Appraisals have stymied many borrowers' attempts to purchase or refinance in recent years. A major problem, due to the decline in home prices since the market peaked in 2006, is that properties haven't appraised high enough for the lender to grant the mortgage amount the borrower requested.
Refinancers who bought during the peak years have had difficulty refinancing if their mortgage amount exceeded the appraised value of the property. The Home Affordable Refinance Program was designed to help people in this situation. Recent changes in the program will allow borrowers who qualify to refinance regardless of the loan-to-value ratio for fixed-rate mortgages backed by Fannie Mae and Freddie Mac. This makes the appraisal process less onerous. Not all lenders participate in HARP; it's not a mandatory program. Those that do should make the changes available to refinancers by December 2011.
Borrowers applying for mortgages have run into other difficulties with appraisals, such as unpermitted work, out-of-area appraisers who don't know the local market, use of distressed-sale properties to appraise a property that is not being sold under distress, and lack of comparable sales.
Buyers and sellers should study the local market to understand current market pricing before making a purchase offer or listing their home for sale. Keep in mind that if a buyer takes out a mortgage, which most do, the lender will hire an appraiser to appraise the property.
In some neighborhoods, there are plenty of recently sold listings that can validate a list or offer price. Ask your agent to provide you with comparable sales that a lender's appraiser is likely to use to appraise the property. Lenders like to see comparable sales for similar properties that sold within the last three months.
Fannie Mae initiated changes in appraisal guidelines in 2009 that prohibit mortgage brokers or loan agents from selecting the appraiser. However, even though the loan representative can't have direct contact with the appraiser, a real estate agent, buyer or seller can.
House Hunting Tip: The key to a good appraisal is using accurate comparable sales to arrive at an appropriate price for the property in question. Don't leave the process to chance.
The buyers' agent, or a refinancing seller, should plan to meet the appraiser at the property to offer relevant information. If improvements have been made to the property, or there are features that don't meet the eye, a list should be provided to the appraiser.
Public record is often wrong, particularly regarding square footage. Any documentation to justify a different number should be made available. According to current appraisal guidelines, square footage added without a building permit usually won't get credit as usable square feet. This can lower the appraised value.
In some cases, there aren't recent comparable sales of similar properties in the area. One complaint in low-inventory markets is that there are not enough good homes. Many sellers are waiting. A great listing you're interested in could be the only one like it for a year if the inventory is low. Real estate agents and appraisers need to get creative and use similar properties that sold longer ago and correct the value for time, if prices have gone up or down since then. Another approach is to go to a neighboring area and correct for difference in location, if necessary.
The Closing: When there aren't comps for the past three months, it's critical that the appraiser is provided with the data upon which to make an accurate evaluation, particularly if the appraiser is unfamiliar with the local market.
Dian Hymer, a real estate broker with more than 30 years' experience, is a nationally syndicated real estate columnist and author of "House Hunting: The Take-Along Workbook for Home Buyers" and "Starting Out, The Complete Home Buyer's Guide."