings.
7. Plaster on gypsum block :
Height

Length

(23' 0 " + 17'0" + 26 ' 0' ') X 7' 0 " .

479 sq . ft.

C. Plaster and waterproof bond coat :
( 18 ' 6 " + 23'0' + 22' 0' ') X 7' 3' ' = 460 sq . ft.

d . Porch ceiling, wood, painted :
8' 6 " X 12' 0 '' .

102 sq. ft.

These measurements are entered separately in the

“ Quantity ” column, and appropriate notations are
made under " Explanation ".
15. Decorating :

a. Because the same treatment is specified for the walls
and the ceilings, this measurement is taken equal to
the total area of the plastered surfaces computed for
elements (a) , (6 ) , and (c) , of Component # 14, thus:
Area of metal lath and plaster ..

6,189 sq. ft.
66

Area of plaster on gypsum block ..
Area of plaster and waterproof bond coat ..
Total..

479
460

7,128 sq . ft.

6. Painting basement concrete floor :
13'0"
3' 0 "
5' 6 "
3' 6 "

X 23' 0 "
X 5'0'
X 7' 6 "
X 5' 0 " .

Total.--

299 sq. ft.
15
41
18

373 sq. ft .

These measurements are entered separately in the

“ Quantity " column, and descriptions are noted under
" Explanation "

UNDERWRITING MANUAL

1726

16. Interior Doors and Trim :
a. Interior doors :
Basement.-First story ---

Second story --Total.----

2
5
10

17

b. Cased openings :
Living room ---Dining

1-(4' 9" X 7' 0'')
1-(2' 8" X 7' 0'')

Total.----- 2

c . Running Trim :
Basement rooms.

66' 0 " + 63' 6 "

130 lin . ft .

First story exterior
walls ----

Second story gables ..

= 125
114' 0 " + 11 ' 3 "
16 ' 0 " X 2 = 32

26 ' 0 " + (3'0 " X 2)
Dormer fronts ...
32
Partitions finished on
two sides ...
(80 ' 6' ' + 93' 4' ') X 2 = 348
Partitions finished on
49

one side ...

716 lin . ft

Deduction for door
openings .-

( 3 ' 0" X 2 X 17) +
(5'0" X 2 ) + (3' 0 " X 2) = 118
-598 lin . ft .

Total.---

The lengths of the first story exterior walls are taken
from the dimensions used for element (a) of com
ponent # 5. The lengths of the finished basement wall

surfaces, and the second story gables are taken from
the drawings. The lengths of the partitions are taken
from the dimensions used for elements (a) and ( 6)
of Component #9.
d . Closet Shelving :
First story
Second story ----

(3' 0' ' X 5) + 2' 0 " = 17 lin . ft.
5 ' 0 " + (3'0" X 2 )
+ (2'0" X 7 ) = 25

Total .-

42 lin . ft .

These measurements are entered separately in the

“Quantity” column, and descriptive notations are
made under “ Explanation ".

APPLICATION OF COST ESTIMATION METHODS
1726

17. Windows :
First story
Second story

7

Total.-.

16

9

The total number of windows is entered in the " Quantity "

column, and a description of the type is noted under
"Explanation.
18. Entrance and Exterior detail :
a . Entranoes :
$ 53. 20

1 Main entrance_ .
1 Porch door1 Rear entry door----

24. 55
19.50

$ 97. 25

Total .

This element embraces completely installed items for
which inplace unit prices are selected from Part 2

of the handbook. Therefore, no detailed measure
ments are made. The total of the individual costs,

to the nearest whole dollar, is entered as a lump -sum
amount in the “ Cost” column, and a descriptive nota
tion is made under " Explanation ."
b. Exterior detail :
Entrance steps--- (6'0" X 2' 0' ')
+ 4'0"
Porch columns.. 6 " X 6 " .
4" X 6'

16 lin . ft. @ $0.55 = $ 8.80
8 units @ 6.20
49.60
@ 5.60 = 11.20
2

Porch beam .---- 8 " X 10 '
(9' 0 " X 2) + 12' 0 " = 30 lin . ft . @ .50
@ 5.00
Shutters
5 prs.
Iron railings---3' 0 " X 2 = 6 lin. ft. @ 1.80
Total

15.00
25.00
10.80
$ 120.40

Applicable inplace unit prices, selected from Part 2
of the handbook, are multiplied by the above num
bers of units to obtain the cost of each .

The total

amount resulting from adding together all the indi
vidual costs is entered as a lump sum in the column
headed "Cost” opposite " Exterior Detail.”
19. Cabinets and Interior Detail :
Kitchen Cabinets :

12' ' wall type 11 ' 6 " X 3' 6 "
20 '' floor "
12' 0 " X 2' 6 "
Bathroom Medicine Cabinet
Cabinet located in basement .-Total...

41 sq. ft. @ $1.10
30

@

1.40

$ 45.10
42.00
9. 75

30. 00
$ 126. 85

UNDERWRITING MANUAL

1726

Applicable inplace unit prices from the handbook
are multiplied by the above estimated quantities to
obtain individual costs . The total of these costs, fig
ured to the nearest whole dollar, is entered as a lump
sum amount in the “Cost” column opposite Com
ponent #19. Descriptive notations are made under
" Explanation ."
20. Staire :

This component is estimated as a completely installed
unit and it is measured by the number of risers in the

flight.

The number of risers is entered in the

“ Quantity ” column, and a brief description of the
materials used is noted under " Explanation ."
21. Special Floors and Wainscot :
a. Bath floor :
4' 0 " X 5' 0 " = 20 sq . ft. of ceramic tile

b. Bath wainscot :
39 sq . ft .
11' 0 " X 3' 6' '
10'0" X 4' 8' ' = 47
Total.---- 86 sq. ft . of glazed tile

c . Kitchen floor :
9'0" X 13' 4 " = 120 sq. ft.
2'6" X 5'0" = 13
66

Total ---- 133 sq. ft. of linoleum

The unit prices selected for the above special floors
and wainscoting, are the differences between the unit

prices of the special materials and the unit prices of
the materials which are replaced. These measure
ments are entered separately in the “ Quantity " col

umn, and the classes of materials specified are noted
under " Explanation ".
22. Plumbing :

This component is estimated as individual elements and
the cost of each element is computed as a separate
lump -sum amount, as follows:

a . Bath , kitchen, and laundry :
1 Double-shell 5 foot recess tub ..

1 Enameled iron pedestal lavatory , 27 X 22 ' '.

$ 72.00
43.00

1 Vitreous china tank and closet combination --

45. 00

1 Enameled iron sink with apron front, 60 X 22''---- 53.00
Carried forward---

213.00

APPLICATION OF COST ESTIMATION METHODS

1726
Brought forward----1 pair of cement laundry trays_

$ 213.00
12.00
12.00

Extra for copper piping, 7 fixt. @ $ 1.75_
Water service
Sewer connection

40 lin. ft. @
40 lin . ft. @

.30

12.00

.750

30.00

$ 279.00

6. Lavatory :
$ 35.00

1 Vitreous china tank and closet combination .-1 Enameled iron , lavatory-

27.00

$ 62.00

c . Water heater :
$ 60.00

1 Automatic heater, 30 gal -----

3. 00

Gas connection for water heater ....

$ 63.00

Applicable inplace unit prices are selected from the hand
book and the total costs are entered as separate lump sum
amounts in the column headed " Cost” . Descriptive nota
tions are made under " Explanation ".
23. Heating :

The subject building indicates an automatic, oil fired ,
forced circulation , warm air heating system . In the
absence of detailed specifications, an inplace unit
price corresponding to the type of heating equipment
assumed is selected from the handbook.

The unit

price for the customary type of heating equipment
is also selected from the handbook .

The difference

between these two inplace unit prices is the cost of
additional mechanical equipment, and it is computed
as follows:
a . Automatic, forced circulation warm air, oil burn

ing unit, including 275 gallon fuel tank, and sup
$ 760.00
ply and return ducts .-6. Gravity warm air, hand - fired , coal burning unit,

including supply and return ducts.-Difference

Allowance for contractor's overhead and profit..
C. Cost of additional heating equipment.---

258.00

$ 502.00
50.00

$ 552.00

The inplace unit price of the specified heating equip
ment, as assumed in (a) above, is the contractor's

UNDERWRITING MANUAL

1726

cost of the equipment called for and no entry of this
amount is made. However, the inplace unit price of
the customary heating equipment, $ 258.00 from ( 6 )
above, is entered in the " Cost ” column on the line

opposite Component # 23, and a description of the
usual type is noted under " Explanation ". The cost
of additional heating equipment resulting from the
computation , $ 552.00 in (c) above, is entered directly
in the Summary of Replacement Cost on the face
side of FHA Form No. 2053 on the line opposite
“ Additional mechanical equipment”.
24. Electrio Wiring :

a. Lighting circuits :
Basement:
Recreation room ..

Ceiling

Switch

1

1
1

Sidowall

4

Lavatory Stairs .

Recep
tacles
4

1

Laundry..
First Story :
Living room ..

8

Porch .-Stairs .

1
1

Stoop
Dining room
Kitchen .

1
2

Second Story :

Ceiling
1
1
1

2

2

Switch
1
2

3

1
1

1

12

Recep
Sidewall tacles

N

Master bed room.
Hall ...
Bedroom .
Bath ..
Bedroom ...

1
1

4

2

1

1
2

16
Total

20
16
64 outlets

The number of outlets is entered in the “ Quantity "

column. A notation of the method of wiring, BX
wiring, is noted under “ Explanation ". For the pur
pose of this measurement, each outlet for lighting

fixtures, switches, and convenience receptacles is con
sidered one outlet.

6. Power wiring :
1 outlet for electric range
" oil burner

1
1

Total.---

“ laundry machine

3 power outlets

APPLICATION OF COST ESTIMATION METHODS

1726

The number of power outlets is entered in the “Quan
tity ” column.
c. Service Panel :

This item is entered in the “Quantity ” column as
“1 panel” and a description is noted under " Expla
nation " .

25. Lighting Fixtures :

An allowance of $ 50.00 is specified for the lighting fix
tures in the subject building. This amount is entered
in the “ Cost ” column on the line opposite Component
# 25 and a notation is made under " Explanation .”
26. Insulation :

a . Walls :
Front.Rear ..
End ...

Height
Length
30 ' 6 " X 11 ' 4 "
22 ' 8 " X 11 ' 4 "
-24 ' 9 " X 10 ' 4 " x 2

Bay-

-11 ' 3 " X

8'6 "

Gables.-Rear dorner ..
Front dormers .----

-24' 9 " X
-35' 6 " X
g' 0 " X

6'0" X 2 =
5' 6 "
4' 6 " X 2 =

Enclosing partitions... 48 ' 8 " X

7'6"

346 sq. ft.
257
511
96
297
195
81
365

2 , 148 sq . ft .

The lengths of exterior walls, shown above, are taken
from the dimensions used to compute areas of exterior
walls under Component #5. The dimensions for

enclosing partitions of second story are those used for
element ( 6 ) of Component #9.
6. Ceilings :
Second floor ..
Rear dormer .
Front dormers .

Bay

16 '
3'
3'
3'

6"
3' '
3"
0"

X 30 ' 6 "
X 26' 0 "
X 3' 0 " X 2
X 6' 6 '

503 sq . ft.
85
20
20

628 sq. ft .

The dimensions used above are the same as those

used in computing the area of ceiling framing under
Component # 10, except that the area of porch ceiling
is not included .

The measurements for wall and ceiling insulation are
entered separately in the “Quantity" column, and
descriptions of the materials are noted under " Ex
planation". The insulation materials measured un

der this component are restricted to those which are

UNDERWRITING MANUAL

1726–1727

installed exclusively for the purpose of insulation .
Insulation materials used primarily as a base for
plaster or as an interior wall or ceiling surface are
not measured under this component inasmuch as they
are considered part of and included in Component
#14 " Plaster Base and Plaster " .
27. Miscellaneous :

The subject drawings and specifications are carefully re
viewed to disclose any elements or items which have

not been measured previously. This review indicates
the following items which have not been included
under other components : parcel receiver, kitchen

ventilating fan, mechanical refrigerator, and weather
stripping for all openings above basement. These
miscellaneous elements are treated in the following
manner :

a . The inplace unit price of parcel receiver selected from
the handbook is entered in the " Cost ” column and &

description of it is noted under " Explanation ".
b. The inplace unit price of kitchen ventilating fan is
selected from the handbook and it is entered directly
in the Summary of Cost Estimate on the face side of

FHA Form No. 2053 on the line opposite “ Addi

tional mechanical equipment”, as illustrated .
c. The cost of the mechanical refrigerator is not included
in this estimate inasmuch as it is assumed here to be
a chattel.

d . The cost of weatherstripping is computed from the
number of openings so equipped and the inplace unit
prices designated in Part 2 of the handbook, as
follows:
16 windows @ $2.50 = $ 40.00
3

doors

@

5. 40 = 16. 20

$ 56. 20

The computed cost of this element, amounting to
$ 56.00, is entered in the " Cost” column opposite Com
ponent # 27, and an appropriate notation is made
under “ Explanation .”
1727. Selection of Inplace Unit Prices. After all of
the components have been measured , the applicable Inplace Unit
Prices, to three decimal places, are selected from Part 2 of the Cost
Data Handbook and entered in the “Unit Price” column opposite

APPLICATION OF COST ESTIMATION METHODS

1727-1729

the respective components or the elements for which they were
selected . The selected inplace unit prices are multiplied by the

number of units of the corresponding items in the "Quantity"
column. The resulting products are the estimated costs of the com
ponents or elements of the components. The individual costs so
obtained are entered in the “Cost” column . The costs of some com

ponents or elements of components for which no measurements occur
in the “Quantity” column have been entered as lump -sum amounts

directly in the “ Cost ” column, as explained in the foregoing example.
The individual costs of components or elements are added together
and the result is the Total Cost of Components.
1728. Determination of Square Foot Cost. A suitable

allowance is determined for contractor's overhead and profit. For

the purpose of this example, the allowance is assumed to be $ 600.,
and it is added to the Total Cost of Components, resulting in a Total
of $ 6,613. The Calculated Area computed on the face side of the
estimate form is entered in the space provided in the upper right

hand corner of the reverse side. The Total of $6,613. is then divided
by the number of square feet in the Calculated Area, resulting in a

Square Foot Cost of $ 4.58 which is transferred to the space provided
for "Modification of Square Foot Cost” on the face side of FHA
Form No. 2053, as illustrated .
1729. Determination of Final Square Foot Cost. The

character and grades of materials specified for the subject building
are reflected by the Square Foot Cost. However, for the purpose

of this example, it is assumed that the quality of construction found
or likely to be found in the completed structure would represent a
saving of 2 % in cost, due to less costly construction than was as
sumed in the development of the Inplace Unit Prices. Therefore,

98% is selected as the applicable Quality Adjustment Percentage,
it being within the recommended limits designated in the handbook.
The selected percentage is entered in the space provided for “Modifi
cation of Square Foot Cost" on the face side of FHA Form No. 2053
and the Square Foot Cost is modified accordingly. The result is

entered in the space opposite the Quality Adjustment Percentage.
CALCULATID AREA
To

MODIFICATION OF SQUARE -FOOT COST

(Oontrastard

TAMILT UT

News & Broen

4.58

Bquare foot cost......
quality adjustment.
Locality adjustment
PORAL SQUARE Foot Cost...

