How To Have A Successful Refinance With A Home Appraisal
When it comes to refinancing your mortgage, the appraisal is crucial. You can’t refinance if the value of your home is so low that you’re underwater. If your home equity is less than 20%, you’ll either have to pay private mortgage insurance (PMI) or bring some cash to the table to complete a cash-in refinance. Furthermore, because lenders perceive borrowers with less equity as riskier, you may not get the best interest rate available.
If you’re considering refinancing, you should be aware of the appraisal’s critical role in the process and how you may best prepare your home for a successful refinance.
What Is a Home Appraisal and How Does It Work?
An appraisal is a professional estimate of the value of your home and is a crucial stage in the home-buying process. Appraisals are carried out by licensed or certified specialists who provide unbiased judgments. The appraiser is paid for their work, but they have no say in whether or not you get a loan or refinance based on their estimate.
An appraiser will spend 30 to 60 minutes measuring your home, looking at its features, and taking photos of the outside, the garage, and every room inside and out. This includes taking pictures of the outside, the garage, and every room inside.
Then they look into the transaction records of properties that are similar to yours—ideally, properties that have recently sold in your neighborhood. The appraiser forms a professional judgment of how much your property would sell for if you put it on the market based on the home visit and this information. This number, along with your income, assets, and credit history, is used by the bank to determine how much and on what terms it will lend you money.
Appraisal vs. Refinance
If you wish to refinance your mortgage, you’ll also require appraisals. A refinance appraisal, like a purchase appraisal, ensures that the bank does not lend the borrower more money than the property is worth. Lenders want to be able to sell the property and get their money back if it is later foreclosed on for any reason.
What Are Home Appraisals and How Do They Work?
The Federal Housing Administration’s (FHA) streamline refinance and the United States Department of Veterans Affairs’ (VA) interest rate reduction refinance loan do not require an appraisal. An appraisal is required for all other types of refinancing deals.
Throughout the appraisal process, federal standards restrict how lenders and appraisers must act. Following the housing crisis of the mid-2000s, the US government sought to improve appraiser independence in order to prevent lending based on inflated home prices. The Dodd-Frank Act and the Truth in Lending Act say that appraisals and evaluations must be done on their own, based on certain criteria, and not be influenced by outsiders.
Because federal appraiser independence rules set a very limited range of interactions between appraisers and loan officers, lenders are worried that any contact with appraisers could be seen as an attempt to change the appraiser’s opinion before the appraisal is done, which would be against the law, so they are very careful.
To avoid the prospect of severe disciplinary punishment, lenders err on the side of caution. The appraiser can’t be chosen by loan officers or brokers, and neither can the borrowers, so they can’t pick one.
A third party called an appraisal management business may be used by the lender to order the appraisal (AMC). While using an AMC is not required, explains Joe Parsons, a senior loan officer at Pinnacle Home Loans, “it is the most typical way to achieve appraiser independence.”
Many lenders, particularly small, local lenders, may not employ an AMC since they have direct referral relationships with a small group of individual appraisers. Alternatively, the lender may have an independent appraisal department on staff. The appraiser should be familiar with the area (called “market competence”). The Appraisal Foundation, a professional organization, has developed the Uniform Standards of Professional Appraisal Practice (USPAP), which appraisers are supposed to follow. These guidelines are not, however, binding.
Who Covers the Cost of the Appraisal?
Because the appraiser completed the job regardless of whether the loan closes, the borrower must pay for the appraisal. While the charge may appear valuable if it allows you to obtain the refinancing terms you desire, it may appear to be a waste of money if a poor appraisal prevents you from refinancing.
Because lenders are no longer allowed to discuss a home’s value or anticipated “target value” with appraisers at the time of assignment, homeowners are unable to obtain a ballpark estimate of whether their home will appraise high enough for them to refinance before paying for the service, as they could before the new regulations. At best, you can use websites like Zillow and Redfin to look for recent comparable transactions, but these records may be erroneous or incomplete.
