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How Your Appraisal Can Ruin Your Mortgage


 Ruin Your Mortgage

How Your Appraisal Can Ruin Your Mortgage - Appraisals are one of the most important steps in buying or selling a home, yet they can also be among the most frustrating as well. That’s because when it comes to determining the value of a home, there's no exact science or magic formula used during an appraisal. However, if there's a large enough gap between the appraised value and the previously-agreed-upon purchase price, it can temporarily or permanently halt the transaction.  

So, how can appraisals go so wrong?
Typically, appraisers review the purchase prices of similar homes located nearby that have sold within the previous six months. But what if there aren't any homes like the one they have been hired to appraise?

Unfortunately, many dig up older sales records dating as far back as five years ago. They may also check out listing prices for similar-sized homes that may be priced significantly higher than what a buyer is actually willing to pay for the home. Or, they may use out of market numbers. In any event, the end result is an appraised value that’s well below what both the buyer and seller were anticipating. As you can imagine, when a buyer receives news that the home they are intending to purchase is worth less than the agreed-upon purchase price, they begin to worry, and rightfully so!

Remember, a lender is only going to approve a loan for the appraised value of the home, so if the property is appraised at 75% of the purchase price, the lender is going to lower the mortgage amount to cover only 75% of the total cost. After all, why would they loan more money than the home is apparently worth? That means the buyer will have to come up with the other 25% on their own, often forcing the buyer into making a larger down payment. If they can't afford to do that, many buyers will try to renegotiate the price will the seller, and that's when things can get messy. All too often, the two sides can no longer come to an agreement on the price of the home, and the sale falls through.

How often does this occur?
The National Association of Realtors recently conducted a survey of 3,000 agents, and found that 33% experienced a delay, had to renegotiate the price, or had to cancel the contract altogether last year because of an appraisal discrepancy. That's up from only 10% in 2008! Economists at CoreLogic recently told the Wall Street Journal that we could see even more sales delayed or cancelled – especially transactions involving luxury homes – as the market continues to recover. They say that's because the system is flawed. They say appraisers are looking at sales prices from a few months ago when the housing market wasn't as strong as it is today.

So what can you do?
There are steps that sellers and buyers can take to protect themselves, to ensure that a transaction happen without any glitches or delays. Experts say buyers should add a contingency clause to the purchase contract stating that they get back the initial down payment if the appraisal ends up being less than their offer. That way, the buyer has more leverage to renegotiate the offer or walk away from the deal without losing the funds they've already paid towards the home.

For sellers, experts advise checking out the county's property tax records. Government officials assess home values to determine how much property taxes the owner owes on the home, but sometimes their figures can be wrong. Since appraisers use these county assessments to calculate their figures, if the government has overvalued the property, chances are the appraisal won't be accurate.

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