Mortgage and Portfolio Loan Guide

5 Reasons Your Home Appraisal Matters

If you have gotten to the point in the home buying process where an appraisal has been ordered, you’re now moving forward full steam ahead.

Pre-approved. Check.

Found the house. Check.non-warrantable condo

Offer accepted. Check.

Inspection passed with flying colors. Check.

Condo meets requirements. Check.

Time to order appraisal.

Congratulations!

It’s no secret that when buying a home an appraisal plays a significant role in completing the process successfully.

For the most part, the biggest anxiety for all parties is “did the home appraise for the contract price?” While the value is indeed extremely important, there is more that an appraisal brings to the table.

The truth is there are several crucial ways that an appraisal contributes to the approval process other than a highly detailed opinion of fair market value of the property.

Let’s look at those truths with a bit of detail and perhaps provide some clarity to the impact an appraisal has on the home buying process.

5 Reasons Your Real Estate Appraisal Matters

mortgage homeTiming

Getting an appraisal back within a reasonable time frame can make or break a deal. If you’re in a rural area or in an area where the real estate market is booming, you could wait up to 3 weeks or more just to get the appraisal results. This can be even more frustrating if the appraised value comes in low or repairs are needed.

Right now there are even some areas in the country where appraisers are flat out declining appraisal orders because they know they do not have the capacity to turn the appraisal report around in a timely manner.

When the purchase contract states that the deal needs to close within 45 days, and it takes 40 days to get appraisal results, expect an extension to the purchase agreement.

2-real-estate-appraisalCondition

If you’re getting a mortgage, the property needs to meet some basic standards for the lender to give the thumbs up on acceptable property condition.

Common property condition issues that pop up on appraisals and cause issues: mold in the attic or basement, peeling paint on the outside of the home or garage, trip hazards, broken windows, and missing fixtures.

Anything noticeably wrong with the property is likely to be pointed out on the appraisal report including photos. When there are repairs noted on the appraisal the seller will need to complete those repairs prior to closing, and the property needs to be reinspected by the same appraiser to confirm the requested repairs have been made.

home mortgageComparables

When coming up with an opinion of value, the appraiser selects recently sold homes within the market that are similar in size/condition/location/amenities.

The appraiser then compares those homes with the subject property and makes adjustments based on differences and similarities between the homes.

For example: if the subject property is a 3 bed, 2 bath ranch on .5 acre, the appraiser would look to include 3 bed, 2 bath ranches that sit on a .5 acre lot. The appraiser would not be including a 3 bed, 2 bath condominium.

It doesn’t have to be identical and size and condition, but it does need to be the same property type. Unique properties can be very difficult to finance. If there are no similar properties sold within a reasonable distance and time frame (underwriter discretion) the deal could be dead. There is also a limit to how much an appraiser can make adjustments on value based on the differences in homes.

If the adjustments made are too high, the comparable property used could be considered irrelevant or unacceptable and would need to be replaced by a better comparable if possible.

home mortgageConfidence

For some buyers the appraised value can have an impact on their ego.

Let’s say you get under contract on a house for $300,000 and it appraises for $380,000. There might be an increased warm and fuzzy feeling knowing you got a good deal. Another confidence booster in a case like this is that if you’re going to be paying private mortgage insurance (PMI) due to a low down payment, you may be able to refinance in a year and then use the new appraised value to drop your PMI (which could save you hundreds of dollars a month).

Knowing that you have instant equity in the home that you already loved to begin with can really add a nice cherry on top.

house home loanCompliance

The collateral (the house) used to secure the mortgage must comply with lender guidelines.

One of the biggest issues when talking about compliance has to do with finding out if the home is a non-warrantable condo (does not apply to single family homes). If the property is a condominium the appraiser will reveal information pertaining to the number of units that are owned by 1 entity, number of units that are not complete, and other important information about the condo that could cause issues. [more on non-warrantable condos here]

Another fairly common issue that can come up as a compliance issue is number of acres the property sits on. Depending on what type of loan program you’re seeking, there may be an issue with giving any value to acreage beyond 10-20 acres. For someone buying a 50 acre property, this can be a deal breaker if most of the value is in the land.

If the appraisal states subject property was recently was sold, there could also be flipping restrictions depending on what type of loan you’re seeking.

The appraisal can clearly make or break the deal in several unique ways other than home value.

mortgage loan officerIf you have run into an appraisal issue that you seem to not be able to get around, you may want to consider looking into getting a portfolio loan. Portfolio loans are mortgages designed to help with unique property scenarios. Portfolio loans are also a great option if there are unique income or credit circumstances. More on portfolio loans here.

