When an Appraisal Comes in Low for a Refi

Appraisals are being scrutinized more than ever with our current mortgage climate.  And I am seeing a few coming in lower than what the home owner anticipated.    If you have plenty of equity, a lower appraisal may not impact you.   However, mortgages are often priced based on loan to values and depending on the type of mortgage and property.  Different scenarios have different pricing based on "risk".  A higher loan to value over a certain price point can increase the cost of the loan.

For example, I recently had a refinance for an investment property where the home was appraised for slightly less than the home owner expected.  He estimated $200,000 for the value of the property and the appraiser (with supporting comparable sales a.k.a. comps) valued the property at $180,000.  The difference between 75.01-80% loan to value and 80.01% LTV is 0.5% to fee (that’s 0.5% of the loan amount or repricing the mortgage interest rate to absorb the 0.5% in fee).    

What are the options with this scenario?

• The property owner could pay the additional 0.5% in fee ($900 based on the above scenario) to keep the same rate or have the rate bumped up to absorb the fee.   Plus they would pay private mortgage insurance since the LTV is over 80%.
• The loan amount can be reduced back to 80% of the appraised value, keeping the current rate.  The property owner may have to bring cash in to closing if there is not enough equity to absorb the difference.
• The loan may be re-priced to absorb closing costs and thus reduce cash needed for closing.

Many appraisals now require interior photos (including kitchen, main living area and bathroom).  Since the underwriter is reviewing the photos, you may want to make sure that your home and yard are tidy.  They are reviewing photos for clues of "pre-foreclosure" or fraud.  I recently even had an underwriter question why a room was vacant on an owner occupied refinance, the home owner had just finished a remodel and had not moved his furniture back when the appraiser was there for the photos.  His house appeared too clean!  Appraisers and underwriters are questioning everything and are being very cautious during these historic times.  What it boils down to is that nobody wants the lender pointing a finger back at them should the loan not perform (become a foreclosure).