1. Let’s say that you are trying to refinance your mortgage. It does not matter if it is because you are trying to refinance from a adjustable rate mortgage to a 30 year fixed rate mortgage or if you are just looking to take cash out of the equity of your home. Every single mortgage company in the United States is probably going to be following almost identical underwriting guidelines.
2. One of the main guidelines is that all mortgage lenders must do an appraisal on the home. There was a time during the refinance boom that sometimes you could get away without having to do an appraisal. The only times you could do this was when you were doing a “rate/term refinance” or doing a second mortgage like a home equity loan. A “rate/term refinance” is one where you just change the terms of the loan, i.e, change from a 30 year fixed to a 15 year fixed or redo a loan with a higher interest rate to a lower interest rate. What the mortgage banker would do is take your application and put a value into the desktop underwriting (DU) system, wait a minute for the approval and if it came back with a “Property Inspection Waiver” you could do the loan without having to do the appraisal. This was a nice feature because it saved the client $300-$400 off the closing costs because an appraisal was not needed and the loan would close in half the normal time. The property inspection waiver could only be done if no cash was being taken out of the home. If you were doing the second mortgage some mortgage companies had this program called an “Automated Valuation Model” or “AVM.” All that they did was put your addredd into this program, the program would look at recently sold homes, take those values and shoot a number back. If the number made the second mortgage work you could do the second mortgage only without having to do an appraisal.
3. The one thing that the mortgage company has no control over is what the appraisal comes in at. It is what it is. Calling a client back to tell them that their house is not worth what they thought it is might be the worst part about being a mortgage banker or mortgage broker. First thing is that they know that you are going to say something like “I just put in new French doors,” or “The granite counter tops are only two years old.” Trust me, I’ve heard all of the stories. The one I heard all the time was that “we just put in a $20k in ground pool.” Most people do not know that having a pool de-values your home unless you live in Arizona or Florida. The other one is that now the mortgage company cannot close this loan which results in wasted time and a lost commission.
4. Even if you are dealing with a nation wide mortgage lender like a Countrywide, Chase, Bank of America, or Quicken Loans the mortgage company is going to call an appraiser from your local area. The operations team of all mortgage companies have a database of appraisers to choose from and they hire one to schedule the appraisal with you. Mortgage companies do not have a in house appraiser that they fly out to value your home and then fly them back in. I could not imagine how costly that would be or how it would even work. I remember days at Quicken where the company as a whole would get over 2,000 new loan applications in the door from around the country. The labor cost would be huge.
5. Who knows your area best than an appraiser from your local area. They probably live within a couple miles of you and know what neighborhoods are best and all of the extra little factors that determine what your house is worth.
6. After the appraiser is done going through your house and taking pictures of comparables (comps) in the area they go back to their office and start adding and subtracting things you have in your house. They add up things of value like an extra bathroom, more square footage, new cabinets, fireplace, etc. After that they start subtracting value based on what the other homes in the area have that yours does not. Take for instance a garage. If yours does not have it then its a major value deduction. The one factor that really determines the value is what the most recent sales prices where of homes in your area. The appraiser will try to find homes that have sold within the last 6 months because those will tell what the market is saying what homes are worth that are similar to yours.
7. When its all said and done, the numbers are added up and a value is written done and the appraisal is faxed back to the mortgage company. The appraisal team is notified and the value is put back into the desktop underwriting system to see if an “approval” is still granted by whoever insures the mortgage, like a Fannie Mae for instance. If the system still says its approved, then you proceed with the mortgage and close the loan. If it comes back with an error (it usually says “Refer”) then you need to see whats not getting the approval. If its the appraisal coming in too low than there is nothing that can be done.
8. This is where you need to see if your mortgage banker can move some numbers around. Maybe you can take out less cash to get an approval. Then you need to see if the loan still makes sense for what you are trying to do. Maybe there are other factors not getting you the approval now because of your debt to income (DTI) ratio or your credit score is low or you do not have enough assets in the bank.
9. The one thing that the desktop underwriting system really likes is a low loan to value. Approvals are easy to get if you have a LTV under 80% and sometimes up to 90% depending on your credit score. Anything higher than those numbers and you are not going to find any help anywhere. This is mainly due to the credit markets tightening. The days of loans up to 100% LTV are basically gone and if your appraisal comes back at over 90% its not because the mortgage company wanted you to spend $350 to do an appraisal that was not going to come through and then deny you on the loan. Its because that is what your house is worth. The mortgage companies are in the business to close loans, not to deny you on a loan.
10. There are times when you can get a second opinion done. In the mortgage business they call it a “value appeal.” This is when there are things that the appraiser just flat out missed. It happens, they are people and people make mistakes. I have seen it where the difference of $3k in value of the home can kill a deal. If the home owner can find more recent comps or can show a reason for the bump in the value then the mortgage lender can take those and give the appraisal back to have the appraiser re-certify it. Sometimes, they will give the value increase and sometimes they will not. It sounds kind of shady (because it is). I can probably picture some conversations between a mortgage brokers and a appraiser saying that they will never use them again if they do not make the value a certain number. I know that happened because it has been in every major newspaper for the past two years. Any credible lender will not let this happen because they have too much riding on it. So if your appraisal comes in low you have two options. You can pay $350 for another appraisal from a different company. I only saw this work once over a two year period. I had a client that lived in Vail, Colorado and the mortgage company I worked at sent a appraiser from Denver, Colorado which is about 100 miles away. The appraisal came in very low and my client told me that we needed to use an appraiser from Vail. We ate the cost (only time this happened) and ordered an appraiser from Vail. Appraisal came in $100k more than the first one. Weird, but it worked. Second option is just to accept that your house is not worth what it was during the years of the refi boom of 2002-2006 and eat that $350 you spent on the appraisal. From all accounts, regardless of where you live, your house has probably gone down in value by 20% from 2006-2008. Don’t feel bad, its not your fault, its not the mortgage companies fault, its the markets fault.