An Appraisal is an estimate of a property’s fair market value. It’s a document generally required (depending on the loan program) by a lender before loan approval to ensure that the mortgage loan amount is not more than the value of the property. The Appraisal is performed by an “Appraiser” typically a state-licensed professional who is trained to render expert opinions concerning property values, its location, amenities, and physical conditions.

Why get an Appraisal

Obtaining a loan is the most common reason for ordering an Appraisal, however there are other reasons to get one:

• Contesting high property taxes
• Establishing the replacement cost for insurance purposes
• Divorce settlement
• Estate settlement
• Negotiating tool in real estate transactions
• Determining a reasonable price when selling real estate
• Protecting your rights in an eminent domain case
• A government agency requirement
• A lawsuit

What are Appraisal Methods?

There are 3 common approaches, or Appraisal Methods, used by Appraisers to establish property value. After thorough exercise of all 3, a final value estimate is correlated. When evaluating single-family, owner-occupied properties, the Sales Comparison Approach is heavily weighted by an Appraiser.

• Cost Approach – A formula is used to obtain the property value: Land value (vacant) added to the cost to reconstruct the appraised building as new on the date of value, less accrued depreciation the building suffers in comparison with a new building.
• Sales Comparison Approach – The Appraiser identifies 3 to 4 comparable comps, recently sold properties in the neighborhood, ideally, sold in the previous 6 months and within ½ mile of the subject property. A comparison is done between the recently sold properties and the subject property including square footage, number of bedrooms and bathrooms, property age, lot size, view, and property condition.
• Income Approach – The potential net income of the property is capitalized to arrive at a property value. Capitalization is the process of converting a future income stream into a present value. This approach is suited to income-providing properties and is used in conjunction with other valuation methods.

Can Another Mortgage Company be Used After the Completed Appraisal?

Yes. In most cases you will not have to pay for another appraisal if you change your mortgage company, and depending on the loan program typed, the first lender can transfer it to the new lender. Some appraisal firms may charge a small fee because additional clerical work is required to reflect the new mortgage company; this is called an “Appraisal Retype Fee”. The original mortgage company has the right to refuse to transfer the appraisal to another lender. In this case, a new appraisal is needed.

Who determines the market value of a property?

The property seller sets the price, especially for residential property, not the Appraiser. Sellers usually don’t order an appraisal because they want to obtain the highest price for their home and therefore don’t want to be bound by the Appraiser’s assessment. The real estate agent receives a percentage of the price as compensation and often represents the seller in the transaction and assists them in setting the sale price. They perform a Comparative Market Analysis (CMA), which real estate agents in most states are allowed to perform without an Appraiser’s License or Certification. The CMA is vital to the agent’s preparation for a listing examining recent property sales in the neighborhood to arrive at a listing price. Typically the agent will suggest a price to the seller based on the CMA however the seller may choose to list their property for a higher price.

How can I assist my Appraiser?

It’s to your advantage to help the Appraiser perform the assessment by providing additional information:

• What is the purpose for the appraisal?
• Is the property listed for sale, and if so, for what price and with whom?
• Is there a mortgage? And if so, with whom, when placed, for how much and what type (FHA, VA, etc.), at what interest rate, or other type of financing?
• Are any personal properties or appliances included in the property?
• With an income-producing property, what is the income breakdown and expenses for the last year or two? A copy of the lease may be required.
• Provide a copy of the deed, survey, purchase agreement, or additional property papers.
• Provide a copy of the current real estate tax bill, statement of special assessments, or balance owed on anything, i.e. sewer, water, etc.

The property is officially transferred from the seller to you at “Closing” or “Funding”. At closing, the ownership of the property is officially transferred from the seller to you. This may involve you, the seller, real estate agents, your attorney, the lender’s attorney, title or escrow firm representatives, clerks, secretaries, and other staff. You can have an attorney represent you if you can’t attend the closing meeting, i.e., if you’re out-of-state. Closing can take anywhere from 1-hour to several depending on contingency clauses in the purchase offer, or any escrow accounts needing to be set up. Most paperwork in closing or settlement is done by attorneys and real estate professionals. You may or may not be involved in some of the closing activities; it depends on who you are working with. Prior to closing you should have a final inspection, or “walk-through” to insure requested repairs were performed, and items agreed to remain with the house are there such as drapes, lighting fixtures, etc. In most states the settlement is completed by a title or escrow firm in which you forward all materials and information plus the appropriate cashier’s checks so the firm can make the necessary disbursement. Your representative will deliver the check to the seller, and then give the keys to you.