98
97

4:49

%
%

knows)

Х

1

X

2

4.36

1

1%

Row

$
my

Detárhed
Semi-detached

9

End row
CALCULATED AREA

SUMMARY OF REPLACEMENT COST

144 3

8g. It

UNDERWRITING MANUAL

1729
2053_Cout Estimate - Implace Unit Method
1443

CALCULATED AREA
Соохон

QUANTIT

EXPLANATION

1. Excavation
2. Foundations:

6 '-6 " DEEP
TRENCH
8 " X18 " CONCRETE
10 " POURED CONCRETE

Footinga
Walls

L.FT.I

.550
.900
.27

827

IS.FT.

.324

6

6
Basement door
Basement sentido
8. Chimney
4. Fireplace
5. Exterior walls

CYDI

144

201

3 * CONC . MONO. FINISH

318
87

.25
.307

775

.120

31 L.ST. 2.65
FACE BRICK VENEER

S.FT.

FRAME & 8 " SIDING

Sq.ft

UxIT PUC COST OF CORRENT

664

5

39
268
80
27
93
205
82

541

125
622

, 287

191

N

6. Floor framing

1530

2 X 10-16 " O.C .. # 1Y.P.

. ! 24

190

4 " CONCRETE MONO . FINISH

138

140

7. Subflooring
8. Finish flooring

1"X6" # 2 Y.P. DIAGONAL
78* X2V4" CLEAR WHITE OAK

1383
1383

.067
282

19
93
252

9. Partition framing

2 x 4 - 16 "0.c.. # 1 Y.P ,
2 "GYPSUM BLOCK
2 X6 - 160.C # ] Y.P.
2 X6-16 " O.C ., # 1 Y.P.

1709

073

125

.057
053

.060

17
39
67

.060

67

10. Calling framing

IX 6 , # 2 Y.P.
210 " ASPHALT SHINGLES
TEOZ .COPPER

834
20
258
1 18
73
6189
-479

40 # TIN
18. Gutters
Downspouta
14. Plaster base and plaster

5 MOULDED COPPER 16 OZ .
3 "x4 " COPPER 16 OZ .
2.3 # PAPER BACKED METAL

- COATS ON
GYPSUM BLOCK
# WPFD . BOND COAT

84
al

11. Roof framing
Sheathing
12. Roofing

297

730
11 12
1112

048
035

UNITS 15.90
L.FT. .145

270
87

fS.FTI

460
7128
17
598
42
16

LCOAT SIZE , 2 COATS FLAT
13/8'STOCK W.P. 2.8 " x 6-8 "
STOCK W.P.

CLOSET SHELVING
17. Windows

D.H. STOCK W.P. 12 LIGHTS
SPLASH BLOCKS

18. Entrance
Exterior detail

265
.55
.60
1.071

66
65
44
439
20
-22
249

L.FT.

.

15. Decorating
16. Interior doors
Running trim

1310

32
UNITS 16.80

I ENTRANCE , I PORCH . I REAR

34 PINE CEILING
41 S.FT. WALL - 30 S.FT. FLOOR

19. Cabinets

102

IS.FT.

269
3
97
120

107

-

127

Interior detail

CASED OPENINGS
20. Btairs

2

OAK TREADS , PINE RISERS

21. Special floors
Special wainscot

BATH,CERAMIC
WHITE TILE
4 " x4 " GLAZED

KITCHEN FLOOR
22. Plumbing:
Extra bathroom
Stall shower

15

RIS .

20

S.FL.

86
133

LINOLEUM + PINE FOOR

8.65

17

5.00

75

..72
.90
10

77
13

COPPER WATER PIPING

279

AUTOMATIC , 30 GAL ., GAS

63
258

Lavatory
Toilet

62

WATER HEATER
23. Heating

GRAVITY WARM AIR & DUCTS

24. Electric wiring
Service panel
25. Lighting fixtures
26. Insulation :

PANEL $ 15.00 . POWER OUTLETS

64

BX CABLE

OUTL

3

1.60
9.50

Wall

MINERAL WOOL BATTS

WEATHERSTRIPS

16

2148
628

S.FT.

.062

.062

PARCEL RECEIVER
16 WINDOWS, 3 DOORS
2 COATS ON FIN . CEM . FLOOR

44

50

SPECIFIED ALLOWANCE

Calling
27. Miscellaneous

102

373

.037

1 33
39
8
56
14

TOTAL COST OF COMPONENTS

6013

CONTRACTOR'S OVEREAD AND PROFIT
TOTAL

600
6613

BOUARU Foot COST

$ 4.58

APPLICATION OF COST ESTIMATION METHODS
1730-1731

1730. After the quality adjustment has been made, the

resulting square foot cost is then adjusted for locality. Locality
Adjustment Percentages are available in the handbook where they
are tabulated for all important cities and localities in the terri
tory. Where necessary, they are tabulated separately for differ
ent types of exterior walls. This tabulation reveals the Locality
Adjustment Percentage applicable to the city in which the subject
building is to be erected , as 95 % for frame structures and 97 % for
brick veneer structures. Inasmuch as the subject building is predom
inantly brick veneer, 97 % is selected as the Locality Adjustment Per
centage. The selected percentage is entered in the space provided for
“Modification of Square Foot Cost" on the face side of FHA Form No.
2053. The square foot cost already adjusted for quality is then modi
fied by the locality adjustment percentage. The result is the Final
Square Foot Cost which is entered in the space provided.
1731. Determination of Total Replacement Cost.

Items included in the Summary of Replacement Cost on the face
side of FHA Form No. 2053 are arranged in the following order :
a . Main Building.
b. Garage, other than built- in .

C. Other Improvements, including accessory buildings, walks
and terraces laid on the ground , driveways, additional
mechanical equipment, items of excessive cost, private

water-supply, sewage disposal and electric generating
plants, and other elements not reflected in the Final Square
Foot Cost.

d. Architectural Service
,Iowa)

(Doutor

CALCOLATRO ARBA

1443

84. It

SUMMARY OF REPLACEMENT COST
Mala bullding
Garage
Other Improvements :
Atory buiten

1443
200

IQ X.20.

8q. it. @
8q . 1

TERRACE
.25
78 Sq. ft. @
.18
89_ Sq. ft.
Walks ( 3 X 21)+5.8 X 18)
Driveways.C7 X 62) XCIOX18 )
.22
64 Sq. ft.
Additionalmechanical equipment_KITCHEN FAN ( $ 22.00 )
AUTOMATIC FORCED WARM AIR AND OIL
BURNER ( $ 652.00

4.36
126

$

20.00
16.00
135,00

$

674.00

3

$

16

12
9 11
2 5 10

O

Items of excesaiye cost

Sewage disposal

Water supply
SUBTOTAL

Architeotural rervice

LIMITED SERVICE

ESTIMATI Or Cost REQUIRED TO REPLACI BUILDING IMPROVEMENT I N

CONDITION

S

7141500

3

15
7

Dari

2062 - Cost Eatimate - Inplace Unlt Method

0100

$

4 3600

UNDERWRITING MANUAL

1732

1732. In order to complete the estimate of total replace

ment cost, it is necessary to make the following computations and
entries :

a . The cost of main building is obtained by multiplying the
Final Square Foot Cost by the number of square feet in

the Calculated Area, and entries are made in the spaces
provided .
6. The cost of garage is computed from the estimated area
and a unit cost obtained from the handbook ,

c. Costs of accessory buildings, walks, terraces, and driveways
are computed separately from estimated areas and unit
costs obtained from the handbook .

d . The costs of additional mechanical equipment which have
been entered directly in the summary of replacement cost
are only the additional amounts for items specified for the
subject building in excess of allowances included in the
Square Foot Cost. The additional amounts have been
computed as described in paragraph 1726 under Com
ponents #23 and # 27, and their combined total has been
entered in the total column.

e. The allowance for Architectural service is determined ac

cording to the instructions contained in Section 16. It is
assumed for this example that limited architectural serv
ice is usually obtained for similar projects in the particular
locality, and that the customary charge for such service in
the locality is $150. This amount is entered in the “ Total”
column on the line opposite " Architectural service, " and a
qualifying notation is made.

f. The total of all costs included in the summary of replace
ment cost is the Estimate of Cost Required to Replace
Building Improvements in New Condition.

PART V

SECTION 18
COMPILATION AND RECORDATION OF DATA

CONTENTS
Paragraphs
1801-1806

General Instructions.--

Economic Background Data.

Economic Background Rating Form ---File of Economic Background Ratings and Summaries .
Valuation and Location Rating Data ---File of Established Ratings of Locations --

File of Valuation and Location Record Cards.Subdivision File .-Real Estate Market Data File .-

File of Maps and Plats ---File of Data on Legal Status of Property

File of Population Statistics ---

File of Rental Income Property Valuation DataProperty Rating Data ---

1807-1844
1811-1842
1843–1844

1845-1868
1849-1851
1852–1855

1856-1857
1858-1859
1860-1861
1862-1863
1864-1865
1866–1868

1869–1878

File of Established Ratings of Physical Security

1871-1872

File of Established Standards and Requirements .

1873-1874

1875-1876
File of Technical and Advisory Data --File of Catalogues of Construction Material and Equipment ---- 1877–1878
1879_1883
Borrower Rating Data ----Mortgage Insurance Allotment Record File
1880-1881

Credit Data File_ .
Construction Cost Data .--

1882-1883
1884

Effective February, 1938
Federal Housing Administration

PART V

SECTION 18

COMPILATION AND RECORDATION OF DATA

GENERAL INSTRUCTIONS

1801. Systematic compilation, orderly recordation, and

habitual reference use of valuation and risk rating data are required
of Preliminary Examiners, Architectural Inspectors, Valuators,
Mortgage Risk Examiners, Section Chiefs, and Chief Underwriters.
These operations are an established part of the routine of under
writing activity and are essential in the interests of uniformity, con
sistency, and accuracy. The following instructions deal with the

sources of information, the procedures to be used in compiling data,
the analysis and interpretation of data, and the recordation of data
in forms suitable for use. They do not deal with the application of
the data to valuation and rating problems. The use of data is pre
scribed and described in other sections of this Manual.

1802. Sound underwriting practice depends on adequate
data facilities. The quality of data determines the limits of the
zones within which estimates of all kinds will fall.

These zones

must be narrowed to practical limits which are sufficiently close to
gether to give reasonable certainty to conclusions and decisions.
1803. Data compilation must embrace a recognition of
the many qualities of data . The significance of any compilation is
modified by the probable accuracy of the information which it con

tains. The quality of data may be judged in part by the sources
from which they come, and in part by the nature of the material itself.
1804. The sources of information are usually local. Lit
tle of the information is secured by actual surveys made by the

Underwriting Staff. Most of the data are assembled from secondary
sources. Suggested sources are outlined below in connection with
the several kinds of data to be secured . Other data are supplied by
certain divisions of Washington Headquarters, such as the Technical
Division and the Division of Economics and Statistics.

1805. The following items are contained in the typical
Insuring Office data recordation system :
a . File of Economic Background Ratings and Summaries,
FHA Forms No. 2096 and 2096a. The Chief Valuator is

UNDERWRITING MANUAL

1805

responsible for this file which contains the results of ex
aminations of Economic Background Areas.
6. File of Established Ratings of Locations, FHA Form No.

2082. The Chief Valuator is responsible for this file
which contains the results of examinations and studies of

selected locations in outlined neighborhoods to establish
comparison criteria for location rating activities.
c. File of Valuation and Location Record Cards, FHA Form

No. 2073. The Chief Valuator is responsible for this file
which contains one card for each case processed .

d. Subdivision File, FHA Forms No. 2084 and 20840. This
file contains the results of examinations of subdivision

projects and the Chief Valuator is responsible for its
maintenance .

e. Real Estate Market Data File. This file contains data on

rentals, sales, occupancy , construction and other aspects
of residential properties, also significant community and

neighborhood characteristics including trends and transi
tions. The Chief Valuator is responsible for its main
tenance .

f. File of Maps and Plcts. Maps of cities, city plans, zoning
plans, and plats of subdivisions are the responsibility
of the Chief Valuator and are displayed on racks, stored
in cases, or appropriately filed in folders.
g. File of Data on Legal Status of Property. The Chief
Valuator is responsible for this file which contains data
pertaining to title and other legal aspects of ownership and
tenancy, distinctions between chattels and real property,
and legislative enactments or policies affecting the real
estate market.

h. File of Population Statistics. The Chief Valuator is re
sponsible for this file which contains population statistics
suitable for use in making market analyses, economic back
ground ratings, economic life estimates, valuations, neigh
borhood analyses and location ratings.

i. File of Rental Income Property Valuation Data . This file
is maintained by the Chief Valuator and contains infor
mation and experience data of use in making estimates
of revenues and operating expenses of rental income
properties.
j. File of Established Ratings of Physical Security. This file

is prepared and maintained under the direction of the
Chief Architectural Supervisor and serves both the Archi
tectural Section and the Valuation Section as criteria data

COMPILATION AND RECORDATION OF DATA

1805–1806

in connection with the establishment of correct ratings of
properties.
k. File of Established Standards and Requirements. These

are files of the Property Standards, Minimum Construc
tion Requirements, and rulings on new methods of

construction established by the Technical Division, Wash
ington Headquarters. The Chief Architectural Super
visor is responsible for the maintenance of the files or
handbooks containing these data.
1. File of Technical and Advisory Data. This file is prepared
and maintained under the direction of the Chief Archi

tectural Supervisor and contains advisory data on the
utility, durability, strength and other qualities of ma
terials.

m. File of Catalogues of Construction Material and Equip
ment. Manufacturers' catalogues, building material ad
vertising pamphlets, and all similar publications and

bulletins are maintained in available form by the Chief
Architectural Supervisor.
n . Cost Data Handbooks. These are prepared by the Cost
Analyst responsible for the compilation of construction
cost data and are under the jurisdiction of the Chief
Architectural Supervisor. They are used by both the
Architectural Section and the Valuation Section in con

nection with the estimation of the replacement cost of
buildings.
0. Mortgage Insurance Allotment Record File.

