In the last episode of Seattle Real Estate Chat, Jim Reppond and I discuss what happens when an appraisal comes in low for a home purchase. Since appraised values are based on comps (recently closed homes), the data used to determine an appraised value is often “lagging” behind current home prices. Factor in bidding wars when prices may be escalated along with HVCC (regulations that do not allow lenders to select appraisers) and it’s not entirely uncommon to have an appraisal come in lower than the offer price.
I’m working with a homeowner in the Wedgwood neighborhood of Seattle who’s interested in refinancing his existing 30 year fixed rate to a 20 year. Mortgage rates are so low that he’ll actually reduce his payment while not extending his mortgage term. The only real mystery is what the home may appraise for.
We have Zillow zestimates, taxed assessed value and we even have our own opinions on what our home should be worth. We don’t know the value the lender will use until the appraiser visits your home. (NOTE: some refinances, like an FHA streamline or HARP 2.0 may not require an appraisal).
The appraised value determines the loan to value (LTV) of the refinance. Loan to value is determined by dividing the loan amount by the appraised value. The best pricing available is for LTVs 60% or lower. If an appraisal comes in at a value that is lower or higher than estimated when the refinance was locked, the pricing may be adjusted if it falls into a different bracket. Conventional loans have what is called “LLPA”s (loan level price adjustment) which is essentially risked based pricing.
Here is an example of different price points based on a rate-term refinance for a 20 year fixed mortgage with excellent credit. Rates are as of 9:00 am, June 27, 2012 and may change anytime.
- 3.500% (apr 3.636) with a loan amount of $213,700 and a loan to value of 60% or lower. This would require an appraised value of approx. $358k or higher. Principal and interest (P&I) payment is $1239.37 and net closing cost is $2652.86.
- 3.500% (apr 3.647) with a loan amount of $213,700 and a loan to value of 60.01 – 75%. The appraisal came in at less than $358,000 to as low as $285,000. P&I is $1239.37. Net closing cost is $3187.11.
- 3.500% (apr 3.676) with a loan amount of $214,700 and a loan to value of 75.01 – 80%. The appraised value came in below $285,000 to as low as $269,000. P&I is $1245.17. Net closing cost is $3724.89.
A loan to value over 80% may require private mortgage insurance or a second mortgage. For this Seattle home owner, I’d be quite surprised if his LTV came in below 80%.
If an appraisal comes in lower than expected and you want to keep your same pricing, you can always opt to bring cash in to closing in order to maintain your same loan to value.
If you’re interested in refinancing or buying a home located anywhere in Washington state, I’m happy to help you.
When the expanded guidelines of the Home Affordable Refinance Program (aka HARP 2) were released late last year, they announced that loan to value (LTV) restrictions were being removed. It all sounds very simple however, no big surprise here, there’s a little more to it.
HUD recently announced they will extend their anti-flipping waiver through December 2012. From HUD:
In an effort to continue stabilizing home values and improve conditions in communities experiencing high foreclosure activity…[HUD] will extend FHA’s temporary waiver of the anti-flipping regulations.
With certain exceptions, FHA regulations prohibit insuring a mortgage on a home owned by the seller for less than 90 days… The new extension will permit buyers to continue to use FHA-insured financing to purchase HUD-owned properties, bank-owned properties, or properties resold through private sales. It will allow homes to resell as quickly as possible, helping to stabilize real estate prices and to revitalize neighborhoods and communities.
The extension is effective through December 31, 2012, unless otherwise extended or withdrawn by FHA. All other terms of the existing Waiver will remain the same. The Waiver contains strict conditions and guidelines to prevent the predatory practice of property flipping, in which properties are quickly resold at inflated prices to unsuspecting borrowers. The Waiver continues to be limited to sales meeting the following conditions:
- All transactions must be arms-length, with no identity of interest between the buyer and seller or other parties participating in the sales transaction.
- In cases in which the sales price of the property is 20 percent or more above the seller’s acquisition cost, the Waiver will only apply if the lender meets specific conditions and documents the justification for the increase in value.
- The Waiver is limited to forward mortgages, and does not apply to the Home Equity Conversion Mortgage (HECM) for purchase program. [Reverse Mortgages]
In addition to what HUD covered in their email on Friday, the waiver also specifies that:
- the sale must be by the owner of record
- the property may not have been a repeatedly “flipped” over the past year
- the property was marketed openly and fairly
When a home is being resold 20% or higher than what the seller purchased the property for in less than 90 days, often times a second appraisal will be required and the seller will need to show documentation to support the increased value in the home, such as receipts for the improvements made. A property inspection report will also be required by the lender to assure the quality of the improvements made to the property. Any health or safety issues disclosed by the property inspection will need to be corrected.