What are Statutory Costs?

These are expenses you have to pay to state and local agencies, even if you paid cash for the house and didn’t need a mortgage:

• Transfer Taxes – Required by some localities to transfer the title and deed from the seller to the buyer.
• Deed Recording Fees – To pay for the County Clerk to record the deed and mortgage, and to change the property tax billing.
• Pro-Rated Taxes – Such as school taxes and municipal taxes may need to be split between the buyer and the seller since they are due at different times of the year. For example, if taxes are due in October and you close in August, you would owe taxes for 2-months, and the seller would owe for the other 10-months. Pro-rated taxes are usually paid based on the number of days, not months of ownership. Some lenders may require you to set up an escrow account to cover these bills. If not, you may want to set one up yourself to insure the funds are set aside for these important expenses.
• State & Local Fees – Other state and local mortgage taxes and fees may apply.

What are Third-Party Costs?

There may be expenses paid to others like inspectors or insurance firms, even if you paid cash for the property:

• Attorney Fees – You may want to hire an attorney when purchasing a home. They usually charge a percentage of the selling price up to 1%, or some work on an hourly basis or for a flat fee.
• Title Search Costs – Usually your attorney will perform or will arrange for the title search to ensure there are no obstacles such as liens or lawsuits regarding the property. Or you may work with a title company to verify a clear property title.
• Homeowner’s Insurance – Most lenders require you prepay the first year’s premium for homeowners insurance, sometimes called hazard insurance, and must show proof of payment at the closing. This insures that the investment will be secured even if the property is destroyed.
• Real Estate Agent’s Sales Commission – The seller pays the real estate agent’s commission, and if one agent lists the property and another sells it, the commission is usually split. The commission is negotiable between the seller and the agent.

What are Finance and Lender Charges?

Most people associate closing costs with finance charges levied by mortgage lenders. The charges you pay will vary among lenders, so it’s good to shop around for the best combination of mortgage terms and closing, or settlement costs:

• Origination Fee – For processing the mortgage application there may be a flat fee, or a percentage of the mortgage loan.
• Credit Report – Most lenders require a credit report on you and your spouse, or an equity partner. This fee is often a part of the origination fee.
• Points – One point is equal to 1% of the amount borrowed and can be payable when the loan is approved either before or at closing. Points can be shared with the seller which is negotiable in the purchase offer. Some lenders will let you finance points which will add to the mortgage cost. If you pay the points up front they are tax deductible in the year they are paid. Different deductibility rules apply to second home loans.
• Lender’s Attorney’s Fees – For your attorney to draw-up documents and to ensure that the title is clear, and for representation at the closing.
• Document Preparation Fees – There are several documents and papers prepared during the home-buying process ranging from the application to the closing. Lenders may charge for this, or the fees may be included in the application and/or attorney’s fees.
• Preparation of Amortization Schedule – Some lenders will prepare a detailed amortization for the full term of your mortgage. This is usually done for fixed mortgages or adjustable mortgages.
• Land Survey – Lenders may require that the property be surveyed to ensure it has not been encroached and to verify the buildings and improvements to the property.
• Appraisals – Professional Appraisers can do a comparison of the value of the property to that of other recently sold neighborhood properties. Lenders want to be sure the property is worth the value of the mortgage loan.
• Lender’s Mortgage Insurance – If your down payment is 20% or less, many lenders require that you purchase Private Mortgage Insurance (PMI) for the loan amount. If you should default on your loan, the lender will recover their money. These insurance premiums will continue until your principal payments, plus the down payment equal 20% of the selling price and may continue for the life of the loan. The premiums are usually added to any amount you must escrow for taxes and homeowner’s insurance.
• Lender’s Title Insurance – Even with a title search for any property obstacles, liens or lawsuits, many lenders require insurance to protect their mortgage investment. This is a 1-time insurance premium usually paid at closing, and is for the lender only, not the homebuyer.
• Release Fees – If the seller has worked with a contractor who put a lien on the house and is expecting payment from the proceeds of the house sale, there may be fees to release the lien. The seller usually pays these fees which could be negotiated in the purchase offer.
• Inspections Required by Lenders – The lender may require a Termite Inspection if you apply for an FHA or a VA mortgage loan. In many rural areas a water test may be required to ensure the well and water system will maintain an adequate water supply to the house; for quantity not quality. Depending on the sales contract and property type, additional inspections may be required.
• Prepaid Interest – The first regular mortgage payment is usually due from 6-8 weeks from closings; however, interest costs begin at closing time. The lender will calculate the interest owed for that period of time, and that fraction of interest is sometimes due at closing.
• Escrow Account – Lenders often require that you set-up an Escrow Account, where you will make monthly payments to, for taxes, homeowner’s insurance, and sometimes PMI (Private Mortgage Insurance). The amount placed in this account at closing depends on when property taxes are due and the timing of the settlement transaction. The lender can give you a cost approximation during the application process of your mortgage loan.