The Chief

Mortgage Risk Examiner is responsible for this file which
reflects the current status of formal commitments issued

with respect to a borrower for whom more than one com
mitment has been previously issued .
p . Credit Data File. This file contains credit data used in
analyses of requests for the establishment of lines of
credit with respect to those borrowers requiring recur
ring consideration . The Chief Mortgage Risk Exam
iner is responsible for its maintenance.
1806. The form and location of the above data items

should be selected with the object of facilitating and encouraging
the general, habitual, and effective use of the data by the staff. In
addition to the items listed above, each Insuring Office should estab
lish a General Subject File and Library in which miscellaneous pub
lications, reports, surveys, newspaper articles, and other items of
value are made available to the staff.

Economic trends and busi

UNDERWRITING MANUAL
1806-1810

ness conditions may be observed through the mediums of trade

journals and financial publications. Economic studies and the pub
lications of mortgage lending institutions provide a background for
the work of Mortgage Risk Examiners. The Chief Mortgage Risk
Examiner should mark material of particular value and require
it to be read by the members of the staff of the Mortgage Risk
Section. The same material will frequently be of interest to other
sections. All data compiled are the property of the Federal Hous

ing Administration and should always be available to the Director
and members of the Underwriting Staff. They should not be kept
in desks or locked files as this may cause great inconvenience during
the absence of certain members of the staff from the office.
ECONOMIC BACKGROUND DATA

1807. Economic Background Data consist of completed
Economic Background Ratings, FHA Forms No. 2096 and 2096a.
These data bear great significance because they reflect the income,
employment, and other factors which create cities and influence the

extent, character, and direction of city growth.
1808. Underlying economic factors within an Economic
Background Area will be revealed through the Economic Back
ground Rating Form which is compiled from (a) statistics dealing

with the volume, trend, and composition of population , ( 6 ) com
pilations relating to the cyclical fluctuations, trends, and diversifi
cations of industrial employment, and the cyclical fluctuations and
trends of commercial and specialty employment, (c) information
pertaining to natural resources, social and cultural advantages, busi

ness conditions, and legislative policies, and ( d) facts concerning
geographical, meteorological and topographical characteristics of
the area .

1809. Information and statistics used to compile Eco

nomic Background Data should be very carefully weighed and se
lected.

A large portion of them will be drawn from other data files

of the Insuring Office, namely: Real Estate Market Data File, File
of Maps and Plats, File of Data on Legal Status of Property, and
File of Population Statistics. The remainder will be drawn from
sources tabulated in Paragraph 1844 .
1810. Compilation and Recordation of Economic Back

ground Data. Chief Valuators are directed to take the following

steps in establishing Economic Background Ratings:
a. One Valuator is designated, whenever possible, to make
and to review periodically Economic Background Rat
ings. This work is under the direct supervision of the

COMPILATION AND RECORDATION OF DATA

1810–1812

Chief Valuator, who is held responsible for its proper
continuance. It is highly desirable that the area being

rated be visited, although it is not always necessary.
6. Areas for rating are selected on the basis of the volume of

business, in order that the ratings will be properly com
pleted at an earlier date in those areas where current
business is the greatest.

c. Economic Background Ratings shall be made in accord
ance with these instructions for all areas from which 10
or more mortgage insurance applications have been re

ceived . Other areas may be rated on a comparative
basis.

d. Two Economic Background Rating Record Cards, FHA
Form No. 2096a, are prepared for each rating made. To
facilitate frequent reference, a card for each area rated

should be filed alphabetically in the Valuation and Loca
tion Record file .

e. Immediately upon rating an area and completing FHA
Form No. 2096a, three reports are transmitted to the

Underwriting Division, Washington, D. C., as follows :
1. A summary report on the Economic Background of the

area , paralleling those reports supplied Insuring
Offices by Washington Headquarters
2. Completed Economic Background Rating Form , FHA
Form No. 2096

3. One completed Economic Background Rating Record
Card, FHA Form No. 2096a
1811. Economic Background Rating Form. The Eco

nomic Background Rating Form provides three categories:

a. Industry (Manufacturing, Assembling, Fabricating and
Refining )
6. Specialty ( Embracing activities not specifically covered
under Industry and Trade, such as exploitation of natural

resources, tourist resorts, educational centers, and political
capitals.)
c. Trade ( Trade, Finance, and Transportation )
1812. The initial step is the gathering of information
pertinent to the economic structure of the area under consideration.
This material embraces, (a) the nature and history of the principal

economic activities prevalent in the area under consideration, (6 )
the nature, size and stability of industrial and commercial activities
within the area, (c) population trends, including rate of growth and

UNDERWRITING MANUAL

1812-1815

racial, age , and family distribution, (d) natural resources, and (e)
miscellaneous items such as type of tenure prevalent in the commu

nity, distribution of incomes, taxation policies and schools and cul
tural institutions. Unusual factors encountered , not provided for in

the rating form , such as exceptional growth or decline, geographical
or climatic peculiarities, or unusual industrial conditions, are impor

tant guides to judgment and should be fully considered .
1813. The next step is to analyze the material to de
termine which categories apply to the area. In most large areas both
the Industry category and the Trade category will apply. In

smaller areas, other than manufacturing centers, the Trade category
alone may apply. Specialty cities require the use of the Specialty
category . If a category does not apply to the economic background
being considered, it is omitted . This determination is made by ascer
taining whether 5% or more of the persons employed in the Eco
nomic Background Area are employed directly in the activities cov
ered by the category caption. If less than 5% are so employed , no

consideration is given to that category. For example, if, in a given
Economic Background Area, 23 % are employed in industry and the
balance in trade, only the Industry and Trade categories are used
and the Specialty category is ignored .
1814. The second step is to establish the weight to be
ascribed to each of the applicable categories. If the number em

ployed in Industry and Specialty activities cannot be determined
from statistics, reasonable estimates should be made. The percent
age of the total number employed in each of the applicable cate
gories except Trade is multiplied by two to determine the weight.
This calculation is necessary under the assumption that for each per
son employed in the activities embraced in the category there is
another employed in servicing activities within the area . The weight
for the Trade category is determined by subtracting the sum of the
weights of the other applicable categories from 100 % . For example,

if the total number employed is 4,100, of whom 575 are employed in
industry, the ratio of 575 to 4,100, or 14% , is established . This

factor multiplied by two equals 28% , the Industry category weight.
If 250 persons are engaged in state or governmental activities, the
ratio is 250 to 4,100, or 6% . This factor multiplied by two equals
12 % , the Specialty category weight. The sum of the Industry and
Specialty category weights, 40 % , subtracted from 100 % leaves 60 % ,
the Trade category weight.
1815. In certain instances, due to the large number em

ployed in the activities embraced in one category, the resulting cate
gory weight exceeds 100 % . In such cases it is to be assumed that

COMPILATION AND RECORDATION OF DATA

1815–1818

those engaged in trade are absorbed by the servicing activity and
hence no weight will be obtained for Trade. For example, if 2,600
persons are employed, 1,600 of whom are engaged in industrial activi
ties, the ratio of 1,600 to 2,600 , or 62 % , is established. This factor
multiplied by two equals 124 % . The Industry category weight is
then arbitrarily reduced to 100 % , with no weight resulting for Trade.
1816. The next step is to rate the features in the ap

plicable categories on the Economic Background Rating Form in
accordance with the instructions given below covering each category.

These ratings are made by entering X marks in the appropriate
spaces, carrying the indicated feature weights to the column cap
tioned Rating, multiplying each category weight by the sum of its
respective feature weights, and extending the products to the right
hand column to be added . The completed sample form shown in

paragraph 1843 illustrates the correct procedure.
1817. The final step is the calculation of the Economic
Background Rating. This is accomplished by multiplying the sum
of the category ratings by the applicable Scope of the Market factor.

The Economic Background Rating thus calculated is the 5 column
weight for the feature, Relative Economic Stability, of the Rating
of Location grid on the Report of Valuator. The other column
weights of the feature are computed , the nearest whole number being
used in all instances, and the final record transferred to the Economic
Background Rating Record card . The 5 column weight for the
feature, Relative Economic Stability, may never be less than 10
points. Hence, if the rating calculated falls below 10 points, an
arbitrary rating of 10 points must be assigned . In such a case,
extreme weakness in the Economic Background Area is indicated.
1818. The Economic Background Rating is an expres
sion of a portion of the hazard to which mortgage funds are sub
jected and is strongly influenced by the employment opportunities
and the marketability of residential properties in the area under

consideration. In the course of time residential property values in
any community are affected by the action of economic forces, which
are extraneous to any given property and which operate over a wide
area . It is usually assumed that an increase in employment will be
accompanied by the maintenance of the level of the earned incomes
of employed persons. Therefore consideration is given to the volume
and trend of employment rather than to payroll amounts. Since the

risks involved in mortgage investments lie in the future, the Eco
nomic Background Rating should reflect the probable future trends
of employment. Such forecast should embrace at least a ten to
twenty year period.

UNDERWRITING MANUAL

1819-1822

1819. Industry Category Rating. Industry includes
manufacturing, assembling, fabricating, and refining of products for

distribution beyond the borders of the Economic Background Area
under consideration. Employment in agricultural activities is not
included in the Industry category. The Industry category is divided
into three features, ( a) Predicted Employment Trend , (6 ) Diversifi
cation, and (c ) Cyclical Fluctuations.
1820. Predicted Employment Trend . The rating of this
feature should express the net result of weighing all favorable and
unfavorable factors affecting the trend of employment, except cy

clical fluctuations which are independently rated in the third fea
ture . In making the forecast of the trend of employment, care
should be exercised to determine the long time trend. Short time

movements are usually those which act in sympathy with temporary
nation -wide fluctuations. Limited significance is attached to a de
cline in local employment during a temporary period of nation -wide
decline such as occurred from 1929 to 1933, but a downward long
time trend is evidenced if over - all local employment runs counter to

expanding industrial employment such as occurred in the United
States during the period from 1921 to 1929. There are many com
binations of factors that may deserve consideration. A few are
reviewed in the paragraphs immediately following. All important
factors are to be taken into account whether or not they are
mentioned here.

1821. The permanence of the market or the demand for

the type of goods produced in the area is one of the fundamental
considerations. Industries producing articles subject to the caprice
of the market lack the stability of those industries producing branded
food products, machinery, glassware and similar products of strong

demand . However, the stability of an industry is not always indi
cated by the determination of whether the goods produced are neces
sities or luxuries, because there are many conventional products such

as cosmetics, cigarettes, and a number of luxuries, that have all the
indications of a permanent and stable market. Whether the demand

for the article produced is local, regional or national is important.
For example, a depression confined to one small section of the
country would not seriously affect the automobile or cigarette
industries.

1822. The demand for the particular brand of a com
modity manufactured in the area should be fully considered. The
automobile industry as a whole has had a remarkable growth , but

many individual automobile companies have failed . Hence, each
important industry must be considered with respect to the stability

COMPILATION AND RECORDATION OF DATA

1822-1824

of the demand for competitive brands. A new industrial enterprise
without an established market for its product does not merit the
same weight as does another industrial enterprise with an established

market. The demand for a product may be excellent, but the manu
facturers in a given area may be unable to compete with manufactur
ers producing the same article in other areas because of high labor
costs, high taxes, unfavorable freight rates, remoteness from the
principal markets, or from supplies of raw material, and other
factors. In such cases, the local industry may be expected to suffer
from competition with industries in other cities, and the effects, as
far as the particular city is concerned , will be just as injurious as if
the demand for the product declined. The relative costs of pro
duction of competitive plants within an industry are difficult to
ascertain but can be inferred from the general trend of grow
If

the output of local plants is growing faster than the national output
of the same product, it may be assumed that the local plants are in
a strong competitive position and are producing on a relatively
favorable basis.

1823. Single-industry areas are usually extremely haz

ardous. The industrial advantages of most large metropolitan areas
are such that if some industries move away, others will enter, thereby

maintaining a balance in the number of people actually employed . It
is not the number of industries, but the volume of employment af
forded that is vital in establishing the rating of the feature Predicted
Employment Trend. Increases in employment offered by one large
industry may offset decreases in many smaller ones. It is the num

ber gainfully employed and the accompanying trend that indicate
demand for housing. The effect of seasonal employment fluctuation,

insofar as it affects the continuity of incomes, must also enter into
consideration in rating this feature. Certain areas may have excel
lent employment conditions from the standpoint of diversification
and cyclical fluctuations, but, due to the seasonal nature of the
activities, an undesirable situation may exist.
1824. In considering these factors it must be remembered

that a serious weakness in any one may have a pronounced effect on
the rating. Even if the general demand for a product is exception
ally good , if the plants in the city cannot produce it in competition
with plants in other cities, this competitive weakness may be decisive.
Or, if the plants in a city can produce a product at exceptionally low
costs but the general market for the product declines, then the low
cost is of little avail. The person rating the area must always bear

in mind that the total anticipated volume of employment in the area
is the fundamental consideration and he should carefully weigh all

UNDERWRITING MANUAL

1824-1829

the elements that may affect it favorably or unfavorably. Of the
Industry category features, Predicted Employment Trend is con
sidered the most important and is given a weight of 70 % .