In addition, if you have run into a challenge on obtaining a mortgage that you can’t seem to get around, I invite you to reach out to me for a possible solution. If I cannot help, I should be able to point you in the right direction at the very least.

 

real estate investment loans

Embrace the Z

“Acceptance doesn’t mean resignation; it means understanding that something is what it is and that there’s got to be a way through it.”

-Michael J. Fox

When you have a powerhouse website, consisting of a wealth of information, that serves as a resource for millions of people, there are going to be some naysayers. I hear real estate professionals and mortgage pros bad mouthing Zillow as if their negativity will somehow alter the house-hunters buying habits.

Here’s the bottom line: When people think about buying a house, they are likely to use Zillow as a resource at some point in the game.

Why fight it? Why discredit a top resource for buyers, sellers, homeowners, etc? Here are a couple of reasons there is some general push-back:

Home Value

Oh boy, here we go. A potential seller takes a look at the estimate Zillow gives them and they are blown away by the equity they have gained in the last couple years. They are so excited and feel they could make a great profit. There is a feeling of anticipation that they will finally have the opportunity to upgrade to the home of their dreams with the proceeds of the sale of their home. They contact their Realtor to list the home.Stop crying about zillow

Now the Realtor (the real-life expert) has an opportunity to showcase their expertise in the market. There is a bit of a let down because of a difference in opinion of home value between the Realtor and the Zillow estimate. But that’s okay. This is where the opportunity lies. The Realtor is able to tactfully explain how homes in the area that are similar to the seller’s home have sold. This is where the Realtor gets to roll their sleeves up and use the facts.

Fair market value is an opinion. Zillow uses formulas to come up with values which are beyond my pay grade, but that doesn’t mean they are going to be accurate. Let’s be real here. If Zillow was right, there would be no need for an appraiser. And even if a buyer is willing to pay a certain price for a home, the appraiser may still come back and give a different opinion of fair market value. Even more interesting, a different appraiser can come up with a different value than the original appraiser.

Why? Value is an opinion! An opinion of how different factors like age, amenities, condition, location, and size can impact the value of a home. Another huge factor is which comparables (recent sales of similar homes within a reasonable distance from the subject property) to use on the appraisal report. When selecting the comps the appraiser is responsible for finding and using the sales of properties that are most similar to the subject property (the home that is being sold). If the appraisal comes in lower than the agreed upon purchase price the buyer will either have to put more down (depending on the loan program, and how much they were originally putting down) or the purchase price will need to be renegotiated between the buyer and seller.

The estimate of value on Zillow is simply a starting point. It’s on the local experts to be effective communicators on their market, not Zillow-bashers.

Pre-approval

A hopeful home buyer can get a pre-approval in minutes on Zillow. The system will ask for general info and pop out a thumbs up or thumbs down so that the consumer can get an idea of where they stand.

The only problem is that there are so many factors that go into a mortgage approval which require an in-depth evaluation of a borrower, and their current circumstances. These instant pre-approvals go against everything I stand for when it comes to setting proper expectations for a home buyer. However, it does give them a place to start. Yes there are disclosures below it that pretty much state nothing is for sure until you talk to your lender, but that is likely to be overlooked because they already see they’re “good-to-go”.

Again, it’s just a starting point. For a true understanding of where you stand, contact your local loan officer. If you did happen to get a thumbs down, and don’t meet typical mortgage standards, here is a great solution.

So why do people use it?

Well first of all, have you seen the Zillow commercials?

The emotion involved in the home buying process is beautifully expressed in their marketing efforts. Their app is easy to use. Not happy home love only can you find upcoming open houses, but also previous tax info, neighborhood trends, estimated payment, etc. You can save the properties you like, and keep browsing. It’s very user-friendly. Are there other websites that offer the same or similar features? Sure, but I promise you they do not have the online visibility and recognition that Zillow has.

There is an advice section on the website where anyone can ask any question pertaining to home ownership. Consumers ask, experts answer. This is awesome because people are able to discuss private matters without having to give out their personal information. This is a huge win for consumers because they can protect their pride, get their questions answered, and not have to deal with a pushy salesperson. It’s a win/win for everyone.

There are some “experts” on these advice forums that really have no business giving advice, but that’s okay too! The consumer is able to weed through the responses, and decide for themselves who is the most credible resource for their particular situation. At that point they can contact the expert through their Zillow profile. Voila, the referral process begins. Best part? It’s free! Now you have two people connecting who may otherwise would not have crossed paths.

The beauty of this is that the consumer is able to do so much research in one place. Is all the information they find going to be spot on? Probably not, but they are able to connect with an expert who will help them connect the dots, and get answers to the questions that were previously a mystery. All this, done from their couch, while sipping eggnog.