• Are There Any Other Up-Front Expenses?

  The major portion of other up-front expenses is the deposit or binder you make at the time of the purchase offer, the remaining cash down payment you make at closing, or can include:

  • Inspections – Lenders may require inspections, and you can make your purchase offer contingent based on satisfactory completion of some other inspections such as structural, water quality tests, septic, termite, roof and radon tests. You and the seller can negotiate these inspection fees.
  • Owner’s Title Insurance – You may want to purchase title insurance in case of unforeseen problems so you’re not left owing a mortgage on property you longer own. A thorough title search ensures a clear title.
  • Appraisal Fees – You may want to hire an Appraiser either before you sign a purchase offer, or after reviewing the lender’s appraisal report.
  • Money to the Seller – You’ll need to pay for items in the house you want that were not negotiated in the purchase offer such as appliances, light fixtures, drapes, lawn furniture, or fuel oil and propane left in tanks.
  • Moving Expenses – If you are changing jobs, your new employer may pay for your relocation, otherwise you must figure in the moving costs such as truck rentals, professional movers, cash for utility deposits like telephone, cable, electricity, etc.
  • Escrow Account Funds – In the purchase offer, you can request that the seller set up an Escrow Account to defray any costs for major cleanup, radon mitigation procedures, house painting, appliance repairs, etc. Depending on the purchase offer contract and contingency clauses, you may discover that you have expenses upon moving in.
  • Example: Your purchase offer contract has a clause making the purchase contingent on a satisfactory structural inspection, and it’s determined that the house needs a new roof. You can negotiate to have the seller arrange for the work to be done but, this will delay the closing date. You may have to agree to a higher price for house, or to pay some of the new roof repair expenses. Or you and the seller may split the cost using estimates from a contractor of your choice, and each of you will put funds into an Escrow Account. Or, the seller may be willing to reduce the sale price of the house, but either way cash will be needed for the new roof.
  • Time Investment – One often overlooks major up-front costs in buying a home. The time and expenses invested in house-hunting, which can take up to 4-months, plus the time spent searching for the best mortgage for you, the right real estate agent, an attorney, and other related things that take up your valuable time.

  What is RESPA?

  The Real Estate Settlement Procedures Act (RESPA) contains information regarding the settlement or closing costs you are likely to face. Within 3-days from the time of your mortgage application, your lender is required to provide you a “good faith estimate of settlement costs” (GFE) based on their understanding of your purchase contract. This estimate will indicate how much cash you will need at closing to cover prorated taxes, first month’s interest, and other settlement costs. RESPA requires lenders to give you an information booklet about settlement costs, written by the U.S. Department of Housing & Urban Development which address how to negotiate a sales contract, ways to work with professionals like attorneys, real estate agents, lenders, etc, and your given rights as a home buyer. It gives an example of the Uniform Settlement Statement used at your closing. You are entitled to see a copy of the statement 1-business day prior to closing indicating your final costs.

  What is “Truth in Lending” (TIL)?