1825. Diversification of Industry. Diversification of in
dustry is a favorable factor. In a general economic depression,
employment in some industries usually declines farther and faster
than in others, with the result that the net decline is generally less
in those areas enjoying the greatest diversification. If there is ample
diversification of industry, the cyclical fluctuations of different indus
tries tend to counterbalance each other, resulting in greater stability

of employment. If 50% or over of all the industrially employed in
a city are employed in the plants of a single industry , the lowest

rating is given this feature. If less than 10% of all the industrially
employed are in a single industry, the highest rating is given.
1826. Cyclical Fluctuations. Economic Background
Areas that show extreme fluctuations in employment from prosperity

to depression do not possess the stability of areas subject to less fluctu
ation . Statistics can be obtained showing the percentage of minimum
employment to maximum employment for the period 1921 to 1933 in
metropolitan areas having populations in excess of 25,000. Areas are
considered most stable where there has been a decline of 10% or less
in employment from the peak year to the period of depression. Those
where the decline has been 50% or more are considered least stable.
In smaller areas for which adequate statistics cannot be obtained, the

Valuator should ask local bankers or other reliable, well informed

sources about the extreme fluctuations in employment and the date
of their occurrence in order to secure a basis for rating this feature.
1827. Specialty Category Rating. In the Specialty cate
gory , employment resulting from activities not specifically covered
under Industry and Trade is considered . It may also apply to an

activity typical only to a particular section. Agriculture will not
be considered under the Specialty category.
1828. Predicted Employment Trend. Of primary con

sideration is the trend of employment which can be anticipated to
result from the activities during the forecast period. As in industry,
only the predominant trend is to be considered . Two facts, the life

of the merchantable supply and the cost of production, must always
be weighed when considering activities classified as exploitation of
natural resources, such as mining, lumbering, fishing, and oil
extraction .

1829. Either short life of the supply, excessive cost of
production, or lack of continued demand will indicate instability of
employment. A low cost of production is of no advantage if the mer

chantable supply will be exhausted in a short period of time. Simi

COMPILATION AND RECORDATION OF DATA

1829–1833

larly, it matters little if there is a vast supply if it cannot be extracted
at a cost less than the market price. Such resources may , at some
future time, come into the field of profitable operation as the result

of new techniques or higher market prices, but such a speculative pos
sibility should not be considered in rating this category. The highest
rating in the category is given to areas with the largest supply of
these resources and the lowest cost of operation, coupled with a strong
demand for the product and evidence of increasing employment.
1830. When rating tourist resorts, educational centers,

and political capitals, it is important to consider employment given
to the area as the result of persons bringing money to it from out

side sources, or drawing their support or income from regions or
persons outside the area . Accordingly, the rating is governed by
employment resulting from tourists, outside students , non - resident

taxpayers, or residents whose incomes are received from outside
the Economic Background Area . In rating this feature, the attrac
tiveness of the area as a particular type of center, its continued
drawing power, its income and social characteristics, and the wealth
of the region supporting it, must be weighed .
1831. Generally, because of the instability and uncer
tainty of tourist resorts, the rating of this category for an area pre

dominantly of this type is lower than apparent from surface
indications. However, a resort that has acquired, to a considerable

degree, a year-round character and has demonstrated marked stability
may be rated fairly favorably. Accurate statistics for employment
resulting from tourist activities are generally not available. The

Valuator estimates as accurately as possible, after investigation, the
number of persons employed in such activities.
1832. Political capitals may be considered in most cases
as immovable.

Contractions and expansions of state or county

functions decrease or increase the volume of governmental employ

ment. The relative wealth of the state or county, and the legisla
tive policies, should be considered in this connection. The political
capital of a state or county with declining population or resources
may be forced to curtail its expenditures for governmental functions,

with a consequent reduction in employment. The same effect would
result from decentralization of these functions.

1833. Educational centers are usually established to a
degree which precludes likelihood of reduced employment resulting
from the removal of educational institutions.

Consideration should

be given , however, to the difference in the rate of growth of the
larger universities and the resulting effect upon employment trends
in their respective centers .

UNDERWRITING MANUAL

1834-1837

1834. Cyclical Fluctuations. If more than one activity
is involved, it is necessary to measure the effect of the fluctuation
in its relation to all the employment estimated for the category.
In the event only one activity is being considered , the fluctuation is
more easily measured, and therefore more readily ratable. If data
for accurate determination are not available, reasonable estimates may
be used .

1835. Trade Category Rating. In the Trade category ,
trade, finance, and transportation are considered. The term , Trade,
includes retail, wholesale, jobbing, and other distributing activities
with the region outside the Economic Background Area under con
sideration .

It does not include trade with those who reside in the

Economic Background Area, inasmuch as that is considered in as

signing the multiplier 2 for servicing activities heretofore mentioned.
In some cities trade factors are of paramount importance, in others
they are relatively minor elements.
1836. Predicted Employment Trend . The rating of this
feature involves an analysis of the trade region, taking into con
sideration its population, natural resources, and purchasing power.
A serious decline in the purchasing power of the trading region
would reduce the number employed in trade in the Economic Back
ground Area. The purchasing power of the trading region may

decline because of a number of conditions, such as the growth of
competitive cities, loss of soil fertility, exhaustion of mineral re

sources, loss of manufacturing plants, decline in population, de
crease in incomes or inherited wealth of the region, or a combina
tion of these factors. On the other hand , the trading region may

increase in purchasing power because of an increase in its popula
tion or income, discovery of new resources, more intensive culti
vation of the adjacent areas, or because of additional land being
placed under cultivation .

1837. Diversification of employment within the Eco
nomic Background Area afforded by the activities classified under
the Trade category, as well as the diversification of types of trading

activity with the region outside the Economic Background Area, is
to be considered because these factors definitely affect employment

trends. If a community is dependent entirely upon trade with the
outside region which lacks diversification of activity, an undesirable
condition may be indicated. An example of this is the plight of a

community entirely dependent upon trade from its surrounding one
crop agricultural area , when left with little more than subsistence

support during periods of crop failure.

COMPILATION AND RECORDATION OF DATA

1838–1843

1838. Cyclical Fluctuations. If dependable statistics are
not available, from which a satisfactory determination of cyclical
fluctuations of employment in trade can be made, an estimate based

upon the best information available should be the basis of rating
this feature. In many cases the percentage of minimum to maxi
mum employment in trade from 1921 to 1933 will parallel the
cyclical fluctuation of the principal category indicated in the Eco
nomic Background Rating.
1839. Adjustment for Scope of the Market. The Scope
of the Market refers to the degree of marketability of residential
properties at current value levels in the Economic Background Area .

1840. The Scope of the Market is a reflection of the

ability of financially capable purchasers to absorb the housing avail
able to the market at current value levels.

It embraces a considera

tion of many factors and is affected by (a) the income characteristics

of the population contrasted with the types of housing available,
( 6 ) the percentage of home ownership , (c) the ratio of residential
property foreclosures to total residential property transfers, and

(d) the gross population of the area. The test of the Scope of the
Market is whether a typical property can be readily sold to a
financially capable purchaser at current value levels.
1841. The Scope of the Market adjustment feature has
five columns to reflect the various degrees of marketability, namely,
( 1 ) Poor, (2) Limited , (3) Moderate, (4 ) Satisfactory, and (5 )

Good. It may prove desirable, in some cases, to use an " in between ”
weight, such as 22 or 37, as the applicable Scope of the Market
factor. The use of this factor is largely a matter of judgment and

the soundness of its application will, to a measurable degree, deter
mine the soundness of the Economic Background Ratings estab
lished .

1842. The accompanying Economic Background Rating
Form has been executed in a manner to demonstrate the mechanics

of rating. The name of the city is fictitious and hypothetical sta
tistics are employed for the purposes of this illustration .
1843. File of Economic Background Ratings and

Summaries. Completed Economic Background Rating Forms, FHA
Form No. 2096 , and summaries, together with the data used in their

compilation, should be filed in folders, using a separate folder for
each area rated. The ratings are recorded on Economic Background

Rating Record cards, FHA Form No. 2096a, and filed in the Valua
tion and Location Record Card file immediately behind the guides
representing the respective cities rated . Some of the data used in

UNDERWRITING MANUAL
1843
YHA Form No. 2006
( Roy . Dec. 14, 1987)

FEDERAL HOUSING ADMINISTRATION
ECONOMIC BACKGROUND RATING FORM
Columbia

Parker ..

City...
Economic background area .....Zenith.
( Principal city )

Rating . 30

( State )

( County)

89.800

1936 .

(Estimated )

1930 ...85.900 .
Population - 1920...78.500 .
r ..
Date of rating . December 15 ..1937........ made by .... Jeha.Sad.th ...ChiefValuato
(Nome)
SELECTION AND WEIGHTING OF CATEGORIES
NUMBER EMPLOYED
(Statistical or estimated )

CATEOORIES

CATEGORY WEIOSTS

PERCENT OF TOTAL

100 %

39,720

100 %

12,310

X2

62 %

Industry

31 %

3.200

8 %

X2

Specialty

16 %

Total

100 % minus sum of other category weights in last column

Trade

INDUSTRY CATEGORY (Manufacturing, Assembling, Fabricating, and Refining)

2

Decline of

10% and

Predioted Employment
Diversification

Cyclical Fluetuations Percentage of Minimum to

50 %

or

1 % to 9%

over

em-

ployed in
the larg.
est indus-

30 % to
49% employed in
the larg .
est indus-

try

try

Less than
50 %

50 %

Increase
of 5 % to
9%

Deeline of
0 % to in-

over

Trend

WEIGHTED
RATINO

RATING

2

Decline of

crease

of

4 %
20 %

to

X

to

Less than
10% em

ployed in
the larg .
est indus

est indus-

est indus

to

and over
66

ployed in
the larg .

59 %

of 10 %
x

10 % to
19% employed in
the larg-

29 % em-

try
60 %
69 %

ineresse

try
570 %
79%

9

try

80 % to
100 %

to

15

Maximum Employment.
1921 to 1933

Category Weight 62 % X74

SPECIALTY CATEGORY (State Type of Activities)Zenith University , Political (Stato Cepital )
Employment

Cyclical Fluctuations Percentage of Minimum to
Maximum Employment.

Decline of
10 % and

14 Decline of
1 % to 9 %

23 Decline of
0 % to in
crease of X
4%
13 60 % to
69 %
x

over

Less than

50 %

50 %
59 %

to

RATING

5

3

Predicted
Trend

Increase

of 5% to
9%
7007
79 %

35 Increase
of 10 %

TO

and over

80 % to
100 %

to

18
Category Weight 16 % X60

1921 to 1933

=

TRADE CATEGORY ( Trade, Finance, and Transportation )
RATINO

3

Decline of

Predleted Employment
Trend

10% and

17 Decline of
1 % to 9 %

34

over

Decline of

BT Increase

0 % to in

of 5 % to
9%

crease
4%

of

60 %
69 %

to

x

Increase
of 10 %
and over

35

68
15

than

50 %

to

59 %

10

Cyclical Fluctuations Per Less
centage of Minimum to 50 %
Maximum Employment.

9

70 %
79 %

to

80 % to
17 100
%
X
12

1921 to 1933

18 %

Category Weight 22 % X 80

Sum of Applicable Category Ratings
SCOPE OF THE MARKET
1

Poor

Degree of Marketability

$

2

20 Limited

Moderate

39 Satisfac

35

RATINO

Good

tory

40

ECONOMIC BACKGROUND RATING (Sum of Applicable Category RatingsX Scope of Market Factor)

Column
Weights Established for " Relative Economic Stabil
6
12
18
ity " Feature
List the cities, towns, villages, and communities included in this economic background area.

24

30

COMPILATION AND RECORDATION OF DATA

1843-1846

compiling the Economic Background Rating Form will be secured
from other files established under these instructions. It is not neces

sary to separate such data from their parent files and file them with
the Economic Background Rating Form .
1844. Sources of Economic Background Data .
a . Chambers of commerce
6. Real estate boards
c. Industrial bureaus

d. Industrial corporations
e. Employment agencies
f. Financial institutions

g. Utility companies
h. Clearing house associations
¿. Educational institutions

. Labor organizations

k. Agricultural agents
1. Publications of U. S. Chamber of Commerce

m. Publications of city, county and state governments
n . Bureaus of vital statistics

o. Reference to other Insuring Office Data Files, especially the
File of Population Statistics
VALUATION AND LOCATION RATING DATA

1845. Exhaustive analyses, reliable forecasts, and de
pendable conclusions with respect to neighborhood influences must
be founded upon the intelligent use of accurately compiled and con

veniently recorded valuation and location rating data. Experienced
appraisers frequently make fair approximations of location charac
teristics from appearances only, because they have acquired consid
erable knowledge of the visible or surface factors which affect loca
tions. Such conclusions are unreliable because they are assumptions
predicated upon random generalities instead of carefully compiled
factual and informative data. The data program is not a second

ary function of an Insuring Office. It is a fundamental aspect of
the primary function of insuring economically sound mortgages.
1846. Valuation and location rating data include various
types of neighborhood data. The distinction between economic back
ground data and neighborhood data is that the former comprise
factors which have some degree of influence on all locations within

an Economic Background Area, while the latter consist of factors
whose influences are more circumscribed and frequently more direct
and forceful.

UNDERWRITING MANUAL
1847-1850

1847. The Chief Valuator is responsible for the intro

duction and maintenance of the following files which are required
for valuation and location rating data :
a. File of Established Ratings of Locations
b. File of Valuation and Location Record Cards
c. Subdivision File
d . Real Estate Market Data File

e . File of Maps and Plats
f. File of Data on Legal Status of Property
g. File of Population Statistics

1848. Following is a detailed description of each of the
required data files listed above. The Chief Valuator will deviate

from these instructions only when it is clearly evident that the adop
tion of some alternate method of filing is essential to the proper
functioning of the Valuation Section.
1849. File of Established Ratings of Locations.
Completed Established Ratings of Locations, FHA Form No. 2082,
should be filed in ring binders according to the following sequence :
a. The forms are first divided into groups and the groups

alphabetically arranged according to Economic Back
ground Areas.

