My property was valued too low
Whether you're buying, selling, or refinancing, an under-valuation can jeopardize the entire transaction.
So what's next? Order a second report? Change sales price? Applying to Another Lender? Something else?
Let's take a closer look at your best options after a low rating.
Shop For An Alternative Lender Here (Jun 24, 2021)
In this article (continue to …)
What a low rating means to you
A valuation that is lower than the purchase price of your new home could bring your entire home buying process to failure.
Mortgage lenders use the estimated home value to calculate your loan-to-value ratio (LTV), which is an important component in the underwriting process. The LTV measures how much of a home's value the lender is funding.
Your LTV must stay within the specific limits of a loan.
For example, on an FHA loan, your LTV cannot exceed 96.5% of the appraised value of the home. That means your maximum loan amount for a $ 200,000 house would be $ 193,000. (The remaining $ 7,000 will be from your down payment.)
What happens if the appraisal is lower than the purchase price?
Lenders always use the appraisal to calculate your LTV – not the purchase price.
If the appraisal is lower than the purchase price, your lender will likely decrease the amount you can borrow. So you either have to pay more out of pocket or get the seller to lower their asking price.
As an an example:
Let's say you've agreed to pay $ 200,000 for a home. You are using an FHA loan; the maximum loan amount should be $ 193,000 (96.5% LTV) amount, You now have $ 9,650 below the agreed purchase price
Unless the seller agrees to lower the price based on the estimate, you will need to increase your down payment to get the same mortgage and interest rate.
Instead of paying $ 7,000, you'd have to pay $ 16,650 to buy the same $ 200,000 home.
Options for low valued buyers
If your home is valued for less than the purchase price, there are a few possible options:
Seller and buyer negotiate a new, lower house sale price Buyer increases deposit to meet new LTV and deposit minimums Seller and buyer terminate the house purchase agreement Buyer or seller requests a rebuttal of the valuation (see below)
The possibility of a "bad rating" is the reason why apartment purchase contracts are often concluded with a rating contingent.
Should the home fail to evaluate its contracted purchase price, the contingent clause allows buyers to reevaluate and potentially walk away without losing any serious money.
In fact, FHA loans require this contingency on all purchases funded with FHA mortgages.
Appraisal quotas are also sometimes used to renegotiate or terminate contracts after an appraiser identifies needed repairs such as chipped paint or cracked windows.
As a home buyer, it is risky to forego your valuation contingency. You can lose your bargaining power if the home is valued for less than the purchase price.
How to refute or object to your review
In some cases, the homebuyer can request a rebuttal of the valuation. This is a formal process whereby the buyer's lender will ask the appraiser to re-examine the estimated price of the home.
Other comparable apartments can be presented to the appraiser, as can "overlooked" features of the property that can contribute to its value.
However, these rebuttals often have little or no effect.
Appraisers refuse to change the value of a home based on the report. The appraiser will submit a rebuttal response stating that the value has been changed due to new evidence or that it has not been changed and why.
Shop For An Alternative Lender Here (Jun 24, 2021)
Low appraisal for the home seller
When you're selling a home and your list price isn't rated, a few things can happen.
Your real estate agent may have over-listed the house. In this case, you can lower your offer price. It could be difficult to find buyers throwing in thousands of additional dollars to make up the difference, even in one seller's market.
And there is no guarantee that ordering another review will produce the results you want.
However, in hot markets, it is common to offer a home at a higher price on the assumption that competition will quickly drive values up. Some markets are rising so quickly that the valuation values cannot keep up.
An appraiser needs to base the value of your home on the current sales prices of similar homes.
Options for low-rated sellers
Home sellers have a few options when the rating is low:
Wait for a comparable home to be sold for a similar price. Ask your buyer to make up the difference in cash, lower your price to match the appraised value
The good news for sellers is that many buyers in today's marketplace are overflowing with cash. So it may not be as difficult to find a buyer willing to make up the difference as it was in the past.
Some buyers may even agree to a "Rating Gap Guarantee," which means they're willing to pay extra money in the event of a low rating.
What if your refinance rating is low?
