Weekly Rate & Market Update 3-17-17

Question of the week: What happens if my appraisal comes in low?

Answer:  This is a topic that has been covered before but needs revisiting from time to time, especially in the current environment where many homes are selling over their list price with multiple offers. (If you missed last Friday’s Weekly Rate & Market Update I covered what price you should offer, link here)

If an appraisal comes in below the value required our first action is to see if we have comparable sold properties we can use to appeal the value in the report. Most often for an appeal to be successful we will need to use comparables that the appraiser did not use and justify why the comparables we want to use are better than the comparables the appraiser did use. On rare occasions we have been successful in appealing the adjustments an appraiser made to the comparables in the report for condition, size, etc—but the adjustments the appraiser used must be very apparently wrong.

If our appeal is denied and the value stands, what are the options available?

If your transaction is a refinance with a low appraisal there can be many ramifications due to loan to value and available programs, mortgage insurance, pricing changes or inability to complete your transaction.  Because there is no price point or other party to negotiate with your options are pretty much dictated by the program guidelines for the mortgage you are using. In other words your options are limited to the nature of the refinance and program requirements.

If your transaction is a purchase transaction and the appraisal comes in low you have four basic options.  We will assume you have a purchase price of $425,000 and your appraisal comes in at $400,000, and our appeal was denied or there was insufficient data for an appeal.

One of the primary guidelines for pricing is the loan to value, what percentage of the value is the loan amount.  For lending purposes the loan to value is based on the lower of the purchase price or the appraised value.  In the instance above the loan to value will be based on $400,000 not $425,000.  This means if you were putting down 20% on $425,000 you wrote your offer to purchase the property with a loan of $340,000.

When your appraisal comes back with a value of $400,000 you have gone from a loan to value (LTV) of 80% to a LTV of 85% if you retain the loan amount of $340,000.

Option 1:  You agree to pay $425,000.  If you retain your loan amount of $340,000 you will have the same down payment, $85,000; however you will now have a loan that requires mortgage insurance since it is greater than 80% LTV.  This will add to your monthly payment, how much depends on the type of mortgage insurance you choose (next week our question of the week is about mortgage insurance).  Or if you choose you can increase your down payment by $20,000 to $105,000; this will bring your loan amount down to $320,000 and 80% of the value of the appraisal.  Note:  If you were putting 25% down or more originally you would not have to worry about additional down payment in order to avoid the mortgage insurance as your loan to value would still be under 80%.

Option 2: Seller agrees to lower the price to the appraised value of $400,000, you put 20% down on the $400,000 ($80,000) and we adjust our loan amount to $320,000 and we move on with the transaction.

Option 3: You and the seller meet somewhere between the appraised value of $400,000 and the original sales price of $425,000. This option may require you to make some additional down payment to avoid mortgage insurance as your loan to value based on the appraisal would still be over 80%, or you would have mortgage insurance since the loan to value of your original loan amount of $340,000 is more than 80% of the appraised value.

Option 4: You refuse to pay more than the appraised price and the seller refuses to take less than the original sales price.  Transaction is off, seller puts the property back on the market and you start looking at property again.

When the market is rising, there are multiple offers bidding prices over list price and a scarcity of comparable sales, i.e. the current market in many areas, appraisals values can lag the market. With sales setting new market highs in a neighborhood it is challenging for an appraiser to find comparables and be able to make the necessary adjustments from prior sold properties to the recently sold property being appraised. As a result low appraisals may be an issue on some transactions, if it becomes an issue on yours these are your options.

Have a question? Ask me!

Remember, with Dennis it’s not just a mortgage, it’s your complete financial picture.

One of the more active weeks for important economic data, little of which  mattered since the Fed raised the Discount Rate on Wednesday. The rate increase was priced into mortgage rates and when the announcement was made Mortgage Backed Securities (MBS) staged a strong rally (lower rates). With the guess work finished, the rate going up 0.25% instead of 0.50% investors bought bonds and stopped the upward pressure on mortgage rates.

The other data that would normally be rate movers but had minimal impact this week in the shadow of the Fed announcement would normally push rates higher—strongly. Prices for producers and consumers climbed in February, with PPI up .3% for the month and 2.2% from last February, while CPI rose 0.1% for the month and 2.7% over the past year. The price increases are at the upper limit of the Fed’s desired inflation target, supporting not only the rate increase on Wednesday but also the projected two more Fed rate increases later this year.

Rates for Friday March 17, 2017: As mentioned the MBS market jumped after the Fed rate increase on Wednesday breaking the downward trend of the past few weeks. With the change in direction we look to see if this is a temporary correction or a trend that could provide slightly lower rates, or no movement for the near future. With a sudden break in direction the market has some instability—which is always a reason to lock in when you can.

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS:

30 year conforming                                            4.125%           Down 0.125%

30 year high-balance conforming                        4.25%             Down 0.125%

30 year FHA                                                      3.50%            Flat

30 year FHA high-balance                                  4.00%            Flat

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down (3.5% for FHA) with 740 FICO score for purchase mortgages.

For many years this update would be coming to you from Las Vegas where my friends and I spent the first days of the NCAA basketball tournament. While the same group is still in the same pool (I think we started it around 1984 my senior year in college), the annual pilgrimage to Vegas has been replaced by work, family and inability to handle three to four nights in Las Vegas—at least for me.

Thankfully technology has evolved for NetHeads like myself so we can stream games live on at our desks while looking like we are productive (the official NCAA streaming site has a “Boss Button” in the corner of the screen one can hit to take the game down and put up an innocuous page that looks like you are working).

I have Duke over North Carolina in the final, when there are a lot of teams that can win I default to teams that know how to win it all. Whoever wins I know we will have many exciting games and great stories the next few weeks.

Thank you to everyone for the kind words following last week’s update.

Happy St. Patrick’s Day and have a great week.,

Dennis