Miami Home loan, and Element Funding, direct lending mortgage bank, found there has been some good articles discussing appraisals. This article was paraphrased from Julian Hebron, a mortgage executive based in San Francisco.[i] . With the mortgage rates on a track to increase in the next few months, getting the best appraisal based on your loan pre-qualification is an important step in keeping your payments at the amount initially estimated. Jim Carter, loan officer, reports on the details of the article from Mr. Hebron.
A home is collateral for your mortgage; your mortgage can’t be approved without an appraisal report on the home’s value. Appraisals aren’t guaranteed to come in at your contract price, and your loan options change if your appraisal comes in short. Here’s what to do if this happensIf you need more information on the Home Appraisal process, here is a flyer to help you learn more Appraisal-Process.
How a low appraisal changes your loan options
When you’re buying a home, lenders will extend a loan on the lower of either your contract price or the home’s appraised value. This is a critical distinction, because if an appraisal comes in lower than you’ve agreed to pay, you must either increase your down payment or increase your monthly budget in order to buy that home.
Suppose a home in a very competitive neighborhood is listed for $300,000. You know there are multiple bidders, so you offer $325,000. Your offer is accepted, and you begin obtaining a loan for 80 percent of the $325,000 contract price, planning to put down 20 percent. When the lender’s appraisal comes back, it shows the value of the home is $300,000.
When your process started, your $325,000 contract price minus your 20-percent down payment of $65,000 made your loan amount $260,000. The low appraisal of $300,000 takes that option off the table, and instead you have two other options.
1. Increase your down payment to avoid paying mortgage insurance
The most you can borrow without paying mortgage insurance is 80 percent of the $300,000 appraised value, which is $240,000. This means that instead of $65,000, your down payment now must be $85,000 to bridge the gap between your $325,000 purchase price and the $240,000 loan amount that’s available with no mortgage insurance.
You’ll need to decide whether this extra $20,000 is something you can afford. If so, the lender also must determine if you’ll have enough reserves left over after closing to still qualify for the loan.
One offset for putting the extra $20,000 cash into the deal is that your monthly payment will be $95 lower.
The original deal with the $260,000 loan using a 30 year fixed rate at 4 percent gave you a total monthly payment of $1,887, comprised of $1,241 mortgage payment, $256 taxes, and $390 insurance. The new deal with the $240,000 loan gives you a total monthly payment of $1,761, comprised of $1,145 mortgage payment, $256 taxes, and $360 insurance.
2. Keep the same down payment amount, and add mortgage insurance
If you can’t afford or don’t want to bring in the extra $20,000 to cover the short appraisal, you can still get your target loan of $260,000. However, if you divide this by the $300,000 value, the loan is 86.7 percent of the home’s value, so you’ll have to pay mortgage insurance.
If you’re getting a 30-year fixed loan at a rate of 4 percent, your total monthly payment will be $1,995, comprised of $1,241 mortgage payment, $108 mortgage insurance, $256 property tax, and $390 insurance.
If you compare the $1,761 payment you end up with by putting in the extra $20,000 (to cover the short appraisal and avoid mortgage insurance) with the $1,995 you’ll pay if you stick with the original down payment (giving you a larger loan plus mortgage insurance), you can see that you’ll save $234 per month if you pay the extra $20,000 upfront.
Disputing low appraisals
All of this assumes you can’t get the appraised value above $300,000. However, when an appraisal comes in short, you can work with your lender and real estate agent to evaluate whether the appraiser included all relevant comparable sales on the report to derive their value.
An appraiser’s selection of comparable sales is based on many factors like location, size, age, upgrades, and general condition of the sold homes being compared to the property you’re buying. How recently the other homes sold is also a factor.
Your lender — usually after consulting with your real estate agent — will advise if they think a value dispute is warranted. If so, underwriters of the file will review any new documents submitted. They will write up a case for a dispute and present it to their appraisal company to review with the appraiser directly. The. Federal appraisal regulations make the dispute process complicated and often slow, so make sure that your contract allows you enough time for a dispute.
If the value is revised to your contract price, you can use your originally intended deal structure. If the low value is validated during the dispute process, you can ask the seller for a price reduction. If they refuse and you still want to buy the property, you can revert to the options laid out above.
Miami-home-loan staff is always a good source of information to keep you informed. To get pre-qualified, discuss a Miami-Home-Loan, or, just ask a financing question, please call me, Jim Carter, Loan Officer, at Element Funding, 305-525-6742.
[i] Notes from Julian Hebron, a mortgage banking executive and writer based in San Francisco. May 5,2015.