Unless you are receiving streamline refinancing through the FHA, VA, or USDA, you will likely need a fresh assessment to qualify for a refinancing loan.
If the appraisal shows that the current market value of your home is lower than expected, your new loan may not be large enough to meet all of your goals.
Your options include:
Objection to the appraisal Find another lender who uses a different appraiser (you will pay for the new appraisal) Do a "cash-in" refinance that involves closing cash to make up the difference between the loan amount and the property value Less Withdraw cash than planned (if you are doing a cash-out refinancing) Cancel the refi until you get more equity
Remember, canceling the refinance does not cancel the evaluation fee you have already incurred. Likewise, ordering a new appraisal is no guarantee of higher value, and you're on the hook for two appraisals.
In addition, the lender cannot allow an additional evaluation.
Why does the estimate affect your refinancing?
Your rating will affect your refinance loan as it helps measure the amount of equity in your home.
Home equity is the appraised value of your home minus your mortgage debt.
For example, if you owe $ 150,000 on your current home loan and the valuation process values your home at $ 225,000, you have $ 75,000 in equity.
If another appraiser values your home at $ 250,000, you would have $ 100,000 in equity.
The amount of equity in your home affects interest rates and determines the size of your refinancing loan. It also determines what “additional” benefits you can get from refinancing.
For example, if you have at least 20% equity and your current mortgage is an FHA loan, you can likely refinance into a conventional loan to remove your mortgage insurance payments.
If you want a payout when refinancing, you will need well over 20% home equity. That's because lenders require you to keep at least 20% of your equity untouched when you pay out.
Human versus automated assessments
Many refinance lenders today use automated assessments (AVMs) to save time and money.
If you've done a lot of home improvement since your purchase, or your interior has features that aren't obvious to a drive-by appraiser, you may want to insist on a human appraiser even if it costs more.
One point to note: it is common for homeowners to overestimate the value of their home. So it is best not to focus on any particular home value or payout amount until you have an official appraisal to verify the home's current value.
Connect with a Refinance Lender (June 24, 2021)
Low estimate for new construction
Apartment valuations work a little differently for renovation loans or new home loans. The appraiser has to determine the market value of a house that does not yet exist.
To do this, the appraiser will examine your building plans together with your local housing market to determine the final value of the house.
Many lenders call this a "conditional assessment" as it depends on the completion of your planned project.
As soon as the builder has completed the work and the house receives its occupancy certificate, you will need a new loan to pay the balance of the home loan. This new loan is known as "permanent" or "take-out" finance.
If for some reason your newly built home hasn't been graded for a loan large enough to cover construction costs, you have some of the same options as any homebuyer:
Try a New Lender Obtain a New Estimate Ask the builder to take less money
If the builder is to blame for the low rating – for example, the build quality or materials were not as described in the loan application documents – you may be able to sue your builder to make up for some of the losses.
Many builders receive building loans (C2P) that combine the building loan and the long-term mortgage in one loan. This option has both advantages and disadvantages. One advantage: you probably only need one report instead of two.
New building that is not custom
If your new building is in a planned development and you finance it with a classic mortgage, you are in the same boat as any other buyer of a prefabricated house.
You have the same options if a rating is low – resign, renegotiate, pay a larger deposit, etc.
Low ratings and FHA 203 (k) loans
If you are funding your home construction with an FHA 203 (k) reha home loan, you might be in luck. The agency allows 10% margin on the final appraisal without affecting your loan terms.
This is true even if you are using 203 (k) refinancing to add some home improvement when refinancing your property.
This is how appraisers determine your home value
With the exception of unrated, upgraded refinance loans, almost every mortgage application requires a home valuation.
While many lenders use automated valuation models (AVMs) to get an idea of your property's value, most transactions still involve licensed individuals.
Licensed real estate appraisers use three common methods to determine your property value:
The "sales comparison" approach
For homebuyers and homeowners financing first homes, the "sales comparison" method is most common.
With this method, a home appraiser compares the property in question (i.e. your home) with other, similar homes in the immediate vicinity.