  It’s required that mortgage lenders provide you with a Truth in Lending (TIL) Statement containing information on your loan’s annual percentage rate, finance charges, the amount financed, and the total payments required. The TIL Statement may also contain information on security interest, late fees, prepayment provisions, and if the mortgage is assumable. If you have an adjustable rate loan, the statement may outline the limits on the adjustments, annual and lifetime caps, and give an example of what your next year’s payment may be depending on interest rates. For adjustable rate loans the total payments figure is estimated as a worst-case scenario. The figure reflects the payments you would make if your loan adjusted upward to the maximum rate allowed by annual and lifetime caps, and then stayed at that rate for the loan duration.

Your credit payment history is recorded in a file or report. These files or reports are maintained and sold by “consumer reporting agencies” (CRAs). One type of CRA is commonly known as a credit bureau. You have a credit record on file at a credit bureau if you have ever applied for a credit or charge account, a personal loan, insurance, or a job. Your credit record contains information about your income, debts, and credit payment history. It also indicates whether you have been sued, arrested, or have filed for bankruptcy.

Do I have a right to know what’s in my report?

Yes, if you ask for it. The CRA must tell you everything in your report, including medical information, and in most cases, the sources of the information. The CRA also must give you a list of everyone who has requested your report within the past year-two years for employment related requests.

What type of information do credit bureaus collect and sell?

Credit bureaus collect and sell four basic types of information:
Identification and employment information
Your name, birth date, Social Security number, employer, and spouse’s name are routinely noted. The CRA also may provide information about your employment history, home ownership, income, and previous address, if a creditor requests this type of information.
Payment history Your accounts with different creditors are listed, showing how much credit has been extended and whether you’ve paid on time. Related events, such as referral of an overdue account to a collection agency, may also be noted.
Inquiries CRAs must maintain a record of all creditors who have asked for your credit history within the past year, and a record of those persons or businesses requesting your credit history for employment purposes for the past two years.
Public record information Events that are a matter of public record, such as bankruptcies, foreclosures, or tax liens, may appear in your report.
What is credit scoring? Credit scoring is a system creditors use to help determine whether to give you credit. Information about you and your credit experiences, such as your bill-paying history, the number and type of accounts you have, late payments, collection actions, outstanding debt, and the age of your accounts, is collected from your credit application and your credit report. Using a statistical program, creditors compare this information to the credit performance of consumers with similar profiles. A credit scoring system awards points for each factor that helps predict who is most likely to repay a debt. A total number of points — a credit score — helps predict how creditworthy you are, that is, how likely it is that you will repay a loan and make the payments when due. The most widely use credit scores are FICO scores, which were developed by Fair Isaac Company, Inc. Your score will fall between 350 (high risk) and 850 (low risk). Because your credit report is an important part of many credit scoring systems, it is very important to make sure it’s accurate before you submit a credit application. To get copies of your report, contact the three major credit reporting agencies:

• Equifax: (800) 685-1111
• Experian (formerly TRW): (888) EXPERIAN (397-3742)
• Trans Union: (800) 916-8800
• These agencies may charge you up to $9.00 for your credit report.

You are entitled to receive one free credit report every 12 months from each of the nationwide consumer credit reporting companies – Equifax, Experian and TransUnion. This free credit report may not contain your credit score and can be requested through the following website: https://www.annualcreditreport.com

Why is credit scoring used?

Credit scoring is based on real data and statistics, so it usually is more reliable than subjective or judgmental methods. It treats all applicants objectively. Judgmental methods typically rely on criteria that are not systematically tested and can vary when applied by different individuals.

What happens if you are denied credit or don’t get the terms you want?

