These past few months, during this latest mortgage boom, where many folks are refinancing their old loans into new ones, with rates in the low 4's, the same question arises each and every time. How much do you think your home is worth?
Each time I ask this question, I realize more and more that so few homeowners know the answer, and for good reason - the values are changing monthly, so it is nearly impossible to estimate just how much value an appraiser will give you for your home.
Previously, I would call one of my appraisal colleagues first thing, and have him go and appraise the home, and when the value was known, I would be able to then determine just which lender and what loan program would best suit a client's situation.
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A loan for a client with 20% equity in their home is quite different than for those with less than 20% equity, and presently so many homeowners are right on the edge. Unless I know for sure what a client's loan to value is, with all good intentions, I cannot know what loan program would best suit that client's needs.
Loan to value is pretty self-explanatory. It is the amount of the loan compared to the value of the home. A person with a 200,000 loan and a $250,000 home value will have an 80% loan to value. Someone with a $150,000 loan and a $250,000 home will have a 60% LTV, etc.
Unfortunately, these days, the loan industry has put up a huge road block that prevents me from having an appraiser come out early in the process and appraise a client's home. These days, I have to first choose a lender to work with, and then the lender selects an appraiser through an Appraisal Management Center or AMC, that they have signed up with. It is the AMC's responsibility to select the appraiser.
While this does keep the loan specialist and the lender away from reaching or influencing the appraiser it is nothing short of a nightmare. For example, one client thought that there home was worth $260,000 and so their LTV would be less than 80%, actually around 70%, which means they were going to get a regular conventional loan. However, when the appraiser went out he ended up putting only a $230,000 value on their home, and so the borrower actually was at 92% LTV. Well this changed the product that best suited them from a conventional loan into an FHA loan. FHA loans cater to those with LTV's over 80%, where they owe more than 80% of their home's value.
The appraiser had to make some changes to the appraisal in order to accommodate the FHA guidelines, which are stricter than conventional guidelines. This was not too bad and the appraiser did receive an extra $150 on top of his $425 fee to make the necessary changes for FHA.
However, here is where the real cost to the borrower starts to be exposed. With a conventional loan, the higher the credit score, the fewer fees a borrower is charged. When this borrower thought that they had a conventional loan, I instructed them on how they could improve their credit. In this case, it cost them a few thousand dollars, because they had to pay down some credit card debt in order to get a more favorable score out of the credit bureaus.
When we discovered that their home's value had dropped so much that they would not qualify for a conventional loan, but instead only qualify with FHA, the entire exercise of improving their credit scores turned out to be a waste of time and money. This is because FHA sets a minimum credit score, and does not penalize a borrower for a lower score unless it is very low, way below what my borrowers already had.
More specifically, my borrowers had 677 credit scores and for a conventional loan needed at least 680's to pay much lower closing cost fees, where with FHA, any score above 640 was fine because their program is not as much credit score driven.
Bottom line of this example is: if I would have been able to determine their home's value first, before the loan had to be submitted to a lender, I would have realized immediately that they were going to need an FHA loan and never would have suggested that they improve their credit scores.
However, since I had to submit their loan to a lender first, to get the appraisal done, if they would have been able to go with a conventional loan, the credit score issue would have already had to be resolved, because it's much more difficult to work with improving a client's credit after they have already submitted their loan to the lender.
The most expedient first step in the loan process, after a client has been pre-qualified, should be to get an appraisal. With the value determined at the beginning of the loan process, I can do a much better job advising my client about what loan program would best suit their situation. Not knowing a home's value until after a loan has been submitted to a lender is problematic, and can cost a borrower huge sums of money.
You might ask why can't a client just get an appraisal first and then send the appraisal to the lender with the loan file. The reason is that the lenders are insisting that THEY will only work with an appraisal that they have ordered through their company. An appraisal could be ordered to first determine a value, but then another appraisal would have to be ordered from the lender in order to get a loan from that lender.
A side note here: if a situation arises where I have to change lenders, the client would also have to order another appraisal, as appraisals from another lender are also unacceptable to most lenders. Remember here an appraisal costs about $500 each.
This issue is called portability; the ability for a lender to accept an appraisal from another lender, or from a client. In the finance reform bill, one issue that was resolved was that lenders would be forced to accept an appraisal from a different lender, but I'm not sure if they would have to accept an appraisal from a borrower who ordered their own. Somehow I doubt it, because then the lender could say that a private appraisal could have been influenced by the borrower.
In the mean time I find myself have to GUESS as to the loan program a borrower needs, and hope that the appraised value comes in as expected. Many times recently this has not been the case and changes to the loan program were necessary. This act has cost my clients many hundreds, or even thousands of dollars, not to mention the hours of wasted time chasing one loan program only to find out that another was a better fit.
The law that created this debacle is nicknamed HVCC. It is actually a rule and not a law that was created by Andrew Cuomo, the attorney general of New York, as part of a plea bargain agreement with Fannie Mae and Freddie Mac, so that they would not be subjected to a state of New York law suit. You can look up the details of that story if you like.
HVCC is by far the most misguided rule dominating my industry at this time. Attempts to stop it have failed in Congress because of intense lobbying by banks who own the AMC appraisal companies that appraisers now have to work through. Others in Congress refuse to eliminate HVCC because they blame the relationship between the lender, the loan specialist, and the appraiser for our financial meltdown. In a few cases this is true, but not in many cases, and to blame this issue is amazingly naive to the facts of the mortgage meltdown story.
HVCC has wreaked havoc on the industry, and most of all on the borrowers trying to buy homes or refinance their present mortgages.
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