May 30th, 2017 3:46 AM by Jackie A. Graves, President
When you refinance your mortgage, everything hinges on
the appraisal. If your home's value is so low that
you're underwater, you can't refinance. If your appraisal value puts your home equity at less than 20%, you'll get stuck
paying for private mortgage insurance (PMI) or bringing cash to the table to do a
cash-in refinance. What’s more, you might not get the lowest interest rate,
since lenders consider borrowers with less equity to be riskier. If you’re thinking about refinancing, you should understand the appraisal’s
essential role in the process.
An appraisal is a licensed or
certified professional’s opinion of a home’s value provided by a disinterested third party. The appraiser gets paid for providing the service of
valuing your home but has no skin in
the game when it comes
to whether you’re able to refinance as a result of the value he or she arrives
at. In a refinance transaction, the appraisal protects the bank by ensuring
that it doesn’t lend the borrower more money than the property is worth. If the
property later goes into foreclosure for
any reason, the lender wants to be able to resell the
property and get its money back.
The appraiser visits your home
for between 30 and 45 minutes to measure its dimensions, examine its amenities
and evaluate its overall condition both inside and out, taking photos of the
exterior, the garage, and every interior room. He or she then examines the
records of properties similar to yours – ideally properties in your
neighborhood that have sold recently. Based on the home visit and these
records, the appraiser arrives at a
professional opinion of
how much your property would sell for if you put it on the market. The bank
uses this value – along with your income, assets and credit
history – to determine
how much it will lend you.
Three types of refinance
transactions do not require an appraisal. Neither the Federal
Housing Administration’s streamline refinance, nor the Veterans Administration’s Interest Rate Reduction
Refinance Loan requires one.
In certain cases, the Home Affordable Refinance Program does not mandate one, as well. All
other types of refinance transactions require an appraisal.
Federal regulations dictate how
lenders and appraisers must behave throughout the appraisal process. After the
housing crisis, the government wanted to increase appraiser independence to
prevent the possibility of lending based on inflated home values. The
Dodd-Frank and Truth in Lending Acts now require appraisals to be “conducted
independently and free from inappropriate influence and coercion.”
Because federal appraiser
independence requirements define a narrow scope of acceptable interactions
between appraiser and loan officers, lenders are afraid that having any contact
with appraisers could be construed as violating the law by attempting to
influence the appraiser's opinion before the appraisal is completed. Lenders
err on the side of caution to avoid the possibility of severe disciplinary
action. Loan officers and brokers cannot select the appraiser, nor can the
borrower. Borrowers also can’t submit an appraisal that was performed for a
different lender, though they “may tell the bank that another appraisal exists,
and the bank can request the appraisal report directly from the other
The lender often will order the
appraisal through a third party called an appraisal management company (AMC). "Using an AMC is not a
requirement, but that is the common approach to appraiser independence,"
says Joe Parsons, senior loan officer at PFS Funding of Dublin, Calif., a
regional banker, and mortgage
Many lenders – especially small, local ones – have direct referral
relationships with a small panel of appraisers and don't use an AMC. Or the
lender may have an in-house independent appraisal department. The
appraiser should have local knowledge of the area (called market competence).
Appraisers are expected to follow the Uniform Standards of Professional
Appraisal Practice issued by the Appraisal Foundation, a professional
organization, though these standards are not law.
Appraisal fees vary by state, but appraisers must
charge customary and reasonable fees for the area. Expect to pay $300 to $500
for an appraisal of a standard single-family home.
“More complex properties are more
expensive because the inspection takes more time,” says Erin Benton, vice
president of Decorum Valuation Services, an appraisal management
company in Ellicott City, Md.
You must pay the fee up front at
the time of the appraisal, not at closing; regardless of whether your loan
closes, the appraiser still did the work. While the fee may seem worthwhile if
it enables you to get the refinance terms you want, it can seem like a waste of
money if a low appraisal means you can’t refinance.
Since lenders cannot discuss a
home’s value or anticipated “target value” with an appraiser at the time of
assignment, homeowners can't get an appraiser’s ballpark estimate of whether
their home is likely to appraise high enough for them to refinance before they
pay for the service, as they could before the new regulations. At best, you can
search for recent comparable sales on websites such as Zillow and Redfin, but
their records may be incomplete.
Another option is to ask a real
estate agent to do a comparative market analysis and provide you with printouts of
recent comparable sales from the Multiple
Listing Service, says Bruce Ailion, an agent with RE/MAX Greater
Atlanta. Ask nicely, since they’ll be doing you a favor – unlike a home sale,
the agent won’t earn any commission from your refinance.