If you’ve been denied credit, or didn’t get the rate or credit terms you want, ask the creditor if a credit scoring system was used. If so, ask what characteristics or factors were used in that system, and the best ways to improve your application. If you get credit, ask the creditor whether you are getting the best rate and terms available and, if not, why. If you are not offered the best rate available because of inaccuracies in your credit report, be sure to dispute the inaccurate information. If you are denied credit, the Equal Credit Opportunity Act requires that the creditor give you a notice that tells you the specific reasons your application was rejected or the fact that you have the right to learn the reasons if you ask within 60 days. Indefinite and vague reasons for denial are illegal, so ask the creditor to be specific. Acceptable reasons include: “Your income was low” or “You haven’t been employed long enough.” Unacceptable reasons include: “You didn’t meet our minimum standards” or “You didn’t receive enough points on our credit scoring system.” If a creditor says you were denied credit because you are too near your credit limits on your charge cards or you have too many credit card accounts, you may want to reapply after paying down your balances or closing some accounts. Credit scoring systems consider updated information and change over time. Sometimes you can be denied credit because of information from a credit report. If so, the Fair Credit Reporting Act requires the creditor to give you the name, address and phone number of the credit reporting agency that supplied the information. You should contact that agency to find out what your report said. This information is free if you request it within 60 days of being turned down for credit. The credit reporting agency can tell you what’s in your report, but only the creditor can tell you why your application was denied.

Fair Credit Reporting Act

The Fair Credit Reporting Act (FCRA) is designed to help ensure that CRAs furnish correct and complete information to businesses to use when evaluating your application. Your rights under the Fair Credit Reporting Act: You have the right to receive a copy of your credit report. The copy of your report must contain all of the information in your file at the time of your request. You have the right to know the name of anyone who received your credit report in the last year for most purposes or in the last two years for employment purposes. Any company that denies your application must supply the name and address of the CRA they contacted, provided the denial was based on information given by the CRA. You have the right to a free copy of your credit report when your application is denied because of information supplied by the CRA. Your request must be made within 60 days of receiving your denial notice. If you contest the completeness or accuracy of information in your report, you should file a dispute with the CRA and with the company that furnished the information to the CRA. Both the CRA and the furnisher of information are legally obligated to reinvestigate your dispute. You have a right to add a summary explanation to your credit report if your dispute is not resolved to your satisfaction.

It’s when a homeowner is unable to make principal and/or interest payments on their mortgage. The lender, a bank or building society, can seize and sell the property as stipulated in the terms of the mortgage contract.

What Happens When a Mortgage Payment is Missed?

Unfortunately, Foreclosure can happen. By missing a mortgage payment, your lender has the legal means to repossess your home and force you to move out. If your property is worth less than the total amount you owe on your loan, a Deficiency Judgment could be pursued. Both a Foreclosure and a Deficiency Judgment can affect your ability to qualify for credit in the future. So you should avoid foreclosure, if possible.

How Can a Foreclosure be Avoided?

First of all, if you are struggling to make your payments, call or write to your lender’s Loss Mitigation Department right away. Explain your situation and be prepared to provide them with financial information like your monthly income and expenses. Just follow these 3 simple rules:

• Contact your lender as soon as you know your payment will be late.
• Never ignore the lender’s letters or phone calls.
• Don’t assume that your situation is hopeless.

What are Some Other Solutions for “Long-Term” Problems to Avoid Foreclosure?

Your lender will determine if you qualify for the following alternate solutions. Also, a housing counseling agency can help you with your options, plus interact with your lender on your behalf: Mortgage Modification – If you can currently make your regular payment, but can’t catch-up on the past due amount, the lender may agree to modify your mortgage. One way is to add the past due amount into your existing loan and finance it long-term. Mortgage Modification may also be possible if you no longer can make your payments at the former level. The lender may modify your mortgage and extend the loan length, or perhaps take steps to reduce your current payments. Pre-Foreclosure Sale – Foreclosure can be avoided by selling your property for a lesser amount necessary to pay off your mortgage loan. You may qualify if:

1. The loan is at least 2 months delinquent
2. The house is sold within 3-5 months
3. A new appraisal, that the lender will obtain, indicates that the home value meets program guidelines.

Deed in Lieu of Foreclosure – This is when the lender allows you to give-back your property and forgives the debt. It does have a negative impact on your credit record; however it’s better than foreclosure. The lender may require that house be “For Sale” for a specific time period before agreeing. This route may not be possible if there are other liens against the home. For FHA Loans – The lender may assist you in getting a one-time payment from the FHA Insurance Fund. The mortgage loan must be into at least 4-months, but not more than 12-months past due. The homeowner must prove the ability to resume making full mortgage payments on time, and other conditions apply:

• A Promissory Note must be signed allowing HUD to place a lien on your property for the amount received from the FHA Insurance Fund.
• The note is interest free, but must be repaid eventually.
• The note becomes due when you pay off the loan, transfer title, or sell the property.