If a home has been re-sold withing 91-180 days at more at 100% or more than the seller’s acquisition cost, the same conditions will apply. If a second appraisal is required, the home buyer is not allowed to pay for it per HUD. Thanks to LO Comp, which the Fed passed in April, your friendly mortgage originator cannot use their commission to pay for this cost either.
Investors who are reselling in a short period of time for a much higher amount than their acquisition cost should be prepared for the cost of the second appraisal when the buyer is using FHA for financing. Folks should also retain detailed records of improvements (including all receipts) when they’re planning to quickly resale a home. The seller’s acquisition cost is the sales price of the home, plus the seller’s closing cost, including real estate commissions. It does not include any repairs.
If you are considering buying a home located anywhere in Washington State, I’m happy to help you! Click here for a mortgage rate quote for homes located anywhere in Washington. I’ve been originating home loans at Mortgage Master Service Corporation since April 2000, including FHA insured loans.
Recently a couple of my clients returned to me to refinance their Washington homes wanting to take advantage of the current historically low mortgage rates. The biggest gamble with a refinance is what the appraised value comes in at. We know at the beginning of the application if someone is qualified based on their income and what their credit scores are. We wait to until we receive the appraisal to learn what has been decided to be a current value based on what other like homes in the neighborhood have recently sold for. If a home's loan to value is over 80% based on the the appraised value, the home owner has options depending on what the actual loan to value is.
Private mortgage insurance has varying rates depending on risk factors, such as credit score, appraised value, loan program and income. The premium can be paid monthly, annually, by the lender (lpmi), single premium (paid once) or split premiums (a combination of monthly and a lump sum premium). If paid monthly, private mortgage insurance is set to be dropped from ones mortgage payment when the principal balance reaches 78% loan to value based on the original transaction.
Here's an example. A couple from Ballard want to refinance their mortgage with a total loan amount of $400,000 with no cash out (rate-term refi). They have excellent credit scores (above 740) and have locked in a 30 year fixed at 3.875% (apr 3.978) with a principal and interest payment of $1881. Mr and Mrs. Ballard would like the appraisal to come in at $500,000 or higher to meet the 80% loan to value criteria. Based on what their neighbors have sold their homes for recently (6-9 months) the appraisal comes in at $480,000 producing an 83.3% loan to value. It's disappointing at first however Mr. and Mrs. Ballard and ready to review what their possible options are.
Bring in cash to make up the difference. $480,000 appraised value x 80% LTV = $384,000 possible loan amount with no mortgage insurance. $400,000 proposed loan less $384,000 = roughly $16,000. NOTE: this figure could probably be reduced with the use of rebate pricing (increasing the rate to reduce the cost) and other closing costs would be reduced based on the reduction of loan amount.
Add monthly private mortgage insurance. Based on their scenario, the rate would be 0.29% of the loan amount divided by 12 months = $96.67 monthly pmi. This premium will remain in their payment until the principal balance reaches 78% of the appraised value of $480,000, which should take approximately 41 months. If Mr. and Mrs. Ballard decides to go this route, their principal, interest and mortgage insurance payment will be $1978 and their initial closing cost will not be increased (apr 4.056).
Pay a one time "single premium" mortgage insurance. Instead of increasing their monthly payment, Mr. and Mrs. Ballard can opt to pay pmi in one lump sum and be done with it! The rate, based on their scenario, is 0.72% of the loan amount = a one time payment of $2880. This does increase their closing cost however their principal and interest payment will remain at $1881 (apr 4.039).
Mr. and Mrs. Ballard decide they like the single premium option considering that they won't have a mortgage payment due for one month after the closing of their new refinance and they're receiving a refund of the balance of their existing reserve account a few weeks after closing from their existing mortgage servicer. Plus they'll break even with the one time mortgage insurance premium quicker than the monthly option. Both pmi options allow them to not dip into their cash reserves and to still proceed with the refinance.
In this climate, sometimes neighbors (or banks) have to sell homes for less than what they or you would like and appraisals may come in lower than expected. It's good to know that there are options for when this happens. A piggy back second mortgage may be something to consider too with this type of scenario.
NOTE: If Mr. and Mrs. Ballard's existing mortgage qualified for a Home Affordable Refinance, there would not be any private mortgage insurance required and if their exisiting mortgage was FHA, they may have opted for a streamlined refinance without an appraisal (no potential loan to value issues) although the pmi rate is currently less expensive than FHA's mortgage insurance.
PS: For the record, appraisals may come in higher than estimated too.
If you are interested in seeing obtaining a rate quote for a refinance or purchase on a home located anywhere in Washington, please contact me.
This is a question that I'm reviewing for a client in Seattle who's current mortgage was a non-conforming loan amount in 2005. Non-conforming (aka jumbo) mortgages do not qualify for the home affordable refinance program which offer expanded loan-to-values. The current mortgage balance is $400,000 (in 2005, the conforming loan limit was $359,650). In King County, the current high balance loan limit is $567,500 (soon to be reduced to $506,000 on October 1, 2011).