"Immediate proximity" varies depending on the region:
In a dense city like Seattle, Chicago, or San Francisco, the immediate area for a house is within 0.25 miles – usually no more than a few blocks miles
Appraisers are most interested in sales of similar homes in these areas. They consider such properties as:
Number of bedroomsNumber of bathroomsAge of the apartmentQuality of the apartment fittingsSquare meters
They also consider the "attractiveness" of a home based on things like school districts and proximity to traffic and shopping.
For each comparable home, the appraisers then search public records for home descriptions, sales dates, and other available information about a property. This data is used to formulate the value of the subject property.
For example, let's say the almost identical house across the street recently sold for $ 600,000. However, it does not contain a finished basement like yours. So your home could be valued at $ 620,000.
Comparable properties that have been sold in the last 90 days are of great importance for the sales comparison. Properties that were sold more than six months ago are less relevant.
Other home appraisal approaches
There are two other methods for appraisers to evaluate real estate – the replacement cost approach and the income approach.
The replacement cost approach estimates what it would cost to buy your property and build a house like yours, and then subtracts the depreciation.
This method is useful when you are purchasing home insurance and you want all potential insurers to have the same home value information. However, the insurers make their own assessment when they write your policy.
With the income approach, an appraiser researches rental data on your housing market to determine what your home would be rented for in the open market and uses that information to calculate your property value.
The income valuation approach is most commonly used for investors and landlords.
3 more ways to determine your property value
In addition to the house valuation, there are three other ways to determine the value of a house. They are from the least to the most accurate:
Automated evaluation model (AVM) – A computer program evaluates the value of your home based on available market dataComparative Market Analysis (CMA) – Your agent analyzes the local property market to help you decide on an offer or list priceBroker Price Opinion (BPO) – A mortgage broker assigns the value of the house
Which method you choose depends on your goals. Each evaluation tool has its advantages and disadvantages. Let's take a closer look at each one:
Automated evaluation model (AVM)
You can find automated assessment models or AVMs online for free. These models estimate your property value by analyzing local records and data from public records, identifying trends, and applying them to your property.
If recently sold similar sized homes ("comps") in your area change hands for 10% more than when you bought your property, your estimated value is likely 10% above your purchase price.
This is a pretty basic assessment.
For example, the software has no way of knowing if you've just gutted your kitchen and added $ 50,000 in equity.
An AVM also does not always “know” whether some of the comps were distressed, their prices were artificially lowered, or whether errors in the title of a comp affected its value. Likewise, it does not know whether a bidding war has raised the sales price of an area above typical market values.
AVMs are useful for showing trends – the direction and extent of changes in land values - but they are much less useful for valuing specific properties.
Comparative Market Analysis (CMA)
Typically, a real estate agent or broker can provide you with a free property value appraisal. You do them all the time for potential home sellers.
This customer sales presentation (because that's what it is) is called a CMA or Comparative Market Analysis.
The CMA is only as accurate as the agent's local knowledge. Real estate agents "spot" real estate differences and make judgments based on their experience.
A CMA can provide useful data when building an asking price. However, you should understand that an agent's main business is not evaluation. It is possible for an agent to overestimate your estimated worth in order to get your listing.
Broker Price Opinion (BPO)
Paying for a Broker Price Opinion (BPO) could result in a more accurate valuation.
Brokers with BPOR certification from the National Association of Realtors have specific training to do this job, and lenders often hire BPOs to assess the value of foreclosures before putting them up for sale.
To conduct a BPO, the realtor examines three recent local sales of properties similar to yours and three currently publicly traded homes. The realtor compares the condition and equipment of these houses with yours, makes numerical adjustments according to formulas and offers an appraisal.
A BPO costs between $ 50 and $ 125 for a typical home.
Can you repeat your assessment?
Homes don't often price for less than their purchase price – especially in an environment of rising home value. It can happen, however, so it is best to know your options.
In some cases, you may want to try another lender to get a second opinion on the value of the home – especially if you have data to show that the first valuation was inaccurate.
You can compare lenders and rates at the link below.
Confirm your new price (June 24, 2021)