Unless you’ve been hiding under a rock, I’m sure you’re heard that home mortgage rates are at all-time lows. But unless you’ve recently refinanced, what you may not have heard is that the process can be nothing short of a nightmare-for you and your Loan Officer. That’s right-money may be cheap these days, but ‘easy’ it is not.
Let’s start with the obvious, your home’s value. Gone are the days of the “Do you have a pulse and can you fog a mirror?” loans, where stated values were used. And back in the ‘old days’ when lenders did require a licensed 3rd party appraiser to inspect and photograph your home inside and out and analyze a multitude of data to determine the price your home would fetch in an open and competitive market–the appraiser’s opinion of value was generally accepted, with few questions asked.
But no more! With the housing market crash, no matter how much an appraiser justifies value, chances are it’s not going to be accepted. In a lender’s foreclosure, it’s this always changing difference between your home’s value and what you owe that can literally ‘break their bank’.
Whether it’s before your loan closes or after you default and your lender forecloses, they want to make sure your home can be sold for enough money to pay off your mortgage balance and all associated costs they’ll incur in getting rid of your home-which costs, according to the Joint Economic Committee of Congress-can average a whopping $77,935!
THIS is why your home’s value is critical -can your equity absorb your lender’s cost to foreclose? And the nightmare in today’s market? No one can figure that out! It’s like trying to appraise a pile of crumbling rock during earthquake after-tremors. Lenders need more valuation proof. They want more “comparables”-recent sales of nearby homes like yours-as many as 5 and 6 rather than what used to be the standard 3. And if you’re watching “For Sale” and “Foreclosure” signs proliferate in your neighborhood for months on end, then you’re right in thinking appraisers must be having a difficult time finding 3 cookie-cutter open and competitive market sales.
Lenders also want more neighborhood data like foreclosure and short-sale trends in the ‘hood’. They want more ‘desk reviews’ (that’s when an appraiser in NY City sits at a ‘desk’ and reviews a local South Carolina appraiser’s opinion of value on a quaint little country home in the Low Country), and more “AVM’s”, an automated valuation model using scientific measures and computer decision logic, versus a human’s inclination and actual details of the home or transaction.
Here’s a real example of a recent refinance my Loan Officer colleague had to deal with:
His borrower was refinancing to a lower rate where the first appraisal came in at $287,000. The homeowner knew his home’s value was low-balled. So another appraisal was ordered, which came in at $345,000. That’s a big $58,000 difference, his equity. Next, the lender ordered the “AVM”, which is like selecting a spouse from an on-line dating site based on nothing but physical stats. And what happens? Well, of course, the “AVM” result was that it can’t support the $345,000 value. Next came the dreaded desk review, performed by an appraiser who wasn’t familiar with local market conditions and who didn’t physically inspect the property, neighborhood or comps. So naturally, the desk reviewer (who’s also covering his ‘backside’) goes conservative at $284,000. And which figure did the lender use? $312,000. Are you scratching your head yet? And, you want to hear the worst part? The cost for determining value is the borrower’s responsibility. In this particular case, what should have been a $400 appraisal cost ended up being over $1,100!
To summarize, if you’re thinking about refinancing, brace yourself. Yes, take advantage of today’s low rates if you can, but be prepared in today’s market that if you ask 5 experts what your home is worth, chances are, you’ll get 5 very different opinions.