Another method, according to Bruce Ailion of RE/MAX Greater Atlanta, is to have a real estate agent perform a comparative market analysis (CMA) and provide you with printouts of recent comparable sales from the multiple listing service (MLS). Ask kindly, as the agent will be doing you a favor—unlike a home sale, your refinance will not earn them any money.
How Much Does a Home Appraisal Cost?
Appraisal fees differ by state, but appraisers must charge fees that are normal and reasonable in the area. For a conventional single-family home appraisal, expect to pay $300 to $500 to the lender.
More intricate properties are more expensive because the examination takes longer, says Erin Benton, vice president of Decorum Valuation Services, an Ellicott City, Maryland-based appraisal management firm.
What do appraisers look for in a property?
The appraiser’s estimate of your home’s value is mostly based on recent sales prices of comparable properties. Nonetheless, you’re erroneous if you believe you can’t do anything to enhance your home’s appraisal for the highest possible price.
According to Ailion, getting your home assessed is analogous to going on a first date. While you have no way of knowing how your spouse sees you, being well-groomed increases your chances of being regarded as beautiful.
He explains: “It’s the same with the appraisal.” “Your home should be spotless, clutter-free, and easy to check.” Any pets should be contained, and any odors should be hidden. You don’t want the appraiser to be in a hurry to go. ”
Ralph J. Vaccari, president of Marblehead, Massachusetts-based Vaccari & Associates, characterized his approach to the job as follows: “It shouldn’t matter if your lawn isn’t mowed or if your house is in shambles in general. It’s crucial to remember, however, that a dirty or unkempt home might give the impression of more wear and tear than is normal—and that this condition can impair value. ”
According to Vaccari, the appraiser is concerned with the following:
Conditions on the outside and inside
The total number of rooms, including bedrooms and baths, has been increased.
Functionality, which includes the design and layout of interior rooms as well as functional obsolescence
Improvements to kitchens and bathrooms, windows, the roof, and the home’s systems (heating, electrical, and plumbing) during the preceding 15 years have brought the home up to date, functional, and livable by today’s standards.
The plumbing, electrical, and HVAC systems in the home’s condition and age
Detached garages, decks, and porches are examples of exterior features. Pools and hot tubs will help increase the value of a home.
Unappealing elements, such as an exterior appearance that is out of character with the rest of the area, will lower the value.
Parsons says it’s a good idea to point out things that aren’t obvious but could help the appraiser figure out how much the house is worth.
What Should I Do to Get Ready for a Refinance Appraisal?
The process of preparing your home for an appraiser’s visit differs from that of preparing it for a potential buyer. “You want to elicit emotional responses when you’re showing your home to a potential buyer,” says Parsons. As a seller, you want the buyer to see themselves in the space and anticipate how happy and comfortable they will be. An appraisal is not vulnerable to such subjective considerations. ”
Vaccari adds that a homeowner would not make the same changes for an appraisal as they would for a sale, such as pulling up old carpet to reveal hardwood flooring. Still, renewing the paint on the inside and outside of the home can assist, as can eliminating clutter to give full access and viewing of all areas of the home, including the basement. Make sure everything works (for example, operate your heating and cooling systems and test your kitchen appliances), and make arrangements for your children and dogs to be elsewhere so they don’t become a distraction. Finally, “if the tax records are inaccurate, point that out,” adds Ailion.
Otherwise, the appraiser’s job, according to Vaccari, is to find faults and ask questions when necessary.
Do You Qualify For a Good Appraisal
Congratulations! You’ve taken a big step toward saving money by refinancing your mortgage. Now it’s time to work with your loan officer on the following set of steps.
Use a tool like the CFPB’s mortgage calculator to investigate interest rates on a refinanced mortgage for a home of your worth if you’ve received a satisfactory appraisal. When you meet with your lender, having these numbers in hand can help you negotiate a better deal.
If you want to fight a low appraisal, you’ll have a better chance of winning if you can show that your case is strong.