6. The forms in each Economic Background Area are then
arranged numerically .
1850. Each Established Rating of Location will be

numbered in accordance with a symbol consisting of the following:
a. Assigned Number. In each Economic Background Area
the assigned numbers will begin with “ 1 ” and run con
secutively.
6. Racial Occupancy Designation . This will be a letter in

dicating predominating racial characteristics, as follows:
W

— White

M – Mixed

F - Foreign

N - Negro
c. Price Range Symbol. This consists of the first digits of the
lowest and the highest amounts listed in the price range.

d . Typical Property Value Symbol. This will consist of the
first digit, or digits, in the amount listed as the value of
the typical property. For example, Outlined Neighbor
hood No. 28 is found to be predominantly of white racial

COMPILATION AND RECORDATION OF DATA
1850-1853

occupancy , with properties ranging in price from $ 7,000 to

$ 12,000 and the typical property having a price of $ 9,000.
The Outlined Neighborhood and the corresponding Estab
lished Rating of Location will therefore be assigned the
following number : 28W7–12–9. If it is desirable to pro
vide for more than one Established Rating of Location in

the same Outlined Neighborhood for other significant
price ranges, such additional ratings shall be designated

by adding the letter A, B or C to the assigned number,
Additional copies of Established
Ratings of Locations for the use of Valuators as pre
scribed in Section 9, Rating of Location, shall be filed in
the same manner as described above. Outlined Neighbor

thus : 28A , W7–12–9.

hoods will be numbered on Outlined Neighborhood Maps

in accordance with the above prescribed method. These

maps are used in conjunction with Established Ratings of
Locations but shall be filed in the File of Maps and Plats
described below .

1851. Sources of Established Location Rating Data.

The only data included in this file are the completed Established Rat
ings of Locations, FHA Form No. 2082. Useful information in the

completion of these forms should be available in the Economic Back
ground Data File previously described and in the six data files de
scribed below .
1852. File of Valuation and Location Record Cards.

These cards, FHA Form No. 2073, should be filed according to the
following sequence :

a. The cards are first divided into groups according to Eco
nomic Background Areas and the groups alphabetically,
arranged .
6. Each Economic Background Area is then subdivided ac

cording to Outlined Neighborhood Areas which are to be
arranged numerically.

c . The cards in each Outlined Neighborhood Area shall be ar
ranged alphabetically by streets and numerically by house
numbers on respective streets.
1853. Valuation and Location Record cards should be

used to record the following information :
a. Occupation of Applicant
b. Business of Employer
c. Total Annual Income

d. Photograph of Property

UNDERWRITING MANUAL
1854–1857

1854. To facilitate analyses of rental areas or over

supply, undersupply and conformity of structures by use -types, these
cards are furnished in the following four color classifications :

a . White : all one family structures, both new and existing con
struction, except when blue is used .
b. Buff : all two or three family structures, both new and exist
ing construction, except when blue is used .
c . Yellow : all four family structures, both new and existing
construction, except when blue is used.
d . Blue : all cases rejected because of Rating of Property or
Rating of Location.
To facilitate frequent reference use, this file shall also
contain the Economic Background Rating Record cards,

FHA Form No. 2096a. These shall be filed immediately
behind the guides representing their respective Economic
Background Areas.

1855. Sources of Valuation and Location Record Card
Data. The only data included in this group are the completed

Valuation and Location Record Cards. Information required in the
completion of these forms will be drawn from Report of Architec
tural Inspector, FHA Form No. 2014, and Report of Valuator, FHA
Form No. 2015.
1856. Subdivision File .

The data in this file consist of

the following completed forms and required exhibits :
a. Subdivision Information Form , FHA Form No. 2084. It is
contemplated that the sponsor will present the completed
form with exhibits in duplicate.

b. Chief Underwriter's Subdivision Report, FHA Form No.
2084a. This form calls for the conclusions of the Insuring

Office as contrasted to the Subdivision Information Form ,
which calls for factual answers.

c. Copies of constructive suggestions transmitted to sponsor or
of rulings contained in commitments previouly issued .
Individual folders should be used for filing the data per

taining to each subdivision . These should be indexed by

the names of subdivision tracts and arranged alphabeti
cally, according to counties. The folders should carry an
assigned number which is also used to indicate the location

of the subdivision on county maps suitable for this purpose.
1857. Sources of Subdivision Data . The only data in
cluded in this file are the completed subdivision forms above referred
to with attached exhibits. Information in the compilation of these

COMPILATION AND RECORDATION OF DATA
1857-1859

forms should be available from subdivision sponsors, previous deci
sions, and from other data files of the Valuation Section .
1858. Real Estate Market Data File. This file should

contain data with respect to offerings, rentals, sales, mortgage incum
brances, occupancy percentages, demolitions, condemnations, and con
struction of residential properties. It should also contain charts,

graphs, pamphlets, tables, and memoranda of significant community
and neighborhood characteristics including trends and transitions.
This information may come in the form of published reports, news

items, classified advertisements, and trade publication articles, and
should be properly dated upon filing. Because of the irregularity
of the style in which it is found, either or both of the following filing
methods may be employed .

a . Newspaper clippings, classified advertisements, and similar
material may be pasted or transcribed to 4 x 6 cards and
filed in the File of Valuation and Location Record Cards

behind the rating cards and according to Outlined Neigh
borhoods.

b. Such material approximately 842 x 11 in size may be placed
in ring binders. Material of smaller size may be pasted or
transcribed to sheets for filing in ring binders. In all

cases, the data are to be filed by Outlined Neighborhoods
unless they are not susceptible to such division.
1859. Sources of Real Estate Market Data .
a. Market analyses prepared by Division of Economics and
Statistics, Federal Housing Administration
b . Real estate boards

c . Real estate brokers

d . Lending institutions and agencies
e. Housing authorities
f. Newspapers
g. Real estate rental and sale offering sheets
h. Official records
2. Case binders

j. University research studies
k. State banking departments
1. Local informed persons

m. Federal Housing Administration block maps
n. Real property inventories
o. Telephone company research bureaus
p. Chambers of commerce
Boards of education

2.

UNDERWRITING MANUAL
1859-1861

r. Utilities and park commissions

8. Transportation companies
t . Zoning and planning commissions
U. Reference to other Insuring Office data files
1860. File of Maps and Plats. Many of the functions

of an Insuring Office require frequent reference to appropriate maps
and plats. They should be carefully filed to expedite required use
and to avoid unnecessary wear and tear. Continual unfolding and
folding of maps tend to destroy them. Therefore, maps and plats

most frequently used should be filed open and flat upon suitable map
racks or upon individual pieces of thin wall board. A large scrap
book approximately 18 x 25, of the type generally used by advertising
agencies to preserve full page display ads, is an excellent file for
maps of appropriate size. Other maps infrequently used may be
filed in folders. The three methods of filing maps and plats and
their respective uses are therefore as follows:
a. Frequently used maps and plats should be filed open and
flat on suitable map racks or thin pieces of wall board .

Maps in this group consist of State or District map show
ing Economic Background Areas, railroads and highways ;
maps of active Economic Background Areas showing out
lined neighborhoods, transportation lines, parks, play

grounds, schools, cemeteries and railroads; and zoning
maps.

3. Less frequently used maps and plats, such as those of in
active Economic Background Areas, geological survey
maps and maps of mining operations, may be kept in
large scrapbooks. These should be securely fastened to
the leaves of the book to avoid unnecessary wear and tear.

c. Infrequently used maps and plats may be filed in folders.
Unless frequently used, it is preferable to keep subdivi
sion maps in their respective subdivision folders.

1861. Sources of Data for File of Maps and Plats.
a. City engineers' offices
6. Map makers and publishers
c. Bookstores

d. Local draftsmen and engineers
e. U. S. Department of Interior ( Geological Surveys)
f. State mining bureaus
9. Extractive trades associations

h. Mining operating companies
¿. U.S. Post Office Department

COMPILATION AND RECORDATION OF DATA

1862

1862. File of Data on Legal Status of Property.

These data fall into three general classifications, namely, (a) Title
and Other Legal Aspects of Ownership and Tenancy, ( b ) Distinc
tions between Chattels and Real Property, and (c ) Legislative Enact
ments or Policies Affecting the Real Estate Market. Individual
pieces contributing to these data will show considerable variance in
size, style and form , and therefore do not lend themselves to a simple
and precise method of filing. Ring binders and folders are prob
ably the most acceptable filing mediums for this material. Bound

volumes, if any, should be kept together in a convenient place. The
liberal use of memoranda to record known conditions with respect
to all phases of these data is strongly recommended . Three gen
eral classifications of material, filed in binders or folders, are
recommended , as follows:
a . Title and Other Legal Aspects of Ownership and Tenancy .

This group should include data pertaining to the nature
and characteristics of titles and the nature of and dis

tinctions between estates in real property ; restrictions,
easements, tenants' rights, leases, conveyancing, rights of
way, and reservations. Copies of deed restrictions should
be retained in the Subdivision File ,

b. Distinctions between Chattels and Real Property. This
group should include opinions of the Legal Division sup
plied to the Insuring Office with respect to the items to be
construed as parts of the realty or as chattels; also mem
oranda setting forth the public customs as to what items
of equipment and accessories are considered as part of
the real property.

C. 'Legislative Enactments or Policies Affecting the Real Es
tate Market. This group falls into three logical classifi
cations. The first is Zoning Ordinances and Planning
Regulations. These are usually in book form with accom
panying maps. Zoning maps of active areas should be
filed as directed above under File of Maps and Plats. The
second classification is Taxes and Special Assessments.
It should contain data on the subjects of taxation policies,
taxation rates, nature and duration of special assessments
in each Economic Background Area within the jurisdic
tion of the Insuring Office. The last of the three classi

fications is Building Codes and Fire and Police Protection
and Regulations. Information on these matters is usually
obtainable in booklet or circular form from the municipal
building inspector, boards of health, and the fire and
police departments.

UNDERWRITING MANUAL
1863–1865

1863. Sources of Data on Legal Status of Property.

a. Recording offices
b. State legislative reference bureaus
c. Real estate boards

d. Abstract and title offices

e.
f.
g.
h.

Subdivision developers
Deeds containing restrictive covenants
Insuring Office applications
Legal Division of the Federal Housing Administration

i. State statutes

j. Municipal building inspection bureaus
k. Apartment or tenement house commissions
1. Boards of health
m. Housing authorities

n. Municipal fire and police departments
o. City assessment bureaus
p. City engineers' offices
1864. File of Population Statistics. These data are

used chiefly in conjunction with material in the File of Economic Back
ground Ratings and Summaries and with outlined neighborhoods in
the Valuation and Location Record Card File. They are also used
with material from the Real Estate Market Data File and the Subdi

vision File. Because of the varied uses of population statistics, it is
desirable to have such data remain assembled, for reference purposes,
rather than to attempt a division of them according to their some
what overlapping uses. This file should contain , usually in book or
pamphlet form , such population statistics as embrace number, race ,

color, age, family size, tenant and owner status, changes in number or
otherwise, incomes and occupations, and such other classifications as
will further aid in making market analyses, economic background

ratings, economic life estimates, valuations, neighborhood analyses,
and location ratings.
1865. Sources of Population Data.
a . Bureau of Census publications

b. Current population estimates of Bureau of Census
c . Publications of the U.S. Chamber of Commerce
d . Bureaus of vital statistics

e. City directories
f. University research bureaus
g. Real property inventories
h. Federal Housing Administration block maps
i. Telephone company research bureaus

COMPILATION AND RECORDATION OF DATA
1865-1866

j. Housing authorities
k. Local informed persons
1. Case binders

1866. File of Rental Income Dwelling Valuation
Data . The data in this file consist of historical analyses of revenues
and expenses of rental income dwelling properties. The analysis of

each property should include data on as much of the past 10 years'
experience as is obtainable, and such data should show a logical
classification of the income and expense items. To each analysis
should be attached a photograph, address and description of the prop
erty, and, if possible, a plot plan and floor plan. The classification of
revenue and expense items for each year covered by the analysis
should include the following :
a. Revenues

1. Apartment units
2. Basement space
3. Garages

4. Miscellaneous revenues
5. Total Revenue Collections

8. Expenses
1. Advertising
2. Commissions

3. Alterations for tenants
4. Office salaries
5. Office expense

6. Legal and auditing expense
ny. Telephone
8. Expense of collections
9. Management fees
10. Miscellaneous

11. Total Renting and Administrative Expense
12. Heating and ventilating
13. Janitor

14. Lighting
15. Refrigerating
16. Water
17. Gas.

18. Garbage and rubbish removal
19. Protection

20. Grounds expense
21. Cleaning
22. Extermination

UNDERWRITING MANUAL
1866–1867

23. Miscellaneous

24. Total Regular Operating Expense
25. Repairs to structure
26. Repairs to equipment and fixtures
27. Painting

28. Decorating
29. Structural replacements

30. Equipment replacements
31. Miscellaneous

32. Total Repairs, Maintenance, and Replacement Expense
33. Taxes

34. Hazard insurance
35. Miscellaneous

36. Total Taxes and Hazard Insurance

37. Total Operating Expense; Items 6–11, 6-24, 6-32,
and 6-36

38. Ratio of Total Operating Expenses (6-37 ) to Total
Revenue Collections ( a - 5 )

39. Ratio of Total Operating Expenses to Total Revenue
Collections, both adjusted to 90% occupancy, or other
suitable standardized percentage used for comparisons.
40. Ratio of item 6-11 to item 6-37
41. Ratio of item 6–24 to item 6-37
42. Ratio of item 6–32 to item 6-37
43. Ratio of item 6-36 to item 6-3Y

Most of the above items should show the income or expense per

room , per family unit, per cubic foot, or per square foot.
1867. Rental income dwelling valuation data, on each
building for which information is recorded, should include informa
tion with respect to the occupancy percentage experience, the char
acter of services rendered, and whether family units are rented

furnished or unfurnished. The following method should be em
ployed for filing Rental Income Dwelling Valuation Data . Folders
shall be captioned for each type and size of rental income dwelling.
The description , plans, photographs, and record of earnings and
expenses in each analysis shall be suitably fastened together and
filed in the proper classification folder. The income and expense

items, and the accompanying ratios, of each property analyzed
should be tabulated on a large columnar sheet for comparison study.
Separate columnar sheets should be used for each of the types and
sizes of properties.