Zillow Testimonials

Last but not least, let’s talk about testimonials. Genuine testimonials. They’re huge. You know it, I know it. So wouldn’t testimonialsit make sense to at least ask for a review on the site that everyone goes to when they research home buying?

People want to know what it’s like working with you before they call you. It’s one thing for you to have testimonials on your personal website or your Facebook page. It’s another thing to have reviews posted on a top website with millions of unique visitors on a daily basis. Alexa.com (a resource for web analytics) tells me that Zillow is the 62nd most popular website in the United States, and ranks 235th in the entire world. Not the 62nd most popular real estate website, but the 62nd most popular website regardless of industry or subject matter. Not only that, but average daily page views per visitor are sitting at about 7.9. That’s an insanely high number of average page views in case you were wondering. Hmm, I wonder if having your stuff on there might be a good idea? Just a thought. Either that or you can keep crying to your friends and family about why it’s such a pile of garbage. Up to you I guess.

Here’s the thing, nothing will ever substitute the special interaction between the homeowner and the real estate pro. Don’t be afraid of the world-wide web robots taking control of the planet. The human connection will always be the irreplaceable element in anything we do. As experts we might as well embrace these tools and leverage them to our advantage. There is enough to go around 🙂

Do you agree? What other advantages do you love about Zillow? What are some other disadvantages that you’re not a big fan of?

Adam Lesner | Mortgage Loan Officer NMLS 198818 | Brighton, Michigan

The Mortgage Collateral

The Property Piece of the Mortgage Puzzle

It’ game time. You have the steady job. Your down payment is sitting safely in your bank account. Your credit expert helped you get things cleaned up. You’re now ready to buy a home! It’s time to put together the last piece of the mortgage puzzle, the property. This is where the fun begins. The factors to consider when figuring out what home fits you the best are endless. This should help you gain an understanding, and a snapshot on how the process works when you find the home of your dreams.
 
Collateral
 
The home you are purchasing is the collateral being used to secure the financing you’re getting. If you expect a lender to give the green light to finance a home for you, be prepared for them to perform due diligence as well. Your lender will have certain standards that the property needs to meet. 
 
Inspection
 
Once your Realtor has helped you negotiate an amazing price, it’s time to order the inspection. Although lenders mortgage collateraldon’t typically require a general inspection to be completed by a licensed inspector, it’s highly recommended that you get one yourself. Your Realtor usually will have a couple recommendations of credible inspectors in your area. An inspection can cost anywhere from $300 to $800 depending on the scope of work and the property size. Your inspector will examine each component of the house in order to give an opinion on what meets code (electrical, HVAC), what doesn’t meet code, and what the estimated remaining life of items might be (water heater, roof, furnace). The cost that you pay for an inspection pales in comparison to the value you receive by knowing exactly what you’re “getting yourself into” with a potential home purchase.

Appraisal

Your lender will require an appraisal to be completed, and will submit an order through a third party. There is no need to order your own appraisal because privately ordered appraisals cannot be used or considered by a lender. The cost can vary depending on scope of work and property size. Typically $400-$750. The purpose of an appraisal is to get an opinion of fair market value of a home, and to find out if there are any serious issues with the home (peeling paint, broken windows, mold…). The appraiser will physically go out to the property to do an general inspection, take pictures, and take measurements. The appraiser will pull records of recent sale history for similar properties that have sold within the area of the home you’re buying. He/she will take into consideration the square footage, amenities, condition, age, and other important factors that contribute to value. The appraiser will make specific adjustments to value based on how those factors compare to the actual property being sold. By doing that, the appraiser can make an educated decision of what people are willing to pay for a home that is similar to the one you’re buying. This is called the sales comparison approach. This approach gives the best indication of what the fair market value is because it’s based on what people are actually willing to pay in that given market. If any repairs needed are noted by the appraiser, there is a strong likelihood that those repairs will need to be completed. You don’t necessarily want to make any repairs, nor will you be authorized in most cases, because you don’t own the home yet. What if you spend $100, and a Saturday afternoon installing a rail on a porch, just to find out you can’t close on the home for other reasons? Doesn’t make much sense.

