Don’t confuse the home inspection with the inspection done by an appraiser who provides the appraisal report. Here’s the difference, quick and easy:
The Home Inspection
You hire and pay for the home inspection outside of the loan. The inspector goes through the house from roof to crawl space. He or she will point out every flaw, take a photo, and write a detailed report. It’s best to be present at the inspection so you can speak with the appraiser directly and ask questions.
Your Purchase Agreement should have a clause that allows you to cancel the sale without penalty if the inspection does not pass your personal standards.
Every house has its flaws. You need to decide which items are major enough to ask the seller to fix or provide you with a credit to fix yourself. It doesn’t make sense to ask for inconsequential items to be repaired.
You do not share the inspection report with your lender.
The appraisal determines the fair market value of the property. It protects you from paying too much and the lender from lending too much. The report is ordered and owned by the lender, but paid for by the borrower. The borrower receives a copy of the report, per federal lending law.
The lender may not collect money for the appraisal until after you have received the loan disclosures, a packet of information that includes the Loan Estimate. Then the lender will ask for payment of the appraisal by credit card.
The appraisal is paid for upfront, because if the value comes in too low or if you cancel the loan for any reason, the appraiser still must be paid. The lender does not cover that cost for you if you cancel the loan.
If the value comes in lower than the purchase price, you have three choices:
- You can have your Realtor renegotiate the price.
- You can pay the difference between the original sales price and the appraised value. (This will increase your cash to close.)
- You can cancel the sale.
You can also dispute the appraised value by providing different comparable properties with an explanation. This rarely works, but one time I saw the value raised in response to a customer dispute.
Neither you nor your loan officer chooses the appraiser. That is done by a neutral party who has no vested interest in the closing of the transaction. The idea behind this regulation is that neither the buyer nor the loan officer should have the ability to influence the value. That is why you cannot order your own appraisal report. No lender will give a report ordered by you one second of their time.
For more information about bogus appraised values, see my post here.
For 7 facts you should know about home appraisals, see my post here.
I welcome your comments and questions. (See Leave a Comment at the top of the post, under the title.)
The main purpose of the home appraisal is to determine fair market value. Thus, it is a vital and necessary part of the home buying process. Here are seven facts you should know.
1) The appraisal report must be ordered by the mortgage company, never the home owner or the home buyer. Why? Because you might have a cousin or friend in the business who will not be impartial in determining the value.
2) The loan officer at the mortgage company cannot choose the appraiser.
This has been law since 2009 after a lawsuit against Washington Mutual Bank about coercing values. Prior to that, loan officers chose the appraiser and often had a conversation about the property. No more! Many lenders use an appraisal management company as a neutral party. This, of course, creates another fee for the home owner. The fee can range from $19 to $200.
3) The appraised value is based on other home sales. The appraiser finds five to six similar homes that have sold in the past three months. The appraiser makes adjustments for size, age, and quality, then determines the value. The idea is that the true value of a home is “where buyer and seller meet.” (If it’s a refinance, the value is also determined by the comps.
4) Unusual homes are difficult to appraise. If you home is a geodome-style, a log home, isolated in the country, or other unique property, it is not easy for the appraiser to find comps and determine value. In this case, many appraisers err on the side of a conservative value.
5) With a purchase loan, the appraiser receives a copy of your purchase contract. The big complaint here is that the appraiser knows the purchase price; therefore, is the appraiser biased in the value determination? Appraisers will argue no, but some home buyers are skeptical. The appraisers are not going in “blind” as they are with a refinance.
6) You have the right to dispute the value. If you feel strongly that the
appraised value is inaccurate, you may provide other comps with a statement to your loan officer. The loan officer will then submit it to the appraisal management company who passes it on to the appraiser. The appraiser’s response will be the final answer. (Personally, I have seen only one instance in which an appraiser raised the value based on the borrower’s dispute.)
7) It is your legal right to receive a copy of the appraisal report before you sign loan documents. Federal lending law gives you three-days to review the report (unless you sign a waiver). In all cases, the lender must provide the report to you before you sign final documents.
I hope this information is helpful. Feel free to share it on Facebook and Twitter. Any questions, let me know.
Did your property receive an inaccurate appraised value? Were you low-balled? Did the appraiser neglect to take into account home improvements or neighborhood qualities? Was your home value unfairly dragged down by the empty, neglected, foreclosed property down the street? If so, I have good news for you.