What Happens If I Don’t Like My Home Appraisal?
The appraiser’s valuation may be lower than not only what you want, but also what you believe your home is worth. Ailion explains, “An appraisal is only one person’s viewpoint.” While this is a well-informed and educated opinion, there are good and terrible practitioners in any profession.
Is there anything you can do about a low appraisal given the rigorous federal standards that regulate the process? If a homeowner disagrees with the appraised value, they can submit a letter of appeal to the lender or AMC, but the chances of an appraiser altering their mind are limited unless the homeowner has irrefutable evidence that the value is incorrect, Benton adds.
It will only work for you if you can show that the appraiser made a big mistake, like wrongly listing the square footage or room count; not including an important feature like a pool or spa; or ignoring a comparable sale that could support a higher value while “cherry-picking” a less suitable one that would show a lower value.
You could also make a case by pointing out that the comparables used were in a bad school district or a bad subdivision without a homeowners association with swimming pools and tennis courts, that all the comparables were distressed or REO sales, or that they have other negative externalities influencing value, such as being on a busy street, according to Ailion.
“Explain why they’re different and not comparable to yours,” Ailion says. “You must show that the comparables you chose are incorrect.”
What Can I Do If My House Is Undervalued?
How can you ensure that the refinance goes through if you are unable to effectively fight a low appraisal? If your appraisal shows you have less than 80% equity, you will need to pay PMI unless you refinance with cash.
If your equity is less than 80%, you can conduct a cash-in refinance by adding enough money at closing to attain that magical 80% loan-to-value (LTV) ratio and avoid paying private mortgage insurance (PMI).
For the time being, you have the option of paying the PMI. There’s a good chance that your mortgage servicer will ask for PMI to be removed if home prices keep going up, even if you haven’t paid much of your loan off yet.
How Long Does It Take to Get a Home Appraisal?
The average time for a home appraisal is seven to ten days. The time frame is determined by the property, the appraisal’s complexity, and the appraiser’s availability (i.e., how busy they are). The appraiser may spend 30 minutes or several hours personally inspecting the home. The report on the home’s value takes a week or two to make after the appraiser has looked at it.
What Happens When the Appraisal Is Completed?
The next step is underwriting, which comes after the appraisal. The mortgage lender examines the loan file for accuracy, assesses the risk, and accepts or denies the application. Some borrowers may receive conditional approval, which means that they must resolve or explain a specific issue. Closing is the next step in the process if the mortgage or refinance is accepted.
How Does a Home Appraisal Affect You?
A solid appraisal is essential if you’re attempting to buy or refinance a home. You may not be authorized if the appraisal is too low, or you may incur higher interest rates. A lot of variables can have a negative impact on your appraisal, including:
- Maintenance that has been put off
- Finishes that are outdated or unappealing
- Not being honest about the need for repairs
- Property comparisons that are “outliers” (e.g., sold to relatives, under duress, or a foreclosure)
- The market situation
- Experience as an appraiser
When is an appraisal required as part of the loan application process?
In most cases, the appraisal takes place two weeks prior to the closing date, so it should be ordered three to four weeks ahead of time.
Understanding the appraisal process will give you the best opportunity of having an appraiser assign your property the highest potential value. Appraisals for purchases and refinances don’t always come in at the prices borrowers expect, and they’re a human process prone to subjectivity and errors. You can try to change a low rating, but only if you have enough evidence to back up your claims.
Important Points to Remember
An appraisal, which normally costs $300 to $450 for a single-family home, is required before a homeowner may refinance their mortgage.
Before coming up with a value for the home, the appraiser does a lot of research on the home and compares it to other homes in the area.
Freshen up a home’s paint job, clear away clutter, and highlight hidden features to boost the chances of a high appraisal.
If a homeowner thinks the value of their home is too low, they can ask the appraiser to change their mind. But unless there is strong evidence that the value is wrong, the chances are slim that the appraiser will change their mind.