Learn how your options for refinancing are affected by your appraisal
If you are looking to refinance your existing home mortgage to take advantage of the lowest mortgage rates in years, there are three steps you can take to make sure your home is not appraised for less than its actual current value. Your biggest hurdle may be getting an accurate home refinance appraisal. Even if you have the best financial qualifications possible, insufficient equity will either get your loan request denied or increase your interest rate.
Home appraisals for refinance problems
Home owners face two problems with getting an accurate appraisal for refinancing property. The first problem has resulted from the recent implementation of the Home Value Code of Conduct (HVCC). The purpose of HVCC was to eliminate any potential that the appraiser might be influenced by either the home owner or the loan officer helping you with your refinance loan.
HVCC requires that all appraisals be ordered through a new process that does not involve either the home owner or the loan officer. In the past, loan officers would work with local appraisers who knew the local market and could best provide an accurate value. Now, mortgage lenders and brokers work through appraisal management companies that receive appraisal request orders and then randomly submit the order to a rotating list of appraisers.
The problem with this arrangement is that many times the appraisal orders received by appraisal management companies are given to the lowest bidders for an appraisal order. When appraisers have to bid for their services, the low bidders will get more business but have less resources to complete the order.
For example, an appraiser who completes an appraisal for $350 can spend more time evaluating a home than an appraiser who bids to do the same job for $195. When appraisers spend less time estimating the value of your home, the likelihood that your home will not be valued correctly increases dramatically.
The second problem that home owners face is rapidly changing real estate values. While the pace of value changes has decreased since 2008, prices continue to change faster than in recent years. Appraisers are required to locate three comparable sales within one mile that closed within the last six months or explain why they could not in their valuation. In many markets, six months can mean a price difference of 5% to 10%. With many recent sales being short sales at below-market prices, home owners can find themselves with little data to support the value of their home.
how to prepare for a home appraisal for refinance
You can take three steps to make sure that you do not get stuck with an inaccurate appraisal too low for you to refinance. First, do your own homework and research your own comparable sales. Perhaps your Realtor could help you access a list of recently sold properties. When the appraiser arrives to inspect your home, present him or her with a list of the properties that you feel best compare with your home and which ones do not.
The second step is to research the history of other comparable sales. Appraisers take into account the fact that other sales may have been distress sales or for properties that were purchased as fixer-uppers. For example, if a home comparable to yours was purchased for $100,000 less than your home four months ago, it may be because it needed $100,000 in work. If the new buyer of that home had spent the last four months fixing up their property, the appraiser needs to know that so they do not just look at the lower sales price and use that figure as a comparable sale.
Finally, give the appraiser proof of any substantial changes to your home since you purchased it. Cosmetic changes such as painting will not affect value, but if you added on to your home or put in a new kitchen you might be able to justify a higher value or better support your current value.
Being prepared for your appraiser will give you the best chance of getting full value for your home.
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