Robert Magda: Could a Home Appraisal Derail Your Refinance?

Wednesday, December 3, 2014

Could a Home Appraisal Derail Your Refinance?

In the rush to lock refinances during the current rate dip, borrowers and lenders may forget to consider the many ways a property appraisal can disqualify or delay a refinance. Here’s what you need to know about appraisals to ensure you handle yours correctly.

Your loan officer can’t talk to your appraiser

Up until 2009, your loan officer could discuss market value trends in your neighborhood with a local appraiser before ordering an appraisal. This advance research helped lenders set expectations about target loan amounts and rates.

But now federal rules prohibit loan officers from communicating with appraisers. The rules are designed to ensure appraiser independence, and have changed the way you can pre-screen your property before a refi transaction.

You can (and should) estimate values before ordering appraisals

Given these appraisal regulations, you must pay for an appraisal in advance to determine your home’s value for a refinance. Fees range from $300 to $1,200 depending on property type, occupancy status and location, so you’ll still want to do everything you can to estimate value before ordering and paying for that appraisal — especially if the outcome is questionable and could render your refinance ineligible.

The first (and fastest) step is to review the home’s value estimate on Zillow. The Zestimate® home value represents Zillow’s estimated market value for an individual home, and is calculated for about 100 million homes nationwide. It’s not an official appraisal, but it’s a starting point in determining a home’s value.

The next step is to fine tune that estimate the same way an appraiser would. Residential appraisals in the U.S. follow the comparable sales method to derive appraised value. They compare recently sold homes that are the closest “model matches” to your home within one mile.

Then they take these comparable sales and make adjustments relative to your home for factors such as proximity to your home, date of sale, location, quality of construction, condition, room count, home and lot size, energy efficiency and parking.

Ask your real estate agent to pull comparable sales and perform this comparative analysis. Then offer your appraiser this data. The appraiser isn’t obligated to take your research, but you can and should offer it.

“Health and safety” issues can trip you up

If your agent’s value estimate makes for a clean refinance, the next step is to assess whether your home has any “health and safety” issues appraisers are required by law to look for, including:

Does the home have carbon monoxide detectors?

Are there bars on windows, and if so, do they have safety latches?

Is there mold or mildew anywhere on the property?

Are any walls open as a result of a remodel or new construction?

Are there any un-permitted additions to the property?

For example, if you had converted your garage into an apartment with a kitchen and didn’t use permits for the construction, the kitchen stove would have to be removed before your loan could close — and if you couldn’t remove the stove, your loan would be ineligible.

All these issues can create loan delays or loan ineligibility depending on the severity of the problem and the time required to fix the issue. Ensure your lender is aware of any potential health or safety issues with your property before you pay for an appraisal.

There’s a big difference between “subject to” and “as is” appraisals

Whenever an appraiser identifies any issue, including health and safety issues, they will note whether the appraisal is being delivered to the lender as “subject to” or “as is.”

A “subject to” appraisal isn’t complete because the value is being determined by a factor that is subject to being fixed. To use our un-permitted kitchen example above, the appraisal would be delivered subject to the stove being removed.

This is critical because you have to do the work, then the appraiser must re-inspect the property, which involves extra fees that you may not have been initially quoted, and it can cause delays that might jeopardize your rate lock. Again, you need to let your lender know of any potential property issues before you pay for an appraisal and lock a rate.

On the other hand, an “as is” appraisal is complete. In most cases, you’re all set and won’t have any re-inspections, associated fees or delays.

You can appeal a low refi appraisal

Appraisals are subjective. No matter how much homework you do, your value could still come in lower than you targeted for a refinance.

The first thing to do in this case is to refer back to the standard U.S. appraisal industry methodology noted above, and consider two factors:

Whether the actual comparable sales include all the comparable sales your real estate agent gave you. If you didn’t do comparative sale analysis with your agent in advance, this is when you can ask your agent for help providing any relevant comparable sales that weren’t in the appraisal.

Whether the adjustments used for comparable sales are appropriate. For example, you may have just renovated your home, and you know that a few neighboring homes used as comparable sales are still in original condition. Make sure the “condition” section makes favorable adjustments for your property being superior to the comparable sales.

Ask your lender to help you evaluate these factors and make corrections where necessary. Then they will use these findings to submit a rebuttal to their bank, which will require the appraiser to comment. Appraisers will often hold the line on their original value if your rebuttal is weak, so you must use hard data as described here, rather than provide your opinion of your home’s condition or value.

These appraisal rebuttals take three to seven days, so you need to account for that in your rate lock timing. But if you’ve done your rebuttal research as described above, you can cut this time significantly.

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