Appraisals, Last Line of Defense to Poor Lending

With the housing slump being the longest running in WNY (some may think decades), many new homeowners may find it difficult to find the home of their dreams when appraisers disagree with the values. Do not fret, this is a good thing! The purpose of an appraiser is to protect the borrower as much as the lender in terms of their investment. Yes, a home purchase is an investment for the borrower; though it is never thought of this way, a home is an investment, not only in a person's/family's future, but also in their net worth.

Have you heard the term "under-water" in reference to mortgages? Simply, what this means is that the mortgage balance is higher than the stated value of the home. How does one feel when they find that they owe more than what the house is worth? Frankly, we would feel like we've been hood-winked and bamboozled. "You're telling me that I owe more than what I could sell this house for?" And that's not even considering the interest yet to be paid.

The Dodd-Frank Act requires that lenders use appraisal management companies or some form of third party appraiser to put as much distance between the lender and the appraiser. Horror stories from this housing crisis include some banks, literally, telling the appraisers what value the home needs to come in at in order to close the deal. Not all banks are bad, but some of the institutions were maximizing their loans falsely through these inflated appraisal values. I.E. $100,000 mortgage would be approved for a home that would be valued at $75,000. This may not be seen as a problem right away because we can be hopeful and say that the value may increase over time as the mortgage decreases over time. However, interest is front-loaded and you may not see that principle balance pick-up speed downhill until you're half way through the term; plus, property values do not always increase. Many factors can affect the latter - increase in renters, very low pricing in home sales, etc.

The home buying experience should not be scary. However, today we have to be smarter in regards to how the process works and the tools provided to aid in the decision making. Appraisers, though they received a bad name in the recent years, are here to help and protect consumers. Again, buyers have to be smarter so question the appraisers and their reporting as much as possible so that you have all the proper information to make the right decisions.

Happy home buying and good luck!