Last week's economic news includes several reports about housing markets.The S&P Case-Shiller 10 and 20 city housing market indices, the FHFA House Price Index, New Home Sales and Pending Home sales reports suggest that the national housing market continues to grow, but at lower rates.
Mortgage rates are the lowest they have been in years—and that presents an opportunity for homeowners to save a good deal of money by refinancing into a lower rate.
One of the most important parts of the refinance process is the appraisal. Lenders require a written estimate of the home’s value to know there is sufficient collateral for the loan they are about to make.
Who determines appraised value?
An appraiser, a licensed professional, inspects the property (“the subject”) and describes it in a systematic, standardized way: living space, number of bedrooms and baths, condition, amenities, lot size, location and more. He determines the living space by measuring it, drawing a diagram to scale, and calculating the number of square feet of living space. A converted garage is not counted as living space unless it has been remodeled in a “workmanlike manner.”
The appraiser notes upgrades and remodeling and documents it all with interior photos. He also photographs the exterior of the property and the neighborhood to give a feel for the property’s location.
What are comparable sales?
Then the appraiser searches public records and the local Multiple Listing Service to find at least three similar properties near the subject that have sold recently—generally within six months. These properties are “comps,” short for “comparable sales.” He researches these comps, usually by viewing their listing information, to find those sales that are the most similar to the subject.
In his report, he describes each one of the comps in the same standardized way as the subject. He applies dollar adjustments to each one to make them the equivalent of the subject. If one comp sold for $300,000 but had 200 square feet more living space than the subject, the appraiser would adjust the selling price downward for the space difference. In this example, he would apply an adjustment of around $15,000 to the comp, giving an adjusted value of $285,000.
He applies similar adjustments to all the comps—subtracting from “superior” comps, adding to “inferior” ones.
Among the features an appraiser can consider are:
- Living space
- Bedrooms and baths
- Lot size
- View and location (a property on a quiet street is superior to one that backs up to a freeway)
- Other amenities, like pools and spas
The appraiser will drive by each of the comps in his report and take an exterior photograph of each one.
When he prepares his report and gives his “opinion of value,” he will arrange the comps in order of similarity, and then calculate a weighted average of the adjusted value of the comps he has chosen to arrive at his opinion of value.
What you can do once you have an appraised value
Every appraisal has an Effective Date. This is the actual date he delivered it to the client (the lender). Any properties that happened to sell after the Effective Date are irrelevant to the report, even if they would support a higher value. If the appraised value is critical to a successful refinance, you may want to consult with a local real estate broker to see if there are any sales pending that might support a higher value. You would order the appraisal only after those sales had closed.
Since the 2008 meltdown, appraisers and lenders are subject to far more regulation and restriction than before. One aspect of this is “Appraiser Independence.” This means that the lender, real estate agent and seller cannot have any communication or influence with the appraiser. Lenders must order appraisals through a neutral third party, an Appraisal Management Company (AMC). The AMC selects the licensed appraiser from their list of independent licensees. This prevents you or the lender from choosing the appraiser. The lender can use only those appraisals that are deemed “compliant” under the new laws.
My appraisal was too low!
An appraisal is an opinion of value. There is always the possibility of error. If the value on the appraisal is too low to accomplish what you want, you have some choices. You start by asking the AMC for a “Reconsideration Of Value” (ROV). In this request, you must demonstrate that the appraiser was mistaken in some way. Did he measure your property incorrectly? Did he report that it has three bedrooms, when there are actually four? Did he claim that the lot size was 4,000 square feet, when you know it is 5,500?
Did the appraiser disregard comps in the area that might support a higher value? It is not uncommon for an appraiser to ignore a sale two doors down from the subject, selecting properties half a mile away that sold for very low prices.
The appraiser may have claimed in his report that your property has no upgrades, but you recently installed new cabinets, appliances and flooring. Errors like these are more common than you might think—and calling attention to factual errors gives your request a greater chance of success. It will not help to say, “My home is the nicest on the block!” without being able to document your claim. If you think the appraiser has made errors, a local real estate broker can help you put your case together.
If they refuse to change the value:
If your loan amount is more than 80% of your home’s value, you’ll have to pay mortgage insurance. What if the low appraised value means that your new loan would be 82% of the value? You have a couple of choices. You could reduce your loan amount to 80% of the value, which means that you would have to bring some cash to the table. Or you could pay mortgage insurance—but only for a short time. The monthly premium could be just $60/mo on a $400,000 loan—and you’ll be able to get it removed once the property has appreciated sufficiently. That could happen in a year or less—and you will be taking advantage of today’s very low rates, even though your appraisal wasn’t what you had hoped for.
There’s much more to the home refinance process than simply finding your home’s appraised value. Get the rest of the vital information you need with our ebook Time The Market: When To Refinance And Lock A Rate.
Have questions? Sammamish Mortgage is a local, family-owned company based in Bellevue, Washington. We currently lend in all of Washington, Oregon, Idaho and Colorado. Please contact us if you have mortgage-related questions.