Appraiser Update

Highest and Best Use: Updated policy for UAD 3.6  

UAD 3.6 expands Highest and Best Use reporting

UAD 3.6 expands our appraisal reporting requirements for HBU analysis. This includes separate reporting for each of the four traditional HBU tests:

• Legally permissible
• Physically possible
• Financially feasible
• Maximally productive

In executing the tests, it is important for appraisers to know that Fannie Mae is not asking appraisers to report HBU “as if vacant.” Instead, we require the appraisal report to disclose the results of the four tests for the property “as improved.” This disclosure provides important information about how market participants perceive a property's utility and value. 

When the property's present use does not satisfy one or more of the HBU tests, the answer to the question, "Is the highest and best use of the subject property as improved (or as proposed per plans and specifications) the present use?" must be "No." 

The URAR is intended solely for residential property appraisals. Use of the URAR to report an HBU analysis assumes the appraiser has concluded that the property’s present use and its HBU are primarily residential. If the HBU is agricultural, commercial, industrial, or otherwise non-residential, the URAR should not be used.

Updated Fannie Mae policy 

In support of UAD 3.6 implementation, we published changes to the Fannie Mae Selling Guide Supplement: Uniform Appraisal Dataset (UAD) 3.6 Policy on Sept. 2, 2026 (see section SB4-1.3-04). 

The policy changes address definitions, HBU analysis, subordinate use, comparable sale (comp) selection, and property eligibility.

Definition of “present use” 

The policy defines present use as the most reasonable and probable utilization of a property, as improved or as proposed, as of the effective date of the appraisal based on its physical characteristics, design, and functional utility. 

Present use reflects how the property is designed and intended to be used. It may differ from how the property is currently occupied or utilized by the occupant. The appraiser’s statement of present use is also independent from, and does not rely on, the appraiser’s HBU conclusion. 

To determine present use, the appraiser must consider the total number of residential units including accessory dwelling units (ADUs) along with any non-residential uses such as agricultural, industrial, or commercial and any property modifications that support non-residential use. 

The appraiser should summarize the property's present use conclusion in the Highest and Best Use Commentary.

Determining HBU 

After determining the present use, the appraiser then determines whether that use satisfies the four HBU tests: 

• legally permissible - consider whether the present use complies with all applicable laws and regulations including zoning and deed restrictions. 
• physically possible - consider whether the present use is suitable for the site’s size, shape, access, and topography. 
• financially feasible - consider whether the present use is economically viable (generates a positive return after development and operating costs). 
• maximally productive - consider whether the present use results in the highest property value among all the likely alternatives that meet the first three tests.

When the answers to all four tests are “Yes,” then the present use is the HBU. 

The existing improvements do not have to be the ideal improvements for the site. Even when improvements exhibit physical, functional, or external obsolescence, they may still represent the HBU as improved if they make a positive contribution to the value. 

To support implementation, we published a Highest and Best Use Playbook with real-world examples along with a set of FAQs. 

Subordinate Use 

The present use of some properties may be a mixture of residential and non-residential uses. When that is the case, the appraiser needs to determine which usage is primary and which usage is subordinate. To be categorized as subordinate use, the non-residential use must be secondary to the residential use, and the HBU must be residential. 

Comp Selection 

When a property's present use is not the HBU, market participants may be influenced by factors beyond existing improvements. For example, the property may command a premium for its development potential. Alternatively, the existing improvements may contribute little to no value if purchasers intend to redevelop.

Reliance on comps with the same HBU and similar physical and legal characteristics enables appraisers to identify such influences and measure their impact on value. 

The report should identify any comps that do not share the same HBU as the subject. 

If no comps with matching HBU are available, then appraisers must follow our requirements for Unique Housing Types in SB4-1.3-05. 

Impact on Eligibility 

Under the updated policy, loans may be eligible for delivery to Fannie Mae even when secured by a property whose present use is not HBU (i.e., when the present use fails one or more of the HBU tests). In that case, the lender must confirm that the present use is primarily residential, the HBU as improved (or as proposed) is also residential, and the property consists of no more than four dwelling units including ADUs. In the case of an illegal ADU, the appraiser must provide at least two comps with the same illegal ADU use as the subject. 

