Its one of those things that make you stop and do a double take. When the appraisal comes in low it’s not like you can just drop your bid, the most common outcome is that the lend just declines to lend on the property. You are back to square one and you have to go back out into the market and hunt for a home like you have already been doing. This time it gets a little more tedious because of the experiences and delays and disappointments that you endured the first time around. So what are a few of the things that you can do to save this deal?
When The Appraisal Comes In Low Get A Second Opinion
Appeal all errors and omissions by the appraiser: The first thing is to get a second opinion. The bank is the one who need to have the right numbers but they may not have employed the most knowledgeable appraiser for the particular location you are looking at.
If you think that the comps that were selected to make the comparison are not in line, talk to the appraiser and if they prove to be unresponsive then you should turn up the heat by talking to the bank and see if it can be redone. Ask your lender to provide a second appraisal opinion. This is the first step in response that you can make to a low appraisal.
On the other side of the coin, look to the seller and use the appraisal as leverage to renegotiate. The seller may have just been too optimistic or had poor advice; they may be interested enough in selling to you that they’ll agreed to revise terms. There is no reason you cannot do this at the same time as getting a second opinion. Depending on how motivated your seller is, they may be receptive to making some sort of concessions on price or terms.
Switch Lenders And Try Again
The mortgage lending market is vast and diverse, even after the big shake up of the last few years. If you have used a mortgage broker they may be limited in how they can respond or in the selection of the appraiser. By looking for an alternative source, you put the pressure on the lender to compete for your business.
It may sound daunting to challenge something so official seeming as a real estate appraisal. Unfortunately, the secret of the industry is that there are issues of training and the way that appraisers are compensated. This has caused some real structural problems within the industry. If you push back you may find the chances of getting a favorable reappraisal are higher than you might think.
At the end of the day, lenders want to lend but they want to be confident that there is adequate security behind the loans they write. When your appraisal comes in low on the home you are looking to purchase, don’t hesitate to stand your ground and also to use it to your advantage.
For the last fifty years or so the Fair Isaac Corporation has been publishing some very useful financial information based on the credit reports of consumers. This is the original, so called FICO Score that lenders and stores use to determine if they will allow you to make purchases on credit.
FICO Scores are very influential and are frequently used to determine if you are suitable for jobs, credit, insurance and even dating. This is because it gives lenders and other decision-makers an indication of character without risking charges of discrimination.
How It Works
According to the myFICO.com website the factors used in calculating credit scores are as follows:
- Payment history 35%
- Amount owed 30%
- Length of credit history 15%
- Types of credit in use 10%
- New credit 10%
The term FICO Score has come to represent all credit scores as a generic term. This is partly because credit scores are calculated by all three of the large consumer credit agencies, Trans Union, Experian and Equifax, using formulae based on the Fair Isaac model. That means the published credit scores from each of these agencies should be similar and fairly accurate. You may find a slight variation because the three agencies may occasionally get information that is reported to some of them and not others.
The scores range from a low of 300 up to highs of around 850, where higher is better and relates to responsible behavior. Credit scores below 640 are considered bad and scores above 700 are considered good ratings.
There are some recent variations on the basic credit score that were designed to either standardize scores or are related to specific industries such as insurance. If you register as a user at the creditkarma.com website you can see different versions (although not from all of the consumer credit agencies) of your credit score that serve different financial purposes, for free.
FICO Here FICO There FICO Scores Are Everywhere
Since the Millennium FICO Scores have only increased in importance. Restrictions on information about employees have brought about more usage of FICO Scores for employment purposes. FICO Scores are becoming a numeric measure of character as they are based purely on financial behavior they indicate your level of financial responsibility and trustworthiness.
Consumer businesses like that they can avoid the risk of violating civil rights or fair housing and employment laws. This is in part because of what credit scores do not include. Any information about age, race or religion, or any other status that might be protected by law will not be included. Essentially, it is the safe way to judge consumers without risking a discrimination lawsuit.
When you are intending to take out a mortgage or engage in any consumer transaction that involves real estate your credit history, your FICO Score is a strong indicator of what sort of credit terms you will be able to get from lenders and whether you will be able to borrow at all. It is not the deciding factor however, as lenders will still want to determine your net worth and what sort of payment you will have the ability to pay over the lifetime of the loan.
