Can A Lender Not Honor A Home Appraisal?


Home Appraisal

Home Appraisal Process
Gustan Cho Associates

All mortgage lenders require a home appraisal to be done on a home purchase and/or refinance mortgage.  The reason for the appraisal is to confirm the market value of the subject property and to protect the mortgage lender’s interest in the case of a mortgage loan default and a foreclosure.  A home appraisal is performed by a licensed appraiser and the market value that mortgage lenders go by is the comparable valuation method.  Appraisers need to justify the appraisal by providing comparable comparison homes to the subject property that is within the same sub-division or within a one square mile radius that is like and similiar in size, quality, and location.  No property is exactly the same and an appraiser can do price adjustments with regards to ammenities, square footage, age, and condition of the subject property to comparable properties.

Home Appraisal Process

Most home sellers have professional realtors price out the home they are trying to sell.  Majority of home buyers are home buyers that need a home loan.  In order to get a home loan approval and close on the home, they need to make sure that the appraisal comes in at the purchase price or otherwise the deal will be dead.  It does not matter whether a home seller gets multiple offers at a high asking price.  Unless the home buyer is a cash buyer who does not care about the value of the subject property, the home will not close unless it is priced accordingly and the property appraises out.

Who Orders The Home Appraisal?

After you enter into a home purchase contract and you submit the signed real estate contract to your mortgage lender, the mortgage lender will order the appraisal as soon as you get a conditional mortgage loan approval.  The appraiser will contact the selling real estate agent to get access to the home.  If the seller’s real estate agent has strong recent comparables to help the appraiser, they can provide it to the appraiser when the appraiser does the home appraisal.  The appraiser will normally take 3 to 5 days to complete his appraisal report and submit the report to the appraisal management company.  The appraisal management company supervisor will review the appraiser’s report and sign off on it and submit it to the mortgage lender.  Once the mortgage lender receives the completed appraisal on the subject property, two things can happen depending on the mortgage lender.  The mortgage lender will just honor the appraisal and will use the appraised value on the appraisal or some mortgage lenders will have an appraisal review process.

What Is An Appraisal Review?

Some mortgage lenders have their own appraisal review process where an appraisal review underwriter will go through the completed appraisal that was just completed by the licensed appraiser.  The appraisal review underwriter is a quality control underwriter and will be scrutinizing and analyzing the appraisal to find any flaws in it.  If everything checks out, the appraisal review underwriter will sign off on it.  If there are issues with the appraisal, then the appraisal review underwriter can not honor the home appraisal until the issues the appraisal review underwriting have addressed have been answered.

Why Lenders Do Not Honor Home Appraisals?

There are two situations where my wholesale mortgage lender did not honor my borrower’s appraisals last year.  Both were FHA appraisals and due to the mortgage appraisal review underwriting having issues on both deals, the mortgage loan closings got delayed.  On one of the appraisals, the appraisal was not honored by the appraisal review underwriter due to the fact that the comparables were not close enough.  The area was a semi-rural area in Jacksonville, Florida and the purchase price was $365,000.  The appraisal came in at $365,000 but the appraisal review underwriter slashed the market value to $310,000.  Long story short, after multiple back and forth with trying to justify the $365,000 appraised value the appraiser came in at and the supervisor of the Appraisal Management Company validating the $365,000 value, the appraisal review underwriter boosted the market value to $320,000.  We were still short $45,000.  The sellers did not want to lower the sales price and the buyers could not cough up with the difference.  On this case scenario, I killed the deal with the wholesale mortgage lender and took the mortgage file to a different correspondent mortgage lender where they did not have an appraisal review process.  The different wholesale lender just went off the original FHA appraisal.  FHA appraisals can be transferred from one lender to another.

Issues With Appraisal Review Process

On a different case scenario, the appraisal review underwriter had a problem with the appraisal on a subject property that came with 7 lots and there were no comparables similar to the subject property.  On this case scenario, the mortgage loan underwriter requested a second appraisal to justify the original appraisal and its price adjustments.  The second appraisal validated the first original appraisal and the mortgage loan got a clear to close and ended up closing on the loan.

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