This BLOG On Appraisal Issues During Home Buying and Mortgage Process Was PUBLISHED On September 2nd, 2019
The word “appraisal” can be an ugly word when things don’t go right.
- The appraisal determines the value of a property
- A lender requires appraisals so they know how much the asset is worth what they are lending on
- Gustan Cho Associates are experts in appraisal for each mortgage product
In this blog, we will detail the importance of the appraisal, the appraisal process, and what to do when appraisal issues arise.
What Is A Home Appraisal And Its Importance To Lenders
An appraisal is a very important part of the mortgage process.
- An appraisal is defined as “a valuation of a property by the estimate of an authorized person” by Merriam-Webster Dictionary
- A real estate appraisal will determine the value of a given property
- There are very strict guidelines the appraiser must follow when coming up with the value
- Think of it this way; if you were lending large sums money to somebody, you would want to know how much their collateral is worth before making that decision
That is the basic principle behind an appraisal.
How The Appraisal Process Work After The 2008 Real Estate Crash
After the real estate crash of 2008, strict guidelines were put in place to prevent overestimated home values.
- The majority of the country had property values way higher than they really should’ve been
- This caused a burst in the real estate market and we all know what happened with that
- Now appraisers must be registered with HUD to complete FHA and or VA appraisals
- They have a strict rule book for how appraisals must be conducted
- This is a good system for all parties
It protects the borrower from buying something overpriced home as well as the lender for not overlending on a property.
How The Appraisal Process Work During The Home Buying And Mortgage Process
Now that we understand the importance of the appraisal, let’s discuss the appraisal process.
- With the new appraisal laws, and appraisal must be ordered by a third-party vendor
- The use of an unbiased third-party takes any personal relationships out of the appraisal process
- The seller, buyer, or lender cannot know the appraiser personally
- This is why appraisals are now ordered through an AMC or appraisal management company
- Once the AMC receives an appraisal order, all licensed appraisers who are signed up with that AMC have in equal opportunity to accept the appraisal order
- It is on a first-come-first-serve basis
- Once an appraiser accepts the bid, they will schedule an inspection time with the homeowner (or listing agent)
- On average, an appraisal takes 7 days from the date ordered to receive the actual report
Once the report is received, an underwriter will go through it with a fine-tooth comb to make sure they agree with the appraiser’s remarks. Sometimes revisions are needed.
Typical And Common Home Appraisal Issues
- The appraised value is the most common issue with appraisals
- When the appraised value is lower than the purchase price or amount needed to complete a refinance, borrowers are upset
- As stated above, the third-party unbiased appraisal protects both the lender and the borrower
- Of course, it is frustrating, and the borrower is out a good chunk of money, but it does protect them from buying an asset overvalue
Condition Of Property And How It Can Become Appraisal Issues:
- An appraised value will either come back “as is” or “subject to” repairs
- An appraisal is different than a home inspection
- But an appraiser will still notice major deficiencies
- Any damage from a leaky roof or missing drywall will need to be addressed prior to closing on the mortgage
- Photos will be taken of damaged areas and those items will need to be fixed
- Once the seller completes the repairs, the appraiser will go back out there and confirm the repairs are completed
- There is a trip fee involved that the borrower must pay for
- Appraisal Issues can be fixed
Below is a photo of an appraisal that shows the property is in “as is” condition:
There are also quality ratings. Most lenders can lend on C4 and better ratings, see below:
Local building codes:
- Many states have specific building codes and appraisers will look out for those items
- For example, California has specific rules regarding hot water heater straps
- An appraiser must take photos of the hot water heater with the straps connected
- There must also be a carbon monoxide detector
- Your loan officer should know of any local codes to be on the lookout for when house hunting
- Something as minor as a missing carbon monoxide detector will cause a delay in the appraisal process
What Happens When There Are Appraisal Issues?
A lender is prohibited from ordering an additional appraisal to achieve an increased property value or lower/eliminate deficiencies or repairs needed.
- You have one shot with an appraisal
- There are times when more than one appraisal is needed, but it is uncommon
- A lender may only order a second appraisal if an underwriter determines the first appraisal is materially deficient and the appraiser is unable to resolve the deficiencies
- The lender must document the deficiencies and have both appraisals in the loan file
A borrower is not allowed to pay for the second appraisal. It must be paid for by the lender.
Appraisal Issue Solutions
The majority of the time if there is an appraisal issue, the buyer and seller must come to a compromised agreement or walk away from the deal.
If the appraised value comes in low, the lender may only base their loan off the appraised value. Meaning the seller must lower the purchase price or the buyer must pay the difference in cash.
Appraisal issues are part of the home buying process. They do come up from time to time. While they are frustrating, the appraisal process is very important. Gustan Cho Associates are appraisal experts. We are available seven days a week for any appraisal related question. Please check out our Blog on APPRAISALS VS HOME INSPECTIONS for more details.