COMPILATION AND RECORDATION OF DATA

1868-1871

1868. Sources of Rental Income Dwelling Valuation

Data. The principal sources of rental income dwelling valuation
data include the following:
Q. Multi- family property owners
b . Real estate boards

c. Real estate and property management brokers
d. Owners' and managers' associations
e. Housing authorities
f. Case binders

g. Financial institutions
h. Research organizations
i. Other data files
PROPERTY RATING DATA

1869. The total rating of property can be more reason
ably determined when founded upon adequate and reliable property
data. The compilation and recordation of such data are the primary

and fundamental steps in property rating and it should be clearly
understood that theyare indispensable in the process of determining
the risks attributable to the physical security. The compilation and
recordation of property rating data is a continuing function. Data,

to be dependable, must be current. Moreover, information used in
establishing appropriate data must emanate from reliable sources
and when possible, be checked against other information of a some
what similar character to further confirm its accuracy.

1870. Efficient methods of recordation and filing of prop
erty data are essential to their effective use. The Chief Architectural
Supervisor is responsible for the introduction and maintenance of
the following files which are required for property rating data .
a . File of Established Ratings of Physical Security

6. File of Established Standards and Requirements
c . File of Technical and Advisory Data

d. File of Catalogues of Construction Material and Equipment
1871. File of Established Ratings of Physical Se
curity. This file consists of all Established Ratings of Physical
Security which have been compiled for reference and review pur
poses by the Architectural Section. The originals should be retained
in the office and kept available for comparison and review of cur
rent cases . The file should contain duplicate sets of Established
Ratings of Physical Security which may be used by Architectural

UNDERWRITING MANUAL

1871-1875

Inspectors and Valuators for reference and feature comparisons
when rating current cases. Established Ratings of Physical Se
curity will be maintained in binders and suitably classified according

to types, sizes, and construction characteristics of the properties.
1872. Sources of Data for Established Ratings of Physi
cal Security. The only data included in this file are the completed
Established Ratings of Physical Security. Useful information in the

compilation of these established ratings will be available in the
Construction Cost Data File, case binders, and other data files.
1873. File of Established Standards and Require
ments. Contained in this file are regulatory data governing con
struction and use of property. These data indicate the line of de

marcation between substandard properties and those which barely
meet the eligibility requirements. They include the Property Stand
ards, Minimum Construction Requirements, and rulings on methods
of construction established by the Technical Division, Federal Hous
ing Administration . The national electric code, the code of the Na
tional Board of Fire Underwriters, and similar material will also be
contained in this file. Rulings on methods of construction, issued by
the Technical Division, are kept in ring binders. The remainder of
these data are filed in binders or folders. Building codes constitute
a part of the File of Data on Legal Status of Property, but due to
the frequent use of these codes by the Architectural Section , they are
kept with the material in this file.

1874. Sources of Data on Established Standards and Re

quirements. The principal sources of data for this file are :
a. Federal Housing Administration
6. National Board of Fire Underwriters

c . File of data on legal status of property

1875. File of Technical and Advisory Data. This file

embraces advisory data prepared by recognized authorities and it
serves to provide authentic information concerning the utility, dura
bility, strength, and other qualities of various materials. It also

includes technical bulletins dealing with recent developments on
dwelling construction, principles of planning small houses, mechani

cal equipment for homes, contract documents for small house con
struction, modern design, and other similar subjects. In addition
to the above, the file will contain such technical bulletins and papers
received by the Insuring Office which deal with frame house construc
tion , masonry construction , thermal insulation of buildings, heating
and ventilating, Federal specifications for materials and equipment,
and similar topics. The file will be constructed in the following man
ner . Bound volumes and thick, paper back bulletins will be kept to

COMPILATION AND RECORDATION OF DATA

1875-1879

gether in a convenient and suitable place. Other technical bulletins,
reports, and papers will be filed in binders or folders to provide the
most convenient means of reference .
1876. Sources of Technical and Advisory Data .

The

sources of these data include :

a. Federal Housing Administration
6. Superintendent of Documents, Government Printing Office
c. U. S. Bureau of Standards

d. American Institute of Architects

e. American Society of Heating and Ventilating Engineers
f. U. S. Department of Commerce
g. Trade Associations

1877. File of Catalogues of Construction Material

and Equipment. This file consists principally of catalogues and
pamphlets which comprise data with respect to the equipment and
construction materials which are either immediately or potentially
available and desirable to the market. The file shall be constructed
as follows :

a. Bound volumes will be kept together in the most convenient
and suitable place .
b. Pamphlets will be filed in folders under suitable captions
and classified to an extent consistent with the volume of
such material.

1878. Sources of Data on Construction Material and

Equipment. Many of these data will be received by offices without
specific request. In such cases they should be routed to the Archi
tectural Section for proper filing and use . Other sources include:
a. Manufacturers, distributors, and developers
6. Newspapers and magazines
C. Sweet's Catalogue Service
BORROWER RATING DATA

1879. Case binders constitute the file for most of the data

normally used in rating borrowers. Types of data which are filed
in case binders are factual data reports, bank account certifications,
bank reference letters, salary and employment records, records of

mortgage status and mortgagee experience, credit references, and
general reference data. In addition to the above, the Chief Mort
gage Risk Examiner is responsible for the compilation and mainte
nance of data pertaining to mortgage insurance allotments. These
data afford an accurate record of the amount of liability outstand

UNDERWRITING MANUAL

1879–1884

ing and credit allotted to each mortgagor in whose favor more than
one firm commitment has been issued .

1880. Mortgage Insurance Allotment Record File.
This Form , FHA Form No. 2211, which is adaptable to the indi
vidual borrower and the commercial borrower, reflects the current
status of formal commitments issued with respect to a borrower for
whom more than one commitment has been previously issued. The file
is constructed as follows :

a. Mortgage Insurance Allotment Record Cards shall be di
vided into two classifications, namely :
1. Operative Builder Borrowers

2. Non -Operative Builder Borrowers
6. The cards in each of the above classifications shall be ar

ranged alphabetically.
1881. Sources of Data for Mortgage Insurance Allot

ment Record File. Data for this file are drawn from Insuring
Office case binders.
1882. Credit Data File.

This file shall contain current

financial statements, itemized statements of contingent liabilities,

operating statements of borrowers, commercial reports, factual data
reports, and all memoranda compiled in connection with analyses of
requests for the establishment of lines of credit with respect to those

borrowers requiring recurring consideration such as operative builder
borrowers, and other commercial borrowers. Such data will be placed
in separate folders for each borrower and filed alphabetically.
1883. Sources of Data for Credit Data File. The
sources of data for this file are :
a . Information from the borrower

6. Credit reporting agencies
c. Commercial reports

d . Borrower's banking institution
e. Borrower's employer
f. Mortgagees, creditors, general reference sources
CONSTRUCTION COST DATA

1884. The data program of the Federal Housing
Administration includes comprehensive compilation and orderly
recordation of construction cost data. This function is set forth
independently in Section 19.

PART V

SECTION 19
CONSTRUCTION COST DATA

CONTENTS
Paragraph
Cost Information -----Cost Data Handbooks---

1901-1905
1901–1902
1903-1905
1906–1913

Compilation and Tabulation of Cost DataDetermination of Inplace Unit Prices ---

1911-1913
1914-1916

Factors_

Determination and Use of Quantity Ratios_
Determination of Basic Square Foot Costs...

1917–1922
1918-1920

Basic Specifications

Component Unit Costs.-Basic Square Foot Costs..
Derivation of Component Unit Adjustments---Determination of Quality Adjustment Percentages_
Determination of Locality Adjustment Percentages
Verification and Revision of Cost Data -----

1921
1922
1923

1924–1926
1927-1932
1933-1936

Effective February 1938
Federal Housing Administration

PART V
SECTION 19

CONSTRUCTION COST DATA

COST INFORMATION

1901. Cost Data Handbooks.

Cost information in the

form of basic unit prices is furnished to the architectural and valua
tion sections in the form of Cost Data Handbooks. These books are

divided into two parts for convenient use. Part 1 contains basic cost
data necessary to make an estimate by the Integrated Square Foot
Method . Part 2 of the handbook contains inplace unit prices required

to make an estimate by the Inplace Unit Method .
1902. Ordinarily, the valuation sections are supplied
with Part 1 only. The architectural sections are supplied with both
Part 1 and Part 2 of the handbook . All cost data shall be consid

ered as being strictly confidential and distributed only to authorized
members of the Underwriting Staffs requiring the use of such infor
mation. Adherence to the following instructions is required :
a . All handbooks shall be numbered serially and a record shall

be maintained indicating the number of copies issued ,
number of pages per copy and the name of the persons
to whom issued .

b. A memo receipt indicating the serial number and title of
the copy issued shall be obtained from each authorized
recipient.
C. All copies must contain the following in the Foreword :
“ This copy and the information contained herein is the
property of the Federal Housing Administration and for
the confidential use of authorized members of the Under

writing Staff. Distribution to, or use of, by others is
strictly prohibited.”
1903. Compilation and Tabulation of Cost Data.

Basic square foot costs, inplace unit prices, component unit adjust

ments, quality adjustment percentages, and locality adjustment per
centages are prepared by a Cost Analyst and assembled in tables
which form the contents of the Cost Data Handbook .

UNDERWRITING MANUAL

1904–1907

1904. The Cost Data Handbook is indexed in the fol

lowing manner in order to provide uniformity throughout all offices.
Part 1
Foreword

Classification schedule

Basic Specifications
Basic Square Foot Costs
Component Unit Adjustments
Miscellaneous Costs

Quality Adjustment Percentages
Locality Adjustment Percentages

Items of rapid deterioration and obsolescence
Part 2

Table of Established Trade Prices

Inplace Unit Prices
One section for each component

1905. The Cost Analyst is responsible for gathering in
formation and converting this information into basic data which are
tabulated in the handbook. The methods used by the Cost Analyst
are described in the following paragraphs.
DETERMINATION OF INPLACE UNIT PRICES

1906. Trade prices prevalent in the territory to which
the Cost Analyst is assigned are assembled and formally tabulated
for use in the development of basic cost data. These trade prices
should be obtained from all available sources. An analysis is made

of all prices obtained, and these prices are systematically tabulated
and recorded by the Cost Analyst. Only the typical prevailing

labor and material prices from dependable sources are selected for
use in developing cost data.

1907. Material and labor prices thus obtained are first
assembled for the selected base city, and next for those cities and
localities within the territory from which a substantial number of

applications for mortgage insurance have been or are likely to be
received . The prices are usually converted into inplace unit prices
for the base city before the material and labor prices are obtained
for the other cities in the territory. The city selected as the base
city for cost data purposes is usually one of the Insuring Office cities
within the cost data territory, but it may be any large city in which
construction costs are found to be reasonably stable and fairly repre
sentative of the territory served. The base city or locality is the
city for which complete cost data is developed, and it serves as a base
for comparison of costs.

CONSTRUCTION COST DATA

1908–1912

1908. An analysis is made to determine the average time

required by the various trades for the individual assembly operations,
and labor prices are converted into erection costs for each element of
a component of a building.
1909. A study is made of all usual types of building
construction within the territory to determine the in -place unit prices
required for construction likely to be encountered . This study usually
proceeds in the following order : A number of cases of proposed and
existing construction are selected from the case files. The number
selected is determined by the number of cases processed per month ,
and should include not less than 200 cases..

In areas where there

is a wide diversity of types of construction , the number of cases
analyzed is increased accordingly . These cases are analyzed as to

date of completion, locality distribution, classification, exterior wall
construction, type of heating equipment, type or size of basements,
type of foundation, type of roof covering and other pertinent char
acteristics which will be later used in the development of basic speci
fications and tabulation of necessary data.
1910. Material and erection costs for individual elements

are added together, and the sums are multiplied by factors estab
lished for components or elements of components to develop Inplace
Unit Prices.
1911. Factors .

A factor or material allowance coeffi

cient is a number which indicates the quantity of a particular mate
rial, including waste and allowances for incidental items, which is re
quired in one surface square foot of construction or finish . Its amount
depends on the character of construction and the sizes of its members.

1912. The following are factors which apply to usual
dwelling construction :
a. Masonry Walls :
4 " thick
8'
12 '

6. Floor Framing:
2" x 6 "
2' x 8 "
2 " x 10 "
2 " x 12 "

C. Sheathing and Subflooring:
1 x 6s & 8s-S2S
1 x 6s & 88 — T & G
d. Finished Wood Floor :

Tongue & Groove

Concrete
. 33 cu . ft.
.67
1. 0

Concrete Block
1. 1 blocks
1. 1
1. 1

16 ' ' o. c.

20' ' o. c.

1.8
2, 2
2. 6

1.6
1. 9
2. 2

Right Angle

Diagonal

1. 2
1. 3

1.3
1. 4

2/4" Face

3/4 " Face

1.4

1. 3

Brick
7 bricks
13

19. 5 “

UNDERWRITING MANUAL

1912

STEPS IN DEVELOPMENT OF COST DATA
INPLACE UNIT PRICES

INTEGRATED SQUARE FOOT COSTS

ANALYZE 200 OR MORE

MEASURE COMPONENTS OF

CASES TO DETERMINE BASIC

SELECTED TYPICAL BUILDINGS

TYPES AND BASIC AND

FOR EACH AREA INCREMENT
IN EACH CLASSIFICATION

A

ALTERNATE MATERIALS

ESTABLISH BASIC
OUTLINE SPECIFICATIONS

COMPUTE QUANTITY RATIOS
FOR EACH TYPE IN EACH
CLASSIFICATION AND AREA

B.

ESTABLISH RATIOS FOR EACH
TYPE IN EACH CLASSIFICATION

|

AND AREA

COLLECT MATERIAL , EQUIPMENT
AND LABOR PRICES

ADD OVERHEAD AND PROFIT
TO INPLACE UNIT PRICES

TO OBTAIN UNIT COSTS
SELECT PRICES TO BE USED
IN CALCULATION OF

INPLACE UNIT PRICES
MULTIPLY UNIT COSTS BY
QUANTITY RATIOS TO OBTAIN

E

COMPONENT UNIT COSTS

CALCULATE
E.