The value the appraiser gives
your home largely depends on the recent sales prices of comparable properties,
but you’re mistaken if you think you can’t do anything to help your home come
in at the high end of its potential appraisal value.
Getting your home appraised is
similar to going on a first date, Ailion says. While you have no idea how your
partner will like or evaluate you, being well groomed substantially improves
your chances of being deemed attractive. “So it is with the appraisal,” he
“Your property should be neat and
clean, uncluttered and easy to inspect. Any pets should be contained and smells
masked. You don't want the appraiser to be rushed to get out,” Ailion says.
Here's how appraisers describe
how they work:
“Generally, it should not matter
if your lawn is not mowed or your house is a mess,” says certified residential
appraiser Ralph J. Vaccari, president of Vaccari & Associates in Marblehead, Mass. “It’s important
to realize, though, that a dirty or unkempt home can increase its appearance of wear and tear beyond normal, and that condition
can, in fact, affect value.”
The appraiser cares about the
following, says Vaccari:
It’s a good idea to point out
features that may not be immediately apparent that could potentially add to the
appraiser’s opinion of value, Parsons says.
Preparing your home for an
appraiser’s visit, however, is different from preparing it for a prospective
“When you are opening your home
to a prospective buyer, you want to trigger emotional responses,” Parsons says.
“As a seller, you want
that buyer to be able to imagine how happy and comfortable they will be there.
No such subjective considerations apply to an appraisal,” he says.
Vaccari adds that a homeowner
wouldn’t make a change, such as ripping up old carpet to reveal hardwood
floors, for an appraisal, as he or she might for a seller. But freshening up
the home’s paint, both inside and out, can help, as can clearing away clutter
to allow full access and viewing of all areas of the home, including the
Finally, “If the tax records are
incorrect, point that out,” says Ailion.
Otherwise, it is the appraiser's
responsibility to discover problems and ask questions where warranted, Vaccari
Congrats! You've completed a
major step in refinancing your mortgage. Now it's time to go through the next
series of steps with your loan officer. If you've secured a favorable
appraisal, then use a tool like Investopedia's mortgage calculator to research
interest rates on a refinanced mortgage for a home of your value. Being armed
with these figures can assist you with some bargaining power when you meet with
Sometimes the appraiser’s value
is not only lower than you’d like it to be but lower than you think your
home is worth.
“An appraisal is just one
person’s opinion,” Ailion says. “While this is a trained and educated opinion,
as with all professions, there are good and bad practitioners.”
Given the strict federal
regulations governing the process, is there anything you can do about a low
“If the homeowner does not like
the value of the appraisal, they can write a letter of appeal to the lender or
AMC, but the chance of an appraiser changing his or her opinion is very slim,
unless the homeowner has overwhelming evidence that the value is off,” says
Your appeal will only succeed if
you show that the appraiser made a significant error, such as listing the
square footage or room count incorrectly; disregarding an important amenity, such as
a pool or spa; or disregarding a comparable sale that might support a higher
value while “cherry picking” a less-suitable comparable that would indicate a
lower value, Parsons says.
You might also make a case by
pointing out that the comps used were in an inferior school district or an
inferior subdivision that did not have an HOA with
swimming pools and tennis courts, that the all the comparables were distressed or REO sales, or
that they have other negative externalities influencing value, such as being on a
busy street, Ailion says. “Explain why they are different and not equal to
yours. You must prove something is in error with the comparables selected.”
If you can’t successfully
challenge a low appraisal, how do you ensure the refinance goes through? If the
appraisal puts you at less than 80% equity – meaning the lender will require
you to pay for private mortgage insurance – you can do a cash-in refinance and
bring several thousand dollars to closing to get to that magical 80% loan-to-value ratio and avoid PMI. You can also choose to pay PMI for
now. If home values continue to rise, you can provide comparable sales to your
mortgage servicer and ask it to remove PMI even if you haven’t yet paid down
much of your principal. If the appraisal reveals that you’re underwater,
however, all you can do is wait for the market to improve unless you qualify
for a government assistance program, such as HARP.
Understanding how the appraisal
process works will give you the best chance of getting an appraiser to assign
the highest possible value to your property. Appraisals don’t always come in at
the values borrowers hope for, and they are a human process with room for
subjectivity and mistakes. You can appeal a low appraisal, but you’ll only
succeed with strong data to back you up.
By Amy Fontinelle - To view the
original article click here