The 2 Major Snags That Can Derail Your Mortgage Loan: Significant Home Repairs And A Low Appraisal

By
Services for Real Estate Pros with Vetstein Law Group, P.C., TitleHub Closing Services LLC

The mortgage lending underwriting environment has changed dramatically in the last several years. At the peak of the bubble, mortgage professionals joked that you needed only to be able to fog a mirror to get a loan. These days, even borrowers with good incomes and good credit scores can get turned down.

Much of the change is driven by the stricter underwriting standards imposed by Fannie Mae, Freddie Mac and FHA. There are two major issues which come up repeatedly in transactions today which can derail a borrower’s loan: (1) repairs, and (2) the appraisal.

1. The house requires substantial repairs

A lot of properties on the market these days are foreclosures owned by banks, short sales, or otherwise aren’t in great repair. Further, in a buyer’s market, sellers will not hesitate to agree to a list of repairs.

Broken windows, defective appliances, roof leaks, unfinished renovations, and serious water damage can all cause problems with obtaining final lender approval of the loan. At worst, the a substantial amount of required repairs could cause a lender to bail out. At best, the lender will require a pre-closing inspection and make the loan commitment subject to the satisfactory completion of all work.

Talk to your lender before the purchase and sale agreement is signed to figure out the extent to which substantial repairs will affect the underwriting process.

2. The appraisal is lower than the purchase price

Occasionally during the bubble an appraiser would decide a home was worth less than the price a buyer and seller had agreed upon. But that was relatively rare. Critics accused appraisers of colluding with lenders to “hit the number” — deliver the values needed for loans to be approved.

These days, appraisals are administered is a completely different fashion. New rules – the Home Valuation Code of Conduct (HVCC) – hold appraisers to higher standards and sharply limit communication between appraisers and lenders. Mortgage professionals cannot select their “hand-picked” appraiser now; there is basically a random lottery system to select the appraiser. The downside of this lottery is that the appraiser may not be very familiar with the town or neighborhood being appraised. So the appraisal may fall short of the agreed-upon selling price. Even if the first appraisal goes well, a second evaluation — known as the review appraisal and now ordered by most investors that buy home loans — may not.

Today buyers, sellers and their agents often attempt to manage the appraisal process by recommending better comparable sales available than the ones the appraiser used. As a buyer’s attorney, I always negotiate an “out” in the purchase and sale agreement for the buyer’s protection in case the appraisal comes in too “low.” If the appraisal remains under the purchase price, buyers may need to reopen negotiations with the seller or come up with a bigger down payment to make a deal work — or pay down their mortgage in order to refinance.

What are your experiences with these two issues?

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Tags:
mortgage approval
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repairs
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Rainmaker
308,562
Rob & Jeannie Steward
RE/MAX Realty Centre - Clarksburg, MD
We Work TWICE As Hard For You!

We have been derailed several times due to appraisals coming in below the purchase price. We have noticed that most REOs are now not necessarily entertaining unrealistically 'highball' offers, and rather looking at offers that will most reasonably appraise. One good thing about the appraisal issue I guess.

May 22, 2010 01:01 PM #1
Rainer
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Jennifer Archambeault
Cardani Group, REALTORS® - Austin Texas - Austin, TX
An Austin Texas Realtor

This usually is a deal killer if the seller will not agree to repair.  If the appraisal came in too low it only means two things:  the listing agent over priced the home or the buyers agent didn't do a grand job in negotiating for their client.  My person belief is every agent she meet with an appraiser every three to six months to be knowledgeable on how to pull comps.  Many agents do not understand how to pull comps or pull comps based on outdated knowledge.  By doing this, the opportunity for a deal killer situation pretty much limits itself to almost never.

May 22, 2010 01:03 PM #2
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Rainer
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Richard Vetstein

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