As part of the Uniform Appraisal Dataset (UAD), Fannie Mae and Freddie Mac require appraisers to rate the construction and building quality on a standardized scale. Whether you’re still in training or you’re an experienced appraiser, it’s always a good idea to re-familiarize your understanding of the UAD quality of construction ratings to ensure accuracy and consistency in your appraisal reports. We’re going to provide some definitions of what these quality ratings are and some guidelines on how to assign them.
Defining UAD quality of construction ratings
Before we dive into the individual ratings, let’s level set.
What does UAD stand for?
As we mentioned above, the UAD is the Uniform Appraisal Dataset. The government sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, developed the Uniform Mortgage Data Program (UMDP) to improve the accuracy and quality of loan data they receive. The UAD is a part of the UMDP. It defines the required fields for specific appraisal forms and standardizes the definitions and responses for a key subset of fields.
With the improved and standardized quality of data and increased efficiency of collection, the GSEs can better manage collateral risk.
What are quality of construction ratings?
UAD quality of construction ratings are the standardized rating system (from Q1 to Q6) an appraiser must use to provide GSEs with information about the materials and structural quality of the property. The rating must describe the overall quality of the property, so appraisers must look at the property as the “sum of its parts” rather than individual elements.
These ratings are absolute, not relative. The quality of other houses in the local market does not matter when applying these ratings. A house that is rated as a Q1 in Los Angeles would also be rated as a Q1 in Buffalo, Minneapolis, Dallas, Seattle, and Denver.
Breaking down the UAD quality of construction ratings
While these are our translations of the individual UAD quality ratings, we recommend also verifying the specific definitions from Freddie Mac and Fannie Mae.¹
Quality of Construction Q1
A Q1 dwelling is the best of the best. The interior and exterior materials and finishes are top quality, with lots of imported materials and high-quality ornamentation. Items like mahogany flooring and woodwork, imported tile, multiple custom kitchens and bathrooms would be indicative of a Q1 dwelling. In many communities, there are no Q1 houses. Conversely, in communities like Beverly Hills or Malibu, a significant number of houses might be Q1.
Quality of Construction Q2
A Q2 dwelling is still a high-quality house. This type of house is typically custom-designed for an owner’s site, but could be found in a high-quality tract development. In some locations where there are no Q1 houses, a Q2 dwelling might represent the best quality house in the area. Good quality trim and woodwork, hardwood and tile flooring, custom-designed kitchens and bathrooms, masonry exterior, etc. would be the hallmarks of a Q2 house.
Quality of Construction Q3
A Q3 house is still good quality with exterior ornamentation and upgraded interior finishes, although not as consistently high as a Q2. Perhaps the kitchen is “semi-custom,” or the exterior siding is mostly vinyl with very little masonry. Interior flooring might be a mixture of ceramic tile and mid-grade carpeting, but it’s still above stock quality or builder’s grade overall. These homes are often found in above-standard tract housing or built on the owner’s property.
Quality of Construction Q4
This is a standard “builder-grade” house. The dwelling meets or exceeds code requirements, and the standard building plan includes a quality of the materials that is similar to what can be purchased at a local “big box” home center. There might be some simple upgrades like a tiled shower stall, ceramic backsplash, or quartz countertops in the kitchen or the exterior may have more ornamentation.
Quality of Construction Q5
These houses meet building codes and are livable dwellings. They are not substandard or defective in any way and meet the basic needs for housing, with low-cost carpet, vinyl flooring, painted wood or veneer cabinets, basic fixtures, laminate countertops, fiberglass or plastic tub or shower units. They are defined by economy of construction and basic functionality.
Quality of Construction Q6
These are the lowest quality structures. Some might not even be suitable for year-round habitation. Not all Q6 dwellings can be characterized as “shacks,” but a shack would likely be rated as a Q6. Many of these dwellings were constructed prior to the advent of building codes. Some were constructed by the property owner (i.e., not a professional contractor.) Like Q1 dwellings, Q6 dwellings do not exist in every market.
Problems with quality ratings
Fannie Mae and Freddie Mac have tried to standardize the quality ratings by providing specific definitions for quality and making them absolute (as opposed to relative). However, there are houses that simply defy categorization.
For example, let’s say you are appraising a standard Colonial-style, two-story house with an attached family room on the left side and a two-car attached garage on the right side. The interior finish is standard builder-grade materials, standard trim and ornamentation, with a few upgrades. It would likely be considered a Q4, but…the buyers are professional chefs, and they had a restaurant-grade kitchen installed with stainless steel and granite surfaces, high-quality cabinetry and fixtures, and commercial-grade appliances including a walk-in freezer. Would this high-end kitchen alone be capable of raising this house from a Q4 to a Q3? If you asked ten different appraisers this question, it is possible that five of them would rate this as a Q3, and the other five would still rate it as a Q4.
The point of this example? Be familiar with the quality rating definitions and have supportable and defensible reasons why you chose the rating you did. As an appraiser, being able to defend your choices is an essential skill, and understanding residential construction is important in applying these UAD quality ratings.
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Editor’s note: This post was originally published on April 14, 2020 and updated in January 2024.
Resources:
What are the quality ratings for appraisals? (fanniemae.com)
