Home Appraisals

A home appraisal is part of the mortgage approval process when you apply for a mortgage loan.  An appraisal is one of the most important factors in getting a final mortgage loan approval.  This article is geared towards first time home buyers to educate them on the appraisal process during the mortgage approval process.  Just because you have the required down payment and are armed with a solid pre-approval does not mean that you are home free.  The property you have under contract need to appraise out to the purchase price.  Most of the time, most first time home buyers or seasoned home buyers do not have low appraisal issues but there are times where a low appraisal can cause delays in the mortgage approval process and sometimes a low appraisal becomes a deal breaker.

Pricing Your Home Right

Most home sellers who want to sell their homes consult with a professional licensed real estate agent.  The real estate agent normally recommends to the home seller a suggested listing price on the home.  The real estate agent normally does a market valuation study which normally consists on recent comparable sales of similar and like properties of the subject property within a one square mile area.

Market Value Analysis

The real estate agent may consult with appraisers or other realtor’s in doing the market analysis study and will recommend to the home seller a suggested listing price.  Most home sellers will also do their own market study and eventually will come up with a listing price.  There are home sellers who feel that their home is worth much more that recent comparable sales and list their homes at a higher market price.  Listing a home higher than recent comparables may be an issue when the home is under contract if the home buyer is getting a mortgage.  Every home buyer who gets a residential mortgage loan is required to have an appraisal done on the subject property.  A low appraisal is often a major issue when it comes to homes that are overpriced.  An overpriced home does not mean that the home is not worth the value.

Custom And Unique Homes

Many home sellers may have customized their homes by having an outdoor kitchen, custom millwork, custom windows, custom flooring, high end electrical and plumbing fixtures, and other ammenities that may add value to the home but will not affect a higher value on the property appraisal.  Residential mortgage appraisers are mainly concerned with similar and like properties within a one square mile radius and do not take certain luxuries into account when giving the subject property a market appraised value.  There are certain aspects to the subject property that the appraiser can add value and give a higher valuation such as an additional adjustment for the subject property being a waterfront property, gulf course property, being backed on a green belt, and being on a larger lot.  There are many cases where home buyers still want the home badly even with a low appraisal.  Low appraisal issues are not common.  It normally happens ten percent of all residential mortgage loans I originate and does cause delays in the mortgage approval process.

Comparables And Low Appraisals

Mortgage lenders will still fund a mortgage loan with a low appraisal but it all comes to money and funding.  Mortgage lenders will only go off the appraised value of the subject property.  For example, if the subject property purchase price is $120,000 and the appraisal comes back at $100,000 and the borrower is going through a FHA insured mortgage loan, the mortgage lender will value the property at $100,000 and not the $120,000.  If the home seller is not willing to reduce the purchase price down to the $100,000 and still wants $120,000 and the home buyer still wants the property, the home buyer will be required to come up with the 3.5% of the $100,000 appraised value plus the additional $20,000.  However, when there is a low appraisal on a subject property, there are solutions where the deal can still go through if both parties, the home buyer and home seller, can come to terms.

Solutions To Low Appraisal Issues

There are multiple solutions to low appraisal issues.  If the appraisal comes in within a insignificant low appraisal value such as a matter of a few thousand, the home seller normally lowers the purchase price.  If the home seller does not want to lower the purchase price, the home buyer can normally afford a few thousand increase if they really want the home.  The issue comes in when the low appraisal is a substantial amount lower than the actual purchase price.  Many times, a home buyer will walk away from the subject home purchase if the home seller does not lower the purchase price to the appraise value.  However, if the home buyer is in love with the subject property and the home seller is not willing to lower the sales price of the home, then an appraisal rebuttal can be done.

Appraisal Rebuttal To Contest Low Appraisal

Appraisal rebuttals are often difficult if you have no evidence to contest your low appraisal.  Your mortgage loan originator needs to complete an appraisal rebuttal request form.  Normally the seller’s real estate agent is required to provide proof and complete the appraisal rebuttal form and submit it to the home buyer’s mortgage company.  Things that the seller’s real estate agent needs to complete is a list of comparable recent sales that is similar to the subject property within a one square mile radius.  There is a comment section where the seller’s realtor needs to complete as well for the reason of the appraisal rebuttal and why he or she feels the market valuation should be higher.  Properties that are currently listed but not sold cannot be used as evidence and to justify the appraisal rebuttal.  The properties needs to be recent sales and properties that are similar to the subject property in square footage, lot size, location, bedrooms, bathrooms, and adjustments such as whether the property is a waterfront property or golf course property.

Appraisal Rebuttal Request

Once the form is completed and submitted to the home buyer’s mortgage loan originator, the mortgage loan originator will submit the completed appraisal rebuttal form to the Appraisal Management Company, also known as the AMC, who in turn will question the actual appraiser who did the home appraisal.  The appraiser will review the appraisal rebuttal and will make comments and submit the appraiser rebuttal form back to the supervisor of the Appraisal Management Company.  The supervisor of the Appraisal Management Company will sign off on the final appraisal rebuttal.  If the appraiser stands by his or her low appraisal value, it will be noted and the appraiser’s comments will be attached justifying the low appraisal.  If the appraiser decides that the subject property warrants a higher appraisal valuation,  a modified appraisal with the new price adjustment will be issued.  Appraisal rebuttals normally will delay the mortgage approval process for about one week.

If Home Sellers Will Not Lower Sales Price On Low Appraisal

Most home sellers do want to work with home buyers in the event a low appraisal happens.  However, there are situations where home sellers either do not cooperate and do not want to lower the sales price or cannot lower the sales price because they just owe too much money on their current mortgage loan balance.  Another solution to resolve a low appraisal issue is to see whether a second appraisal is warranted.  If the first appraiser and Appraisal Management Company were extremely unreasonable and you have justified comparables that you feel a second appraisal is warranted, it may be another solution to solve the low appraisal issue.  You need the mortgage lender’s blessing in order to order a second appraisal and see whether the mortgage lender will even allow it.  If you do not have valid comparables and solid reasons to warrant a higher appraisal valuation, the second appraisal will be a waste of time and money.

Other Creative Solutions To Low Appraisal Issues

Most home buyers get a sellers concession towards their closing costs on their home purchase.  Many times when I have low appraisal issues, one of the ways we resolve low appraisal issues is where both the home buyers and home sellers give up a little.  The home buyer will give up their sellers concessions towards their closing costs and the home sellers will come down on the price of their home.  If the home buyer really needs help with closing costs and giving up the sellers concession will affect their ability to close their residential mortgage loan, they can request a lender’s credit towards their closing costs on their home purchase.

Lenders Credit Towards Closing Costs

Mortgage lenders can give the mortgage loan borrower a slightly higher mortgage rate and in lieu give them a lenders credit towards closing costs where it can offset the home buyer’s closing costs or eliminate the closing costs altogether.  Getting a second mortgage from the home seller is absolutely not allowed so that possibility is out of the question.

All in all, if there is a will, there is a way.  Most low appraisal issues gets resolved over time and if both the home buyers and home sellers can team up to resolve the low appraisal issue, the deal will get done.

By Gustan Cho


The information contained on Gustan Cho Associates website is for informational purposes only and is not an advertisement for products offered by The Gustan Cho Team @ Gustan Cho Associates or its affiliates. The views and opinions expressed herein are those of the author and/or guest writers of Gustan Cho Associates Mortgage & Real Estate Information Resource Center website and do not reflect the policy of Gustan Cho Associates Lenders Network, its officers, subsidiaries, parent, or affiliates.

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