INPLACE UNIT PRICES

ADD COMPONENT UNIT COSTS
OF BASIC ITEMS TO OBTAIN

BASIC SQUARE FOOT COSTS

F.

TABULATE INPLACE UNIT

TABULATE 'BASIC SQUARE

PRICES IN PART 2 OF
COST DATA HANDBOOK

FOOT COSTS IN PART 1 OF

COST DATA

COST DATA
HANDBO
OK

HANDB

OOK

PART 2

COST DATA HANDBOOK

DART

F.

CONSTRUCTION COST DATA

1912-1914
e. Roof Framing:
2" x 6 "
2" x 8"

2 ' x 10 "

J. Ceiling Framing:

16 " 0. c.

20 " 0. C.

1. 0
1. 4
1. 7

.9
1.1
1. 4

16 " 0. C.

20' ' 0. C.

2' ' x 6 "
2' ' x 8 "
2 " x 10 "

1. 0
1. 2
1. 5

1. 0
1. 2

g. Partition Framing:

16 " 0. C.

Studs 2 " x 4 "
Studs 2 " x 6 "

h. Siding :
6 " Drop
6 ' Bevel
ec
8"
ee
10 "

i. Wallboard :

1. 4
2. 0

16 " o. c.

1. 3
1. 4
1.4
1. 3
1. 1

1913. Inplace unit prices of associated elements are com
bined to form inplace unit prices for the usual combinations of
elements that comprise the individual components. Inplace unit
prices for components and elements of components are then tabulated
and indexed in Part 2 of the Cost Data Handbook .
DETERMINATION AND USE OF QUANTITY RATIOS

1914. An examination of a sufficiently large number of
plans reveals certain consistent or reasonably consistent relationships
between the quantities of certain components of the building, such as
walls and roof, and the number of square feet of livable floor area .

These relationships are reasonably constant in buildings estimated
by the Federal Housing Administration because of the type of
buildings encountered. Minimum room sizes are limited by Prop
erty Standards and building codes. Maximum sizes are limited by

the available area or cost of the structure. Ceiling heights are be
coming standardized through the demand for economy in initial
cost and in the operating expense of heating and cooling equipment.

Halls and stairways in typical buildings are usually the minimum
width or length necessary to permit easy passage. Plumbing and
kitchen equipment have been developed to such a degree that sizes
of bathrooms or kitchens are largely governed by the number of
fixtures used. The relationship between the minimum area of win
dows and floor area is limited by Property Standards and governed
by climatic conditions of the territory. Because of the consistency
of the relationships between walls, floors, roofs, items of equipment

UNDERWRITING MANUAL

1914-1915

and the number of square feet in the livable floor area , it is possible
to compute ratios of quantities for each of the components of a
building. These ratios are determined for each component and each
range of floor area, and are termed , quantity ratios. Quantity ratios
are used to avoid laborious calculations in building up basic unit
costs of a large number of types and areas.
1915. A quantity ratio is a number which expresses the

relation between the measurement of a component part of a building
and the measurement of the livable floor area of that building. The

ratio is obtained by dividing the total number of units in the com
ponent by the number of square feet of livable area . The quantity
ratio expresses the number of units of a component per square foot
of livable floor area. For example :
a . The number of square feet of exterior wall of a typical

house, similar to the one illustrated in Section 17, is 1715
and the livable floor area of that house is 1363 square feet.
The number of square feet of exterior wall is divided by
the number of square feet of livable floor area thus :
1715
= 1.26
1363

The result, 1.26, is the quantity ratio for "Exterior Walls",
and it indicates that this particular structure has 1.26

square feet of exterior wall for each square foot of livable
floor area .

b. The derivation of the quantity ratio for electric wiring is
illustrated as follows :
47 outlets
= .035

1363 sq.ft.

The result indicates that the building has .035 wiring
outlets per square foot of livable floor area .
The application of quantity ratios to the calculation of component
unit costs is illustrated in the following example :
$0.595 X 1.26 = $0.75

In the above computation, $ 0.595 is the unit cost of exterior wall, and

1.26 is the applicable quantity ratio. The result, $ 0.75, is the Com
ponent Unit Cost for " Exterior Walls". The unit cost used is the
inplace unit price plus an allowance for contractor's overhead and
profit. The following example illustrates the mathematical accu
racy of the use of quantity ratios and also indicates the laborious
computations eliminated through its use .

CONSTRUCTION COST DATA

1915-1916

Assuming 1715 square feet of exterior wall, in the building re
ferred to in (a) above, to have a unit cost of $ 0.595 per square foot,

the following computations would ordinarily be necessary to calcu
late the component unit cost of exterior walls :
$0.595X1715 sq. ft. = $1020.43
$ 1020.43

$ 0.75

1363 sq. ft.

These computations combined into a single operation are shown as
follows :

$0.595X1715 sq . ft. $ 0.75
1363 sq . ft.

The above may be indicated without changing its value thus :
1715

$ 0.595 X 1363 = $0.75
or

$0.595 X 1.26 = $0.75

The fraction, 1715/1363, is equal to 1.26, the quantity ratio
derived in ( a) above. Its use obviates the necessity of comput
ing the total dollar cost of the component and subsequently

dividing $1020.43 by the livable floor area.
The quantity ratio is just as accurate as the total measurement from
which it results. However, ratios to three significant figures are
more convenient for examination and recordation . Furthermore,
quantity ratios once established, remain fixed although prices may
change. Revisions in component unit costs are therefore computed
with new unit prices applied to established quantity ratios.

1916. Quantity ratios, to three decimal places, are com
puted for most of the twenty -seven components or their elements.
For those components which are estimated in lump sum amounts,
quantity ratios are expressed as a fraction having a denominator
equal to the average of the increment of floor area to which they are

applicable. Quantity ratios for components Nos. 1, 4, 18, 19, 20,
22, 23, 25, and 27 are expressed as fractions, and therefore, are not

tabulated . The quantities of the various components are measured
from a sufficient number of plans to determine applicable quantity

ratios. In general, for a given classification, eight to ten cases per
area -increment may suffice. Ratios that are not reasonably consistent

with others in the same area -increment are discarded, and an addi
tional number of plans are measured . The illustration on the follow
ing page shows an example of quantity ratios for a one and one -half

story building.

UNDERWRITING MANUAL
1916

Classification
DETACHED
Type
Family ONE

FEDERAL HOUSING ADMINISTRATION

METROPOLITAN CITY Insuring Office

Stories 112

Quantity Retios
No.

Component

1. Excavation
2. Foundations
Footings
Walls
Basement Floor
Basement Essentials
3. Chimney
4. Fireplace
5. Exterior Walls
6. FloorFraming
7. Subflooring

8.

Finish Flooring

9. Partition Framing
10. Ceiling Framing
11. Roof Framing
12. Roofing
13. Gutters
Down spouts
14. Plaster Base & Plaster

15. Decorating
16. Interior Doors & Trim
17. Windows

Aree in Square Feet
1100 1200 1300
1400
1200 1300 11700 1500

900
1000

1000
1100

.095
.718

.092

.580

.036
1.23

1500
1600

1600
1700

.579

.089
.648
.577

.087
.620
.574

.085
.597
.570

.083.082 .081
.577.561 .548
.563 .557
.567

1032

029

.026

.024

,022

.678

1.24

1.25

1.25

1.26

1.26

021
1.27

.020
1.28

1.11

1.11

1.00 1.00 1.00 1.00 1.00 1.00
1.34 1.31 1.29
1.27 1.25 1.23 1.21 1.20
.43
.43
45
.45
.46
47
44 .44
.882.879.877.875.875.874
.885
.889
4
75.87
.882 .879.877.8751.8
.889 .885
.109 .106 .101
.096 .090.085
.079.073

1.00

.048

1.00

.042

.037

.033

.030.027

.025

024

4235 4.125 4.050 3.990 3.950 3.920 3.900 3.888
4235 4.1 25 4.050 3.990 3950 3.920 3.9003888
.011
011 .011.011.011 .011
.01.01
.150 .150 .150 . .150 .150.150.150.150

18. Entrance & Exterior Details
19. Cabinets & Interior Detail
20. | Stairs
Special Floors & Wainscot

21 .

Bath Floor
Bath Fainscot

.032 .041

.047

.053

.093.082 .072 .065

.058
058

.063

.068

.072

.052

.047

043

22. Plumbing
23.
24. |
25. |
26.

Heating
Electric Firing
Lighting Fixtures
Insulation

.038

.037

.036

035

035 ,034.033.032

Malls

Ceilings
27. | Miscellaneous

QUANTITY RATIOS FOR CON PONENTS NOS. 1, 4 , 18, 19 , 20 ,
22 , 23, 25 AND 27 ARE EXPRESSED AS FRACTIONS AND
THEREFORE ARE NOT TACULATED

CONSTRUCTION COST DATA

1917-1922

DETERMINATION OF BASIC SQUARE FOOT COSTS

1917. A selection of typical buildings to form a basis
for the tabulation of Basic Square Foot Costs is made from those
types of buldings which have been, or are likely to be frequently
offered as security for insured mortgages. A field survey is made and
case files are examined in order to select the types for which Basic
Cost Data should be first developed.

1918. Basic Specifications. The selected types of con
struction are classified in accordance with instructions contained in

Section 16 under the heading, “ Classification of Buildings.” Basic
specifications are established for the selected types. The materials
and equipment frequently used as alternates to the basic specifications
are next listed in the order of their prevalence.
1919. Basic square foot costs for each classification of
buildings are determined for an area range, starting at the lowest
probable area and progressing to the largest probable area . Each
area range is divided into increments of one hundred square feet.

Columns are provided for several areas on each of the sheets used
for tabulation of cost data.

Each of these columns represents one

division of areas and is used for all areas between the two limits

indicated . The cost data tabulated in these columns are based upon
the average of the two limiting areas.
1920. Ordinarily, one set of basic specifications is re

quired for each classification. As an example, for detached , single
family, one-story dwellings, one set of basic specifications may suf
fice. It is not necessary to indicate the sizes of the various struc

tural members, quality of plumbing equipment, and other similar
elements, since the sizes of structural members and quality of mate
rials are increased in proportion to the increased areas of dwellings
and these differences are included in the basic square foot costs . For
example, in establishing basic square foot costs for a six hundred

foot area dwelling, the costs include plumbing equipment of a pass
able quality, while in a fourteen hundred foot area dwelling, better
equipment of a quality in keeping with the size of the structure is
included .

1921. Component Unit Costs. Inplace unit prices for
separate elements to which are added allowances for overhead and

profit, are multiplied by applicable Quantity Ratios to obtain com
ponent unit costs.
1922. Basic Square Foot Costs. The component unit

costs of all of the 27 components selected according to the basic
specification are added together to form Basic Square Foot Costs.
These basic square foot costs are computed for each range of Calcu
lated Area for each type and are tabulated in Part 1 of the handbook .

UNDERWRITING MANUAL
1922

FEDERAL HOUSING ADMINISTRATION
METROPOLITAN
CITY
Insuring Office

Classification
type
DETACHED

Family

ONE

Stories

112

Sq.Ft.Area 1400-1500

Basic Square Foot Cost
No.

Component

1. Excavation
2. Foundations
Footings
Foundation Walls
Basement Floor
Basement Essentials
3. Chimney
4. Fireplace

The cost
.850

.60

..180

.07

.264

.29
.297

.120

.13

.082
.587
.553
553
.023

.02

.270

07
.07

1.26

.75

.120.13
2.65 2.90

5. Exterior Walls .

.541

6. Floor Framing

.124.36

595

.17

.07

.15
.07

7. Subflooring

.0671-073

8. Finish Flooring

.1 661 .183

9. Partition Framing

.10
.073 .080 1.25
.053 .058
.5201 .03
.0601 .066 .707 .05
.066.073
.707 .05
.060.066
.707
.05
.065
2001 .22
.03
.051 .056 4.24
.24
.035) .038 4.24
.16

10. Ceiling Framing
11. Roof Framing
12. Roofing
Roof Sheething
13. Gutters & Down spouts

14. Plaster Base & Plaster
15.
16.
17.
18.
19.

Decorating
Interior Doors & Trim
Windows
Entrance & Ext . Detail
Cabinets & Int . Detail

20. Stairs
21. Special Floors & Wainscot
Bath Floor
Bath Wainscot

100
1.00

.18

51

16.80 18.50
72.00 80.00

.012

.06
.06
.06

80.00 88.00
75.00 83.00
.80
2730
.900 1.00

.23

.015
.063

.01
.06

Kitchen Floor

22. Plumbing
23. Heating
24. Electric Wiring

327.00 360.og

.26

258.00 283.00
1.59

25. Lighting Fixtures

1.75
40.00

.21

.035

.06
.03

26. Insulation
Walls
Ceilings
27. Miscellaneous

BASIC SQUARE FOOT COST

3.64

CONSTRUCTION COST DATA
1922

CLASSIFICATION
Detached
| Туре

FEDERAL HOUSING ADMINISTRATION

Family

Insuring Office

Metropolitan City

Stories
Area in Square Feet
Exterior Fall Construction

Frame Shingled or Sided

Face Brick Veneer
Face Brick 12 "
all

1000 1100 1200 1300 1400 1500 1600
1100 1200 1300 1200 1500 16001 1700
Basic Square Foot Costs.
3.38

3.35

3.32 3.29

5.371 3.46

3.42

3.53

3.29

3.25

3.43 3.39 3.35

3.65 3.62
3.671 3.64
3.80 3.77

3.58
3.60
3.73

3.55
3.37
3.70

Frame Stucco on Metal Lath 6.33
Common Brick Veneer
Common Brick 8 " Tall

900
1000

* 7.47
*8.17
7.75

3.493.49
3.51 3.51
3.67 3.64

* Cost per lineal foot of exterior wall including foundation
100 103 107
98
95

Basic Perimeter

110

3.263.23
3.321 3.29
3.461 3.43
3.48 3.25
3.61 3.58

111

118

.21
.19
..23
03

Basic Wall Height 101/

Component Unit Adjustments
25 % Basement
50 % Basement
2 - Foundation - 12" Brick
Foundation - Lon Concrete

.21
.17

.34.31

.30

.06.06

$90. $100

- Fireplace
8

.19.20
.151.16

Clear White Oak Floor
+
Gutters- Din sponte- Coppert

13
14 - Metal Lath

22 - Extra Bath - Complete
23 - Hot Water Heat
26 Insulation 4 " RN - Walls

Ceilings

02

.02

, 05

.22
.17
..28
6.05

3100. $110.
..02

‫ܝ‬20

07

..06

2.05

, 12 .12
26 1.22

26

..10
.24

15

13

12

.13 .12

12
‫ܩܝ‬3

.03 1.03

.22
.18
.27
.01

.23

23

..28

219

26

.25
03

120. $ 240 . $150.160 .
-402 02 02

02
OM

, 03
08
30

08

.22

02
.09
.22

12

12.