As with many other aspects of your public life, real estate financing will depend on your credit records. Over the years lenders have determined that there is a strong correlation between credit history of past behavior and the likelihood of appropriate future behavior. Your FICO Score is like a meter that gives an instantaneous snapshot of your credit worthiness.
The number one cause of cancelation of a real estate sale is the lender receiving a low appraisal in response to the loan application. Three of the most basic responses are to dispute it, renegotiate with the seller and change lenders. These are not the only options, there are other, more daring tactics to help to get the home you want, even after it looks like all is lost.
Receiving a low appraisal has been one of the hazards of the market in recent years and low appraisals have caused the majority of sales cancellations. When lenders get low appraisals they tend to scrap the deal and you have to start the process all over again.
Getting creative and being stubborn enough to resist accepting a low appraisal has a better chance at success than doing nothing. After all, when it gets to that point, what do you have left to lose?
Get Your Own Appraisal
When it is the lender that has chosen the appraiser you do not have much power to control the quality of the service. Depending on the form of your lender, for example a mortgage broker that has limited choices and has to go with someone else’s vender list you may get an appraiser who is unfamiliar with your market.
Getting an alternative appraisal from a known expert in value for your neighborhood can be an effective way to persuade your lender to look again and reconsider your loan.
A Difference Of Cash
You might be wondering why, when the appraiser says the home is worth less than the asking price, you would be willing to put up more cash? It really depends on what the home is worth to you. If losing the deal will cause enough pain then it will be worth it to come up with some more cash. Of course, if you are mortgaging less then your payments will be less, proportionately.
If you have the cash on hand this might actually be the best alternative. If you do not have the cash on hand then you might consider changing your loan terms. It may be possible to proceed with reduced points on your loan, which could find the cash for you.
You might even go to the extreme of negative points which will give you cash at closing that you might be able to apply to your down payment. The cost of reducing points is of course, an increased interest rate on your loan. Changing your home loan terms in this way is something that needs to be carefully worked out before you make any decision.
Sellers Who Carry Seconds
If the seller is willing to carry a second mortgage note against the property you will be able to use that like cash at closing to make up your extra down payment. If you can cope with this extra debt it might be enough make the difference between a new home and starting a new search.
Since the disaster of the sub-prime home-loan crisis that started in 2007 and really has not completely resolved itself in 2014, it has been just a little harder to get a government-backed mortgage. Fortunately it has not been impossibly difficult, just a few more hoops and altered terms.
When borrowers take out FHA and VA mortgages it does not mean that the agencies are actually funding their mortgage. It just means that they are providing a government guarantee to back up loans that conform to their standards of what is needed and sensible.
Advantage To Veterans In FHA and VA Mortgages
If you are a veteran, i.e., anyone serving in or honorably discharged from the of the branches of United States military a Veterans Administration (VA) home loan could be a good way to get a home of your own for no money down. It has to be offered at the appraised value or less and you need to have the seller agree to pay the closing fees. Assuming a go on all of this and you can have about the easiest no down payment real estate deal out there. Of course that doesn’t take into account anything that you went through while you were deployed by the service you served in.
You still need to qualify for FHA and VA mortgages on similar terms of income and credit history. With some exceptions the VA program covers loans up to $144,000 for both purchases and refinancing. There are other terms that make it quite a generous deal: VA loans are assumable by qualifying veterans, the vet doesn’t have to be a first time buyer and you can use is it repeatedly without penalty. Also, a private mortgage insurance policy is not required, making it a much preferable option when compared to FHA.
On the down side you can end up with a loan that is greater than 100 percent of your home value due to VA funding fees and, as anyone who has ever attempted to get anything out of the Veterans Administration can tell you there is paperwork involved, which can be burdensome.
Down Payments With FHA Home Loans Are Still Pretty Low
With the financial crisis in the rear view mirror the Federal Housing Administration (FHA) has made some changes to their popular FHA loan program. The main changes are in raising the down payment requirement from three percent up to 3.5 percent and adding extra flexibility to refinance for homeowners who are under water.
One drawback of the FHA home loan program is the cost of private mortgage insurance that is required on the loan, both as a closing cost and as a monthly premium, on top of mortgage payments of principal and interest. For this reason, an FHA loan is likely to be the last resort for borrowers.
There are options for most homebuyers depending on needs, terms and ability to pay. The access to homeownership that FHA and VA mortgages have given to the American public is one of the great features of the US residential real estate market. Although some borrowers will qualify for better terms with conventional loans, for everyone else need not give up on the dream of homeownership just because they need a little extra help. FHA and VA mortgages are there to make it happen.