For the first time, lenders are now required to disclose to you ALL the information they base their underwriting valuation on, including the appraisal report. But that’s not all. Lenders use much more than the appraisal for their final judgment on a property value.
Common Considerations in Determining Property Value
The following are often used to determine value and loan-to-value ratio:
- The Automated Value Model (AVM). For example, CoreLogic provides more than one billion AVM reports monthly to lenders and other clients. These reports estimate property value without having a human go out to see the actual house. Freddie Mac has their version, called Home Value Explorer (HVE). There are others as well.
- Broker Price Opinions. For a fee, some real estate brokers will provide a value opinion to lenders.
- Appraisal Reviews. This is when the lender pays a second appraiser to take a look at the first appraiser’s report and weigh in. You might have noticed an Appraisal Review Fee on your Fee Worksheet or Good Faith Estimate if the lender passes on this cost to their customers.
- The Appraisal Report. Before now, this is the only document that has been provided to you, the borrower.
You now have the right to receive all this information. The law dictates that the lender is to provide it to you “promptly” (however that vague term might be interpreted) after receiving it, and no later than three days before closing.
WARNING: If you sign the waiver form that is included in your initial disclosure packet, then you give permission for the lender not to provide you with this information before closing. So pay attention to what you sign. You can also ask your loan officer where this is in the packet if it’s not clear and obvious to you.
If your property value is inaccurate, unfair, and bogus, you should share the disclosures with your real estate agent and ask for his or her assistance in making a list and including good comparable properties. Then you have the right to dispute the value, using this list. Personally, I’ve found that lists are a more effective and efficient way to get a decision reversed than a long essay-type letter.
I would be interested in hearing about your experience with this new law, so please feel free to email me via my “Ask Carolyn Warren a Question” page in the blue banner at the top.
The first thing you should do is have your real estate agent show the appraisal report to the seller’s agent and ask them to lower the price to match the appraised value. If they agree, then that is your best option. The purchase agreement is amended to the new price, you send that page to your loan officer, and then the loan officer adjusts your down payment and loan accordingly.
If the seller does not agree to lower the price, then you have two choices. You can either make up the difference with cash out of your own pocket, or you can walk away from the deal.
To Make Up the Difference in Cash
Let’s say the sales price is $200,000 and the appraised value is $190,000. In this case, you would have to kick in an extra $10,000 out-of-pocket if the seller will not lower the price. This is because lenders will not go higher than the appraised value for their loan. I suggest you think do a thorough market analysis and put your emotions in check before you take this option. Why would you want to pay more than the property is worth? You’d want to have a very compelling reason to make such a financial decision.
To Walk Away
The seller might disagree with the appraised value and think that a different buyer with a different lender will get a different appraised value; therefore, they might not agree to lower the price. You should have a contingency clause in your purchase contract that allows you to walk away and get all of your earnest money refunded if this happens. A good buyer’s agent always makes sure you have such a clause, and this is one mistake do-it-yourselfers who are not represented by an agent sometimes make. I once witnessed a terrible fight break out between a For Sale By Owner seller and a buyer who went straight to the seller without agent representation. Believe me, it was quite a spectacle when the yelling turned into threats to “take it out onto the street.”
One More Option
Occasionally, there is an appraiser who royally messes up the value. The report that comes in is nothing short of idiotic. The comparable properties are totally inappropriate with better comps in the neighborhood ignored. Not only that, but special features that increase the property value have been ignored. When this happens, the seller probably won’t lower the price. If you want to continue to fight for this house, you can ask your mortgage broker to go to a different wholesale lender for the money and thus start fresh with a new appraiser.
This works because your loan file goes to a whole different company with a different underwriter who never saw the bogus appraisal. Of course, you will need to pay for another appraisal.
If your lender is a direct lender or a bank and does not have the option to shop wholesale lenders for you, then this choice is not available. Once an underwriter has seen an appraisal, she (or he) will not consider a different appraisal, even if the second one is more accurate. Only if the original appraiser will change the report will the underwriter accept a different value. (Getting underwriters to change their reports, even when they are dead wrong, is impossible 99% of the time.) So in this case, you would have to withdraw your application from the bank and shop for a mortgage broker yourself in a super speedy manner. Depending on the closing date, this could be problematic.
No matter which option you choose, you need to discuss the situation with your real estate agent and your loan officer. With the three of you working together, you should be able to select the best choice and protect your earnest deposit.