Property Type

  • Single family home – This is your typical stick built, built from the ground up, free standing home. You’ll be required to maintain your own landscaping, snow shoveling, and exterior maintenance. You may or may not have an organized homeowners association (HOA) in your neighborhood. The HOA will help with general street maintenance and neighborhood needs. Be mindful of what the HOA fees are because it can have an impact on your debt-to-income ratio. In some areas you may think you’re buying a single family home, but find out too late that it’s a “site-condominium”. Depending on your loan program, your lender may have to do a more extensive review of the property and HOA if the home is found to be a site-condo.
  • Condominium – This can be a home in a community of 1 or 2 story homes that are attached, or a building of many stories containing units stacked on top of one another (like an apartment building). You own the interiorcollateral mortgage of the home. The exterior is typically maintained by the HOA, so the HOA fees are typically more costly on a condo. There are usually amenities like a pool and exercise facility among other things. Condos are popular for people who want to enjoy the benefits of homeownership, but pass on the headache of maintaining anything outside the home. Condos require a more thorough review than any property type. The lender will examine the financials of the HOA in detail. They’ll look for things like reserves, delinquent owners in the community, and insurance coverage. If you are getting an FHA loan or a VA loan, you can find out what condos are already approved in your area. For FHA approved condos in your area click hereFor VA approved condos in your area click here
  • Townhome – A townhome can be a very similar setup as the condo that’s in a community with 1 or 2 story homes that are attached. With a townhome you do own the land outside but the HOA will cover day to day maintenance usually. Your lender will contact the HOA, but typically will not be as strict on guidelines as they would be on condos.
  • Manufactured home – These are homes that are built in a factory and placed on a piece of property. It can be a challenge to find a lender for manufactured home financing. One of the reasons many lenders do not offer financing on manufactured homes is because manufactured homes typically depreciate in value. In other words, the value of the home will likely decrease over time. Whereas the value in a single family home, condo, or townhome, will typically increase (appreciate). Of course the housing meltdown in recent years has made many people question that fact. But historically, real estate is a great investment, and will appreciate in value.  
  • Multi-unit – any property that is being sold as piece that has several functional dwellings (units). These are duplex (2 unit home), triplex (3 unit home), and fourplex or quadplex (4 unit home). You can obtain a residential mortgage on multi-unit homes as long as they are 4 or less units. Anything with 5 or greater units will require a commercial loan. Multi-unit homes are a great way to supplement your income and have your mortgage paid for by the tenants.

Escrow Account

  • General – Your escrow account is a cushion set aside so that you have adequate funds available to pay your taxes and insurance when they are due. At closing you’ll pay for your full year of homeowners insurance, and several month’s worth of your taxes (depending on the time of year and frequency of taxes due). In your mortgage payments moving forward you’ll pay a fraction of your annual homeowners insurance and taxes. Each payment will contribute to your escrow account so that enough is accumulated when the next tax or insurance bill is due. Your lender will manage your escrow account for you. This keeps things simple for you because you do not have to worry about having to pay a large bill for taxes and insurance two or more times per year. It’s all included in your payment so you have less responsibility to manage. If you have a FHA loan, VA loan, or put less than 10% down, you’ll be required to have an escrow account with your lender.
  • Insurance – You’ll need to obtain an insurance policy to cover unexpected, significant damage on the home. Each property type will have different requirements, and needs that will be covered. Your Realtor and your lender can give you insight on what type of coverage to get. Certainly the insurance agent you choose will be the expert in that field on what coverage you need.
  • Real Estate (property) Taxes – Be mindful of how much the taxes on your property are. This can make a significant difference on your budget and your debt-to-income ratio. Your taxes are likely to fluctuate, which can cause an adjustment in your monthly escrow payment.

Congratulations! 

With the information you’ve been able to acquire by skimming through the “keeping your home loan process simple” series, you’re now more prepared than the vast majority of home buyers. Use this as a reference. Use it as a tool to come back to as you get closer to being ready to take the next step into the American dream. Subscribe by email to stay in the loop on the latest and greatest info on homeownership, and balanced living.  

A few closing tips…

From Livingston County, Michigan expert, and licensed inspector, Dominic Vagnetti of Inspections on Demand. 517-540-0800

 

-Roof conditions and foundations are the two most worrisome items for buyers. Roofs are a disposable product and we want to start paying extra attention as they reach their 20th birthday. We are seeing longer lifespans from dimensional (or architectural) designs, however exceptions are always present. Curling, granule loss, missing shingles are things a buyer can see driving up to the property.

-Foundation cracks can be problematic but are most commonly superficial. Look for signs of water leakage that would require injection sealant, gaps larger than 1/4 inch, or horizontal cracks which can be signs of significant movement.

-Foundation waterproofing and drainage are mostly typical of 1970s and newer homes. Prior to that, sump crocks and foundation drain lines were either not present or poorly designed. Signs of water damage or flooding can be found by examining homeowner belongings on the floor or looking for stains on wood walls or shelving. It can be important to differentiate between ongoing flood issues and a single water event like a water heater failure or leak in a pipe.