The central bank of the United States that is entrusted with the responsibility of making sure the nation has a flexible, safer, and stable monetary and financial system is known as the Federal Reserve or just the Fed. The Congress created this system after President Woodrow Wilson signed the agreement that made the Federal Reserve Act into law. The Federal Reserve came into existence on December 23rd, 1913.
Four Areas Of Federal Reserve Responsibility
- Making sure the monetary policy of the nation is capable of providing employment and stable prices to everyone, which is done by controlling the economy’s credit and money supply.
- Keeping the financial institutions like banks in check, so the consumers’ credit rights are always protected.
- Managing any kind of risk that occurs in the markets by stabilizing the financial system.
- Taking care of all the payment systems of the nation, and help the government, financial, and foreign institutions by providing financial services on time.
Structure Of The Federal Reserve
The Federal Reserve is a system comprising of one central agency and twelve regional agencies. At the center, in Washington DC is the independent agency with the Board of Governors. In twelve major cities across the US, Federal Reserve Banks have been placed at strategic locations, to regulate and maintain the financial markets in an effective manner.
While local banks maintain the economy of each region, all of these banks are accountable to the Federal Reserve. Not only does the Federal Reserve supervise all the financial institutions, it also provides banking services to the federal government and depository organizations always making sure that the consumers’ rights are protected and everyone is given a fair treatment.
The body that is responsible for making policies related to money is the Federal Open Market Committee (FOMC), which comes under the Federal Reserve. It has twelve members who have the right to vote, seven of whom come from the Board of Governors and the remaining five from the presidents of the twelve Reserve Banks.
The Chairman leading the FOMC is the Chairman of the Board of Governors. All the presidents of the Reserve Banks, even the ones who are the non voting members have the right to attend the meetings of the FOMC where the policies and economy are discussed and assessed.
As mentioned above, the Federal Reserve controls the currency in the entire nation. It accomplishes this by regulating the open market operations. By using this tool, it influences the conditions of the money market and controls the growth of money and credit. The purchases of large-scale assets, and currency swaps also fall under the supervision of the FOMC.
Duties Of The Reserve Banks
- Control the currency by regulating the institutions like credit unions and banks
- Provide supervision to all commercial banks and bank holding companies that are members of the Federal Reserve System
- Provide official opinions for making policies regarding money
When it comes down to the home appraisal basics what matters is the value that the lender will agree on as much as what the seller is willing to accept. This is because in many ways real estate sales are complicated transactions that involve large investments and the work of many interested parties.
Home Appraisal Basics In A Nutshell
Because of these complexities in the marketplace, there are several different types of appraisals. Occasionally an appraisal is required to determine a divorce settlement, set insurance or value for property taxes. By far the most common appraisal, and the one that homebuyers are most interested in, is the mortgage appraisal; purchase and refinancing are two of the main reasons to have a home appraised.
Appraisals of real estate for loan approval are very highly regulated at the state and federal levels. They must be conducted by state certified appraisers. When a buyer needs to finance their real estate purchase it is the lender that orders the appraisal. The cost of the expert opinion is passed on to the buyer as a fee in the closing costs of the loan.
A significant part of the reason for government involvement is the number of government backed home loans on the market. In the case of FHA loans the appraiser has an obligation to reveal any defects that they find to the buyer. In non-FHA loans there is no such obligation.
If buyers are paying cash there is no requirement for a valuation. However, as a matter of due diligence, cash buyers should get professional advice to establish that they are about to offer a reasonable price.
How To Appraise A Home
Real estate has the very unique characteristic that no two parcels of land or buildings are exactly alike. It is this feature that requires that trained professionals do appraisals.
The most direct method of appraisal that is used is to rate a home relative to comparable properties that have recently sold nearby. It helps to have a large market of fairly conventional homes with which to compare your property. There is much that goes into this approach, beyond the mere comparison of square footage.
Appraisers take into account the location, recent sales of similar properties in the area and any obvious defects in the land parcel or structure of the buildings included in the purchase.
The one most disruptive outcome to an appraisal is that it should come in as being worth less than the asking price. That will cause lenders to deny the loan application.
The Value Of The Disinterested Third Party
The most valuable aspect of professional appraisals apart from their knowledge of the market and skills is that they are disinterested parties. When homes are bought and sold emotions run high.