For VA Loans – The Veteran’s Administration Loan Centers offer financial services designed to help homeowners avoid Foreclosure, and options for your specific situation.

What are Some Other Solutions for “Temporary” Problems to Avoid Foreclosure?

Reinstatement – This is possible when you are behind in payments, but can promise to pay a lump sum of money to bring your regular payments back by a specific date. Forbearance – It may be allowed to delay payments for a short period with the understanding that another option will be used to bring the account current later. Repayment Plan – If your account is past due, but you can now make regular payments again, the lender may allow you to catch-up by adding a portion of the overdue amount to a certain number of monthly payments until your account becomes current. Partial Claim – Your lender may be able to help you obtain a one-time payment from the FHA Insurance Fund to bring your mortgage current, if you qualify: You may qualify if:

1. Your loan is at least 4-months delinquent, but not more than 12-months.
2. You are able to begin making full mortgage payments again.

When your lender files a Partial Claim on your behalf, the U.S. Department of Housing & Urban Development will pay your lender the amount necessary to bring your mortgage current. You must execute a Promissory Note and a Lien will be placed on your property until the note is fully paid. The note is interest-free and is due when you pay off the first mortgage, or when the property is sold.

In 1934, the Federal Housing Administration (FHA) was established to improve housing standards and to provide an adequate home financing system with mortgage insurance. Now families that may have otherwise been excluded from the housing market could finally buy their dream home. FHA does not make home loans, it insures a loan; should a homebuyer default, the lender is paid from the insurance fund. – Buy a house with as little as 3.5% down. – Ideal for the first-time homebuyers unable to make larger down payments. – The right mortgage solution for those who may not qualify for a conventional loan. – Down payment assistance programs can be added to a FHA Loan for additional down payment and/or closing cost savings.

FHA Loans vs. Conventional Home Loans

The main difference between a FHA Loan and a Conventional Home Loan is that a FHA loan requires a lower down payment, and the credit qualifying criteria for a borrower is not as strict. This allows those without a credit history, or with minor credit problems to buy a home. FHA requires a reasonable explanation of any derogatory items, but will use common sense credit underwriting. Some borrowers, with extenuating circumstances surrounding bankruptcy discharged 3-years ago, can work around past credit problems. However, conventional financing relies heavily upon credit scoring, a rating given by a credit bureau such as Experian, Trans-Union or Equifax. If your score is below the minimum standard, you may not qualify.

If I’ve Had a Bankruptcy in Recent Years, Can I Get a FHA Loan?

Yes, generally a bankruptcy won’t preclude a borrower from obtaining a FHA Loan. Ideally, a borrower should have re-established their credit with a minimum of two credit accounts such as a car loan, or credit card. Then wait two years since the discharge of a Chapter 7 bankruptcy, or have a minimum of one year of repayment for a Chapter 13 (the borrower must seek the permission of the courts). Also, the borrower should not have any credit issues like late payments, collections, or credit charge-offs since the bankruptcy. Special exceptions can be made if a borrower has suffered through extenuating circumstances like surviving a serious medical condition, and had to declare bankruptcy because the high medical bills couldn’t be paid.

How big of a FHA Loan Can I afford?

Your monthly costs should not exceed 29% of your gross monthly income for a FHA Loan. Total housing costs often lumped together are referred to as PITI.

• P = Principal
• I = Interest
• T = Taxes
• I = Insurance

Examples: Monthly Income x .29 = Maximum PITI $3,000 x .29 = $870 Maximum PITI Your total monthly costs, or debt to income (DTI) adding PITI and long-term debt like car loans or credit cards, should not exceed 41% of your gross monthly income. Monthly Income x .41 = Maximum Total Monthly Costs $3,000 x .41 = $1230 $1,230 total – $870 PITI = $360 Allowed for Monthly Long Term Debt FHA Loan ratios are more lenient than a typical conventional loan.