Dennis' Mortgage Blog

Special Edition From Scottsdale, Arizona vacation location!

Question of the week:  What are my options as a buyer if the appraisal for the home I am buying comes in low?  If the appraisal comes in low can I get my appraisal fee back?

Answer:  Between the large percentage of homes on the market that are either short-pays or foreclosures, soft prices in most areas still and the HVCC process forcing poor appraisers into the market place, appraised value is more of an issue than it was a few years ago.  So what are the options available when an appraisal comes in low, or if an underwriter cuts the value of an appraisal, for a purchase transaction in escrow?

First, if an appraisal comes in low you are not entitled to a refund of any appraisal fees.  Appraising is a fee for service industry, when an appraiser completes and appraisal he gets paid for his service regardless of the value returned.

Now onto the meat of the question: what are the options if the appraised value comes in under the sales price?  For our discussion I will use a sales price of $500,000 and an appraisal of $487,500—a 2.5% reduction in value from the sales price.

As the options are considered a primary issue is that lenders use for value the lesser of sales price or appraised value.  Therefore on this transaction if the borrower was putting 10% down, his 90% loan would be $450,000 of the sales price; now his $450,000 loan is a 92.3% loan to value transaction which changes the rate, the mortgage insurance and in many instances may not be able to secure financing. 

Here are the Options, not in order of preference for either party:

Option 1:  The seller lowers the price of the home to the appraised value and the transaction continues with a 90% loan based on the $487,500 sales price ($438,750 loan amount).  Good for the buyer, bad for the seller. 

Option 2: The buyer makes up the difference between the sale price and the appraised price in cash to reach the new 90% loan to value limit of $438,750; a total of $61,250 down payment; an increase of $11,250 in cash to close.  Good for the seller, bad for the buyer.

Option 3: The buyer and seller agree to split the difference and agree to a sales price of $493,750; the seller gets less money and the buyer comes in with a down payment of $55,000 to meet the lenders loan limit of $438,750.  Not as bad for the buyer, not as bad for the seller.

Option 4: Both parties agree to have the borrower change lenders and order a new appraisal. This is a very risky option depending on several factors, including the borrower’s rate lock and most importantly the risk that the next appraisal may be even lower than the first.  Remember using the HVCC appraisal process has been a roll of the dice on who will appraise properties.

Option 5: An agreement cannot be reached and the transaction is cancelled.  The buyer moves on to find another property and the seller puts the home back on the market hoping to get another buyer at $500,000 or greater and hoping the property will appraise at that amount, or if it does not the new buyer will agree to pay the difference between the appraised value and sales price.

Option 5 is, in my opinion, the worst case scenario and one that we do not see taken very often.  Given the volatile market and uncertainty in appraisals most sellers, while strongly desiring Option 2 (buyers pays the difference) push for Option 3 (split the difference) or accept Option 1 (lower sales price).  But each transaction is different because each individual buyer and seller is different with different motivations and needs.

If you have an appraisal issue keep an open mind and explore all option available to you.

I will keep this link on my “Question of the Week” section to assist new homeowners:

IRS Form 5405 for First Time Buyer Tax Credit for those eligible

Have a question for me?  Ask me!   

Another interesting week in the economy.  Last week we saw Mortgage Backed Securities (MBS) bounce off the 25 day moving average and fall through the 200 day moving average.  As this week progressed the averages met and crossed, with the 25 day moving average price drop below the 200 day moving average (hence the 25 day average interest rates moved above the 200 day average). 

This week saw plenty of activity with the Treasury auctioning off over $100 billion in notes of various terms and the Federal Reserve Board of Governors (the Fed) meeting.  Leading into the auctions and the Fed meeting rates remained flat just below the 200 day moving average.  The auctions went better than expected, with significant foreign investment.  The Fed announced no rate changes would be forth coming for a while and committed to continuing to purchase conventional MBS. 

Combined with economic data and announcements the bond markets responded positively.  The World Bank announced that the global recession would be more prolonged than earlier thought (good news for bonds), unemployment claims went up a bit higher than expected (good news for bonds) and wholesale prices came in under expectations (good news for bonds).  As a result yesterday a big finish to the day saw the 200 and 25 day moving averages broken through by MBS and a strong close for rates.  Stocks, after being positive Wednesday, did not fair as well, with investors moving their funds from stocks to bonds. 

Today we see everyone taking a breather and while trading mostly negative early on (I write this at 8:00 a.m. Friday morning Pacific) with many investors selling to take profits from the last few days.  Consumer sentiment has come in a bit better than expected which puts some downward pressure on the bond prices.

Looking ahead it is still a very volatile market for interest rates.  We are experiencing big swings intra-day for rates, and day-to-day and week-to-week.  Having just broken above the moving averages yesterday we need to see if the market can sustain levels this high—last week when MBS cracked the 200 day moving average it lasted about 4 hours in trading. 

I counsel caution.  If you are purchasing a home and the market is providing the rate you used to make your decision to purchase your new home I suggest locking through the close of your escrow period.  Floating in this market may lead to some gains with a lower rate or costs, but it is risky and you can just as easily—more easily in my opinion—end up with a higher rate very quickly.

Rates down this week—With almost all of the drop in rates coming yesterday leading into this morning’s rates.  Too early to tell if these rates will continue, market is volatile so plan accordingly.  Follow me on Twitter (dcslb is my Tweet) if you want through the day mortgage market updates.

FIXED RATE MORTGAGES AT COST OF 1 POINT*

30 year conventional  5.125%                           Down .25%

30 year conforming-jumbo 5.5%                       Down .375%

30 year FHA    5.375%                                    Down .125%

30 year FHA jumbo 5.875%                            Down  .25%

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, and period rate is locked (i.e 45 days instead of 30 days).

Please note that rates quoted are based on average of several lenders for a purchase transaction with 20% down payment and a minimum FICO score of 740; APR is not quoted as it is dependent upon specific loan amounts, lenders and services selected.  Numbers provided are for comparative purposes only.

We are about to wrap up our family vacation week in Scottsdale, hot temperatures, hopping across the pavement to the pool and plenty of time splashing around the pool with the girls.  What a great way to start the summer with some much needed relaxation and family time for all of us.  I hope you have on your schedule this summer both of these items:  spend more than a couple of days just relaxing and being with your family.

Stay cool!

Dennis

Remember this update is posted weekly on My Blog at www.DennisCSmith.com ; feel free to forward the link to family and friends who may be interested in past commentaries.