Buyers and sellers all have a strong interest in receiving the outcome that they desire. That desire often is less than realistic or emotionally charged, they will cling to unrealistic hopes. That is why lenders and buyers need to go beyond the home appraisal basics to ensure that they are making smart decisions that are sound investments.
The Farm Service Agency (FSA) is a part of the U.S. Department of Agriculture (USDA) and the institution responsible for guarantees for government backed rural lending specifically for small farm holdings and those in need of help. Updates have made it easier for a wider range of farmers to qualify under the new terms of the program.
Help Buying The Farm
Farmers that have acceptable credit in the eyes of lenders and the ability to pay for a loan but are unable to otherwise qualify to get a loan for a farm property, this program might make the difference between getting the loan and not. In recent year farmers have been having a particularly tough time due to the recession.
The recession has hit young and small holding farmers particularly. However these are the future of agriculture and so the FSA has a mission to make sure that any farm owners that could reasonably be expected to succeed in the business are given a fair chance to find the funding to purchase the farmland required to make an enterprise out of a season’s crops. The terms that lenders can give are more flexible than they would otherwise be due to the revisions and extension to the Ability to Repay Rule.
Ability To Repay Is Different For Farmers
Unlike residential real estate where the ability to repay is predicated on the income and debt of the individual borrower farming is considered a business and the producer of vital resources, requiring expertise to succeed. To that end the FSA gives lenders some flexibility in the calculation of a farmer’s ability to repay a loan. As well as income lenders consider the experience or education of the farm owner. Any combination of these factors is considered acceptable.
As a national resource farming is one of the most important activities that keeps the nation on its feet. The USDA and the FSA have a broad remit to ensure that there is a healthy environment for farmers and for the future of the farming community. Providing loan guarantees is just one way in which they look out for the rural economy.
Putting The Life Into Country
The guarantees have been expanded and will cover the purchase of land, repair and construction of buildings, institute water conservation and among other things enable farmers to refinance existing debts on favorable terms. The rules do stipulate that any lending must be adequately secured so that there is a realistic chance of repayment. The guaranteed portion of any of these loans can be sold to investors so that the lender can recover their funds to initial new lending.
Agricultural and farm mortgages like these are considered a safe investment because of the government backing that comes with them. This sort of subsidized lending helps everyone involved. Farmers get funding on better terms or where none was available before, lenders create new business and investors receive a secure income.
The Home Affordable Refinance Program or HARP is a program by the federal government to help homeowners in refinancing their mortgages. If you are current on your mortgage payments and still did not get traditional refinancing, maybe because the value your house has declined, HARP can help you refinance.
This program by the Federal government is designed to provide you with a new, more stable, more affordable mortgage. If you want to refinance through the program you must know that it requires a loan application and underwriting process along and certain other criteria that define eligibility
Eligibility Criteria For HARP
- You should be current on your mortgage, with not more than 30 days late payments in the last six months and not more than one in the last twelve months
- Your home must be primary residence, single unit second home or a one to four unit investment property
- Fannie Mae or Freddie Mac should own your loan. There are loan look-up tools present to check it
- Your loan must have a note-date of May 31, 2009 or before
- Your current loan-to-value (LTV) ratio needs to be greater than 80 percent
You can ask the company to which you make the mortgage payments for the availability of HARP, i.e. whether they participate in the program or not. The company you pay might have set up the loan for you but there is a high probability that, if you have a conforming loan, they have sold the ultimate title to the loan to an institution that holds mortgages and investments. Alternatively, you can determine your eligibility by simply contacting Freddie Mac or Fannie Mae.
Steps Which Will Lead You To Affordable Refinance
By using their respective look-up tools, you can determine if your loan is owned or guaranteed by Freddie Mac or it is owned or guaranteed by Freddie Mae, which is one of the important criteria for eligibility for HARP. Moreover, to enquire about HARP, contact your current mortgage servicer or contact any other, which is approved by Freddie Mac or is approved by Fannie Mae if your servicer does not participate in the program. To compare costs and rates with additional mortgage companies in order to ensure best refinance terms.
