Sometimes lenders signal appraisers to lowball their value estimates

Verify all appraisals. Sometimes they push too high. Sometimes they come in too low to justify the amount of your mortgage loan.

"We had spent almost a year looking at houses," says Phil. "We liked a lot of them, but for one reason or other nothing quite excited our fancy. Then one Saturday we drove by a house we knew we had to have. It was priced right—or I should say, we thought it was priced right. Less than 10 days before closing, we learned the lender's appraiser had reported a different opinion. She valued the property $10,000 less than our purchase price.

"To offset this lower appraised value, the lender said we'd have to increase our down payment by $8,000. Or, instead, we could ask the sellers to reduce their price. We had bargained hard as it was, so we didn't think the sellers would agree to come down more. And they wouldn't. As for raising our down payment by $8,000—no way. So, the financing fell through and we had to begin our search all over again."

From time to time, lowball appraisals kill a sale. Sometimes lenders use low appraisals to turn down loans they do not want to make. At other times, appraisers respond to tightened government appraisal regulations. Either way, a lowball appraisal can wreck your planned LTV ratio and down payment.

Prevent Deal-Killer Appraisals

To help prevent this problem, research the sales prices (and terms) of similar properties in the neighborhood. Use these prices to guide your offer. Next, learn the name of the appraiser your lender plans to use. Identify for the appraiser (or ask your agent to) the comp sales you relied on to figure your offer. After the appraisal is complete, get a copy from the lender. (You are entitled to a copy of your appraisal under the 1991 Equal Credit Opportunity Act, various state laws, and regulations put in place by the Federal Reserve Board.)

If, because of a low appraisal, a lender rejects your loan (or requires you to pay more money down), a financing contingency clause in your purchase contract should permit you to recover your earnest money deposit. If you think the appraiser has lowballed you, schedule a meeting with the appraiser, or write out your objections to the appraisal and give them to your lender.

The appraiser can either accept or dismiss your comments. If he or she rejects them, you can ask the lender to send out another appraiser. If the lender wants your business, it will probably agree to obtain a second opinion. If the lender doesn't oblige (and you exceed the allowable LTV), you must increase your down payment, ask the sellers to reduce their price, or apply for a mortgage somewhere else. (To appease your frustrations with the appraiser, write a complaint to the state licensing board; however, that won't help you get the financing you need.)

Beware, though. If an appraiser refuses to hit the value you want, at least carefully listen to his reasoning. At times, buyers press appraisers to boost a property's appraisal only to learn later (and to their regret) they really did overpay. The appraiser's original estimate proved correct. As some property markets soften, appraisers should become more conservative. Remember, in a declining market, comp sales actually overstate current (and future) values.

In sharply rising markets, lenders, appraisers, homebuyers, investors, and, yes, speculators get careless. With eyes on the future, no one worries much about the price today because it's sure to climb higher tomorrow. (This ill-advised outlook reflects the view that "inflation cures all mistakes.") When you value a property, give due weight to the past, present, and future. Where are you relative to the real estate cycle?

Appraisals Exclude Personal Property or Atypical Seller Contributions

Appraisers limit their value estimates to the building, site improvements, and lot—that is, real estate. If your purchase price includes personal property (antique Oriental rugs, costly appliances, custom-made draperies, furniture) or if your seller has agreed to pay an atypically high percentage of your mortgage points and/or closing costs, the lender's appraiser will subtract these amounts from his or her value estimate. If the lower appraisal increases your LTV, the lender may cut back the amount it is willing to lend you—or increase your interest rate and/or the costs of your mortgage insurance. Before you write seller contributions into your purchase offer, learn lender rules; then figure out an advantageous way to get the loan you need to pay for any personal property and/or settlement expenses. Sometimes it's wise to write up a separate agreement to cover these items. Ask your loan rep or real estate agent for advice.

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