12.

12

10

10

03

‫ܩܝ‬3

‫ܩܝ‬3 ‫ܕܩܝܐ‬

02

20

‫ܦܩܝ‬

Miscellaneous Costs
4 Footing Drain -Lineal Foot
Sewer Connection - Lineal Foot
Shingles

210 # Asphalt - Square Foot
Clear Red Cedar Square Foot
Square Foot
Heavy Asphalt

Standard Slate - Square Foot
Shutters - per pair
Wall Sq . Ft .
Kitchen Cabinet
Floor Sq . Ft .
Kitchen Cabinet
Tile Floor
Tile Wainscot
Extra Lavatory

Extra Closet Combination
Copper piping - per fixture

Laudry Trays
Weatherstripping_ per door
Weatherstripping - per window
Standard Linoleum on Pine Floor

40 # Tin Roofing - Square Foot

.065 Copper Screens - par sdndox

3.00
8.00
per door
5.00
Galvanized Screens per door
d
2.00
per dindow
u Galvanize Screens
1.00
square foot
07 Linen Cabinets
.15
20 .
Garages
5.501 car Frame Detached
550.00
1.2012 car Frame Detached
325.00
300.00
1.5511 car B. V. Detached

90 Copper Screens

1.0012 car B.V. - Detached

200.00

1160.00
32.001 car B. V. - Attached
200.00
foot
square
20.00.4" concrete walks
.18
square foot
* .22
2.00.5" concrete drive

1.2011 car Frame - Attached

20.00

6.00 Kitchen fan
2.75
.11

22.00

UNDERWRITING MANUAL

1922

DERIVATION OF ADJUSTMENTS
COMPONENT UNIT ADJUSTMENTS

AL

QUALITY ADJUSTMENTS

SELECT AND RECORD USUAL

DETERMINE DEGREES OF QUALITY
OF CONSTRUCTION ENCOUNTERED

ALTERNATE MATERIALS AND
EQUIPMENT

IN BUILDINGS RECENTLY COMPLETED

ADD OVERHEAD AND PROFIT TO
INPLACE UNIT PRICES OF USUAL
ALTERNATE MATERIALS ANO

EQUIPMENT TO OBTAIN UNIT COSTS

MULTIPLY UNIT COSTS BY
C. APPLICABLE QUANTITY RATIOS TO
OBTAIN COMPONENT UNIT COSTS

OR UNDER CONSTRUCTION

ESTABLISH RECOMMENDED QUALITY
ADJUSTMENT PERCENTAGES BASED
ON LOWEST AND HIGHEST QUALITY B.
OF CONSTRUCTION FOR EACH
CITY OR LOCALITY

.TABULATE RECOMMENDED QUALITY
PERCENTAGES IN PART I OF

COST DATA HANDBOOK

COMPUTE DIFFERENCES BETWEEN

COMPONENT UNIT COSTS OF BASIC
D. MATERIALS OR EQUIPMENT AND
COMPONENT UNIT COSTS OF
ALTERNATE MATERIALS OR EQUIPMENT

LOCALITY ADJUSTMENTS
SECURE MATERIAL AND ERECTION
PRICES FOR LOCALITIES OTHER
THAN BASE CITY WITHIN THE
COST DATA TERRITORY

TABULATE THE DIFFERENCES
COMPUTED IN STEP D ABOVE AS

COMPONENT UNIT ADJUSTMENTS
IN PART I OF COST DATA HANDBOOK

DETERMINE INPLAGE UNIT PRICES
FOR EACH OF THE ABOVE

B.

LOCALITIES

SELECT A TYPICAL BUILDING AND
COMPARE ITS COST IN EACH

LOCALITY WITH THE COST IN THE A
COST DATA
HANDB
OOK
PARTI

BASE CITY BY THE
INPLACE METHOD

DETERMINE LOCALITY ADJUSTMENT
PERCENTAGES TO COMPENSATE FOR
DIFFERENCES BETWEEN COSTS OF 0 .
THE BUILDING IN VARIOUS
LOCALITIES AND THE BASE CITY.

TABULATE LOCALITY ADJUSTMENT
PERCENTAGES ACCORDING TO
NAMES OF LOCALITIES

CONSTRUCTION COST DATA

1923–1926
DERIVATION OF COMPONENT UNIT ADJUSTMENTS

1923. Component Unit Adjustments are derived from
component unit costs as follows:
a . The various materials and combinations of materials which

are commonly used in the territory are listed in the order
of the 27 components and are arranged so that the elements
of each component are grouped together.
b. Component unit costs for each material or element are com
puted for each tabulated area and are recorded in the

proper column for each classified type.
c . Component unit costs of materials which are selected as part
of the basic specifications are compared with alternate
materials, and their differences are tabulated as component
unit adjustments. These adjustments are derived sepa
rately for each increment of area in each classification .

Adjustments for certain components are of such character
that a single adjustment is applicable to the entire area
range on a given classification sheet.
DETERMINATION OF QUALITY ADJUSTMENT PERCENTAGES

1924. The quality adjustment provides for the differences
in workmanship and materials, as well as details of construction be
tween the quality of construction reflected by the square foot cost in
either method , and the quality of the actual construction, assuming
the same specifications. This difference results from varying degrees
of workmanship under identical specifications. The adjustment is
accomplished by the application of a percentage described in Section
16 as the Quality Adjustment. These quality adjustment percentages

are indexes of comparative quality, expressed as a percentage of the
quality of construction reflected in the square foot costs.
1925. A careful field examination of buildings involved
in recently processed cases in each locality within the territory is

made to determine the degrees of quality of completed construction .
At the same time an inspection is made of other buildings under
construction to determine the quality of construction which is cus

tomary and readily acceptable in various parts of the territory. This
degree of quality is the basis on which the cost data are established ,
and the quality adjustment percentage for such construction in each
locality is, therefore, 100 % .
1926. Recommended limits are set for the lowest quality

of construction which is acceptable, and the highest quality which is
encountered . The effect upon the cost of construction is considered
when setting these limits. In general, the range between these
limits does not exceed 10% . The recommended limits of Quality
Adjustment Percentages are included in Part 1 of the Cost Data
Handbook .

UNDERWRITING MANUAL

1926

FEDERAL HOUSING ADMINISTRATION
Metropolitan City

Insuring Office

Recommended Quality Adjustment Percentages
Locality

Low

ligh

Metropolitan City (Base)

95 % .

1055

Forest Valley

24 .

104

Rapid River

93

103

Railroad Junction

902

10,0

Lakeview

93

102

Millbrook

90

100

92

102

Oiltom

93

103

Centerville

92

102

Desert City

90

100

Brownsville

91

101

95

205 .

Eagle Landing

Elm City

CONSTRUCTION COST DATA
1926

FEDERAL HOUSING ADVINISTRATION
Metropolitan

City

Insuring Office

Locality Adjustment Percentages
Locality

Wood Frame

brick
Veneer

100 %

100 %

Forest Valley

90

104

Rapid River

98

98

୨୨

95

Metropolitan City (Base )

Railroad Junction

100

100

97

102

Eagle Landing

104

110

oil Tom

102

102

Centerville

91

93

Deser
t
Cit
y

96

89

Brownsville

100

102

Lekavion

Millbrook

Elm City

103

UNDERWRITING MANUAL

1927-1932

DETERMINATION OF LOCALITY ADJUSTMENT PERCENTAGES

1927. Locality Adjustment Percentages, as tabulated in
Part 1 of the Cost Data Handbook , provide a means whereby the
basic square foot costs and inplace unit prices compiled for a base city
may be used in other cities or localities without the necessity of com
piling separate basic costs for all types and variations in each
locality.

1928. The accuracy of the estimate is dependent upon
the accuracy of the Locality Adjustment Percentage used. There
fore, unusual care is necessary in the preparation of these percentages.
1929. One or more typical buildings most applicable for

the entire cost data territory are selected for the purpose of deter
mining locality adjustment percentages. Selected typical buildings
must be of a type and construction common to all of the cities and
localities other than the base city, but not necessarily typical of the
base city.

1930. Inplace unit prices are then developed for the ma
terials which enter into the construction of the typical building for
each city and locality other than the base city for which inplace unit
prices have already been prepared. The same methods are used and
the same care is exercised in the development of the inplace prices
for the other localities as was used in the base city. The inplace
unit prices determined for the other cities do not become a part of
the Cost Data Handbook, but are recorded on standard sized sheets
for reference by the Cost Analyst.
1931. Necessary measurements are made and quantities
are recorded for each component of the selected typical buildings.
Estimates are made using these quantities and the inplace unit prices
applicable to each locality. A comparison of the totals of each of

these estimates is made, and the comparison is expressed in percent
ages, taking the base city estimate as 100 % . These percentages are
tabulated in Part 1 of the Cost Data Handbook according to the
names of the cities.

1932. If more than one type of building construction is
common to the territory, and there appear to be different relative costs
for different types in each locality, it may be necessary to determine
more than one percentage for each locality.

CONSTRUCTION COST DATA

1933–1936
VERIFICATION AND REVISION OF COST DATA

1933. Verification. A periodic review or inspection of
cost estimates selected at random from cases in process, or those re

cently processed, is made by the Cost Analyst to discover the following:
a. The most common errors involved in the application of the
two prescribed methods of cost estimation
6. Those individuals who are in need of further training

1934. The Cost Analyst makes a periodic verification of
cost estimates for selected cases. First, he determines whether an
estimate is correct. Second, he compares the verified estimate with

the actual cost of the buildings after completion, which actual cost
he obtains from reliable sources .

1935. Revisions of Basic Costs. Current trade prices
of both materials and labor are gathered at regular intervals and are

analyzed to determine the cause, extent and probable permanence of

changes which may be taking place. These materials and labor prices
are obtained at intervals of six months or less to ascertain whether

there has been sufficient change in level to make cost revisions

necessary. If this analysis discloses changes of a permanent char
acter which will have a total effect of less than 10% upon the total esti
mated cost of construction, major changes in basic data may be un
necessary. In such instances the locality percentages for the cities
concerned are increased or decreased to compensate for these changes.
This may likewise apply to the base city.

1936. If current material or labor prices have changed
to such an extent that the total effect upon the estimated cost is 10 %
or more, then it is necessary to make a temporary adjustment to the
locality percentages to compensate for the changes. These temporary
adjustments are used only until all basic inplace unit prices and basic
square foot costs, together with component unit adjustments, are com

pletely revised to comply with the new price levels. Major changes
in material and construction prices due to artificial conditions such

as manipulation, temporary material or labor shortages and other
factors of this character are not considered a basis for cost revision .

Seasonal changes in costs within twelve month periods are not con
sidered as a basis for revision.

2014
No.
Form
FHA
1938
February
R)( evised

ADMINISTRATION
HOUSING
FEDERAL

Pronaand
aan

eInterior
, tc
partitions

.
special

repair
edsng
oror
ssumi
Arequir
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rity
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Us
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ity
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and onal
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es rin
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ent
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20

Mechanical
and
Conven
ience
Equipment
and
Light
Natural
Venti

2

4

16

8

10

heating-fuel
of
cost
annual
)(1$.2stimated
Efor
6

2

8

10

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maintenan
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12

16

20

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iveness
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with
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building
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remaining
)E(14stimated
SECURITY
PHYSICAL
OF
RATING
TOTAL

maintenance

.
years

$.)T
cost
to
me
eby
,changes
specifications
and
drawings
in
afollowing
orepairs
dditions
(1lterations
5rstimated
he
required
.rejection
avoid
;nare
toone
Cost

Item

Architectural
Inspector
-Report
2014
of
16-6729

av
,in
ubag
mi
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UA
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are
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never
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APPUCULU

for
except
before
property
and
(State
)when
whom
for

.,oepair
items
similar
r
bills
rassessments
special
refinance
may
mortgage
.
LUUIO
LUVULCD

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and
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.
WITVICUM

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,..etal
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None
..
..
lath
w
,Wallboard
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. ood

finish
wall
Typical
..
lath
sPlaster
, heet
Trim

..
Doors

..
birch
or
Oak

.
Gum

.
birch
or
Oak

..
Gum

Electrical
.
Conduit
wiring-Electrical
outlets
Adequate
.-..

..
X
B.

.
tube
and
Knob

Inadequate
.

Average
..

..
steam
pipe
One

water
Hot
.Vacuum

Heating

Pine
.or
fir
or
.Pine
fir

.
air
Hot

air
Forced

..
Stove

.
Gas

.
Oil

.
Coal

Fuel
..

.
stoker
Coal

Plumbing

)-.(fLavatories
-ixt

Showers
.

Tubs
...

Laundry
trays
.

..
Sink

Toilets
.

Hot
-wteel
ater
s...
ron
pipe
,bC.,Istorage
rass
opper
Roof
or
ceiling

Walls

Floor

.
Insulation

.YStorm
es
Weatherstripped
:0
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O
sash
o.
YO
.:0
es
Recreation
room
and
..Miscellaneous
Interior
partitions
,etc.

.
special

REPLACE
TO
REQUIRED
Cost
OF
ESTIMATE
aBUILDING
( ssuming
CONDITION
NEW
IN
IMPROVEME
alterations
repairs
required
or
proposed
have
been
made
):
Main g
Buildin
Garage
Improvements
.Other
.
Service
Archite
ctural
TOTAL
OTTICE
PRINTING
U...
GOVERNMINT

16-6760

.$
@
t
fsq

.$@
t
fsq

BOUND EDITIONS
OF

UNDERWRITING MANUAL
JUNE, 1935
APRIL , 1936
NOVEMBER , 1936

FEBRUARY, 1938