The Coming Update Of HARP 3.0
The points or changes included in the next update of the program, HARP 3.0 are still being debated. Hence, it has not been instituted yet. Some of the changes likely to be included are:
- Allow mortgages that are not backed by Freddie Mac or not backed by Fannie Mae to qualify for HARP 3.0
- Shift ahead the HARP eligibility dates out from May 2009 to 2011
- Waive or loose credit, income and employment verification guidelines
- Allow homeowners who already have refinanced under HARP to refinance under the program again
As of the writing of this article, the HARP is scheduled to end on December 31, 2015.
Anyone old enough to remember the eighties movie The Money Pit will think twice about purchasing a distressed property that needs some serious repair to bring it up to standard and then either live in it or sell it on to a less ambitious buyer in better condition than which you found it.
Of course, with the support of professionals and a really great discount price, you might be tempted to take on such a challenge. As long as the foundation is not cracked and there is no mold growing anywhere in the structure you might find that you have a hidden gem.
Discounts Are The Keys To Distressed Properties
When you purchase a distressed property you are going to negotiate a discount from the full market value before you consider the repairs. You will need to have inspections and appraisals and estimates from vendors. Large repairs will need to have estimates from three vendors.
Once you know what it will take to get the house in shape you can then subtract that cost from the discounted price. This will be the upper limit of what you will be willing and able to pay.
If you are one of those fortunate people who have the ability to put cash into such a project and close rapidly you will be in an extra powerful position. For the sake of speed of transaction many distressed property owners will accept an even lower price to get the property off their hands then with hard work and smart moves you can realize the equity or just make it your dream home in just the way that you wish.
Geography Makes Real Estate Worthwhile
The first consideration in buying real estate in general and particularly distressed property has to be the location. The old saying that the three things that matter most in real estate are location, location, location is doubly true for homes that are in bad repair.
It is always better to purchases the worst home in the best neighborhood, as far as property values are concerned because you will have more favorable comparable. There will also be lots of good will from neighbors when you fix up the home that has been ruining their views and dragging down values.
Attitude Equals Savings
There will always be risks and hidden faults when you are buying older properties. You must take that into account when you make your offer. You may be surprised at how low an offer you can make. Of course there will always the owners that overvalue the abandoned, rundown home for which they are demanding full market value. You don’t need to deal with them.
As a buyer willing to invest in repairs and maintenance you are in a position of strength and you should not be afraid to walk away from the seller demanding too much money for too little house. Make your distressed property purchase wisely and growing equity and the satisfaction of creating your own dream home will doubly reward you.
There are many people who, upon retirement, receive a lump sum payment. While it could be very tempting to pay off the mortgage, is this really a wise move? The lump sum payment could also be used to pay off loans which have been taken out in the past and which have high interest rates. Many seniors like the idea of being debt free but is this really a wise move?
It depends upon the amounts involved and whether the payments are easy to make to a certain extent. Of course, those loans that have high interest rates would be the first to consider, but the mortgage may not be a sensible choice to pay off.
It also depends upon any tax relief that is gained for having a mortgage and also upon whether the lump sum payment is of more use to the senior as a means of doing something they want to do, rather than paying off their mortgage.
Alternatives At Retirement
Back in the days when the mortgage was arranged, it’s quite possible that the payments were fairly small. If this is the case, then keeping the mortgage on is a good idea. If, however, the monthly payments on the mortgage are proving difficult on a reduced income, then payment may be a sensible option.
Before deciding, it’s worth finding out how that lump sum could be invested to increase the monthly revenue rather than simply assuming the payment of the mortgage is wisest. If an investment of the lump sum can give you a better income, then investing is wiser than paying off the easily manageable mortgage.
Another alternative is to buy into property. Perhaps the lump sum is sufficient to buy an investment property. This could be either a house that could to be renovated and flipped for a good return, or that could generate rental income.
Making The Decision About What To Do
Before parting with that retirement lump sum by paying off the mortgage, do the calculations. High interest loans will cost more long term, so you need to work out how much more they will cost. Then, work out the investment value of the money placed in a monthly income account.
It’s also worth bearing in mind that if you pay a mortgage before its term is finished, you may be penalized and have prepayment fees to pay which make it more costly nit. The retirement lump sum causes a great deal of worry to some seniors. Asking your bank for advice may help you in making a wise decision.
Paying the mortgage off should not be a high priority, unless you are struggling to meet payments. Even in the case of difficulty, it may be possible to arrange with the bank to pay reduced payments on the existing mortgage, making it more manageable and allowing you to have the retirement lump sum still available as a potential investment to make life easier.