Here are some examples of what programs are available based on how much the home may appraise for (loan to value) with a mortgage payoff of $400,000.
- appraised value of $508,000 or higher = 80% loan to value and no private mortgage insurance = conventional mortgage with closing costs and prepaids financed.
- appraised value of $500,000 or 80% loan to value = conventional mortgage with closing costs and prepaids paid out of pocket or with rebate pricing.
- appraised value of $475,000 or 85% loan to value = possible combo mortgage with first mortgage at 80% loan to value or lower (to avoid private mortgage insurance) and second mortgage at combined loan to value at 85%. Yes, second mortgages are starting to come back. This scenario would require a minimum mid-credit score of 720.
- appraised value of $450,000 or 90% loan to value = mortgage insurance
- appraised value of $415,000 or 97% loan to value = FHA insured mortgage with upfront and annual (monthly) mortgage insurance.
- appraised value below $415,000 means that the borrower will need to consider a cash-in refinance if they want to proceed.
NOTE: If the mortgage that was being paid off was eligible for home affordable or if it was an FHA underlying mortgage, there would be more options…because it was originally a jumbo loan in 2005, the options are limited.
How much this home appraises for will impact whether or not a refinance is possible…I really believe that if Congress is sincere about a housing recovery, we need to eliminate appraisals on certain rate-term refinance where the borrower qualifes based on their income, employment and credit.
The media is reporting that the Seattle-Tacoma-Bellevue area saw a huge increase in foreclosures from information provided by RealtyTrac. According to the media, the Seattle area has had an increase of 71% in foreclosures; one of the largest increases in the nation. I agree with CNBC's Diana Olick's take on the data:
"During the housing boom, Seattle was actually the last to see the big boom in prices and then on the other side, the last to see the big drop in prices so it could be that Seattle is kind of catching up with the rest of the country now seeing those foreclosures because prices did get so high there and drop so precipitously."
Foreclosures and short sales do impact property values and the current "appraised value" of your home as an appraiser may need to use a nearby short sale as a comparable property for your home. If you're considering refinancing, and your refinance requires an appraisal, this may impact your loan-to-value and home qualifying for the new loan if your home appraises for less than originally expected. Some refi's do not require an appraisal, such as an FHA Streamline (where you are refinancing an existing FHA mortgage to a new FHA mortgage) and some Fannie Mae Home Affordable refi's are qualified without an appraisal…but a majority of mortgages do require an appraisal. (I wish that all appraisals could be waived if the home owners qualifed based on employment, income and credit…I truly beleive this would help stimulate the economy…but it's not the case).
If you are delaying a refinance, you may be risking more than losing today's low interest rate, you may be risking your home's appraised value.
When HUD changed the guidelines for FHA streamlines last fall,I thought they had pretty much stuck a fork in a program that has been very beneficial to home owners who have an FHA insured mortgage loan. You see, HUD made it to where if a borrower opted to not have an appraisal, they cannot finance their closing cost or reserves/prepaids. Back then I never thought we would see rates at their current levels. With today's rates, many home owners can opt for a slightly higher than "par" rate to have the lender pay for a portion of their closing costs. In addition, it doesn't matter what your home's current appraised value is since there is no appraisal!
With an FHA streamline refi, if the loan has less than 36 payments, there may be a credit of the balance of the upfront mortgage insurance premium if it was financed (99% of loans have the ufmip financed). The credit is on a sliding scale (the earlier in the loan, the larger the credit).
Closing costs are reduced since there's no appraisal fee (and no worry about what your home may appraise for). The loan amount is limited to the current principal balance plus the new upfront mortgage insurance premium. With today's pricing, many Seattle area home owners are typically bringing in the mortgage payment they would have "skipped" or funds to start their reserve account at closing and enjoying the benefit of a much lower payment due tot he reduced rate. Borrowers will receive a refund of the balance of their reserve account a few weeks after closing from their existing mortgage servicer.
FHA mortgage insurance premiums are set to change in weeks (October 4, 2010). Although the upfront premium is decreasing, the annual (monthly) is increasing and the net effect is more expensive that the current formula.
At Mortgage Master Service Corporation, we are a HUD Endorsed Lender with our own in-house FHA underwriters. I've been originating FHA loans for over 10 years and I'm happy to provide you a free rate quote for your home located in Washington state.
UPDATE: In order to qualify for an FHA streamline refinance, the borrower must:
- have an FHA insured mortgage
- have made a mimium 6 mortgage payments (seasoning) by the time they apply
- have a minimum mid-credit score of 620 640 (or higher)
- document income and employment
- document assets needed for closing
- Last but not least, the proposed refinance must create a "net-tangible" benefit to the borrower.