Further, if the present use is not financially feasible or not maximally productive, then the appraiser must: 

• Complete the appraisal “as is,” based on the present use as a residence 
• Provide similar comps 
• Factor the subject’s obsolescence in the value opinion by adjusting comps to reflect market reaction 

Loans secured by mixed-use properties (properties with both residential and non-residential uses) are eligible for sale to Fannie Mae provided the property is a one-unit residence that the borrower occupies as their principal residence, the non-residential use is subordinate to the residential use, the borrower is both the owner and the operator of any business utilizing the non-residential improvements, and the dwelling has not been modified in a manner that has an adverse impact on its marketability as a residential property. 

Loans secured by properties with commercial, agricultural, industrial, or otherwise non-residential present use and HBU are not eligible.

Recap 

To support UAD 3.6 implementation, Fannie Mae has published new materials for appraisers and lenders in relation to HBU. These documents provide guidance on how HBU analysis affects comp selection, appraisal reporting, and property eligibility. 

A sound and well-supported HBU analysis is a critical component of the appraisal process, helping ensure the appraisal reflects the actions and motivations of typical market participants.

Four new resources to build UAD 3.6 readiness

We recently published four new job aids for  the Uniform Appraisal Dataset (UAD) 3.6:

• Guidance for Appraisers through Lessons Learned: Provides practical examples to help appraisers complete the new URAR, ensuring consistency and accuracy.
• Photo and Image Requirements: Clarifies photo requirements for UAD 3.6 reports, detailing required, conditionally required, and optional photos. It aims to reduce uncertainty and improve data quality by specifying when and where photos are necessary.
• UAD American National Standards Institute (ANSI) Reporting Requirements: Provides examples to illustrate how to comply with ANSI requirements when documenting the area breakdown of a residential property.
• Uniform Appraisal Dataset (UAD) 3.6 Frequently Asked Questions: Addresses common questions about key concepts, reporting requirements, and processes. It aims to reduce uncertainty, improve understanding, and help industry participants prepare for implementation.

Access these and other resources from the Fannie Mae UAD webpage.

Resources for responsible use of Generative AI

A frequent topic in conversations with appraisers is the responsible use of artificial intelligence (AI), particularly generative AI (GenAI) tools powered by large language models (LLMs). The use of these technologies may raise a variety of considerations, including important considerations around data privacy and the handling of non-public information (NPI). The following resources are provided for informational purposes only and may be useful to appraisers as they evaluate appropriate uses of GenAI tools in their business.

The Appraisal Standards Board recently published Advisory Opinion 41 (AO-41), Use of Technology in an Appraisal or Appraisal Review Assignment. To access AO-41, visit USPAP Resources and scroll to the Advisory Opinions section.

• Fannie Mae recently published Lender Letter LL-2026-04 Governance Framework on use of Artificial Intelligence and Machine Learning. While the letter is directed to lenders, many of the principles it describes may also be useful to appraisers. 
• MLS usage terms and conditions may include guidance regarding how MLS data may be shared, which may include restrictions or considerations related to sharing data with AI tools. 
• Subscription agreements and terms of service for GenAI platforms may describe how user-entered data is stored, processed, or used. Many platforms also include configurable privacy settings that allow users to manage how their data is handled. 
• Professional liability insurers may provide guidance to appraiser customers regarding responsible GenAI use and related risk considerations. 
• Continuing education providers may offer courses on GenAI or technology adoption that address data privacy, professional responsibilities, and responsible use considerations.  
• Conversations with lender clients, appraisal management companies (AMCs), and legal counsel along with other applicable professionals may help appraisers determine appropriate uses of GenAI within their business practices. 

As GenAI tools continue to evolve, appraisers should take time to understand how those tools handle data and align with applicable professional obligations. The resources above can help appraisers evaluate potential risks and benefits so they can confidently incorporate technology into their workflow while maintaining compliance and protecting sensitive information.