July, 2009

An appraisal is a process in which the value of a home is established. If you find a house you want to buy, make an offer, and it is accepted, then you have what is called a ratified contract. A ratified contract means that you and the seller have agreed on a sales price, on a settlement date, and other conditions. Next, the REALTOR® will get a copy of that signed contract to your lender, who will order the appraisal. The lender wants to make sure that the house on which they are lending money is worth the purchase price.

In normal real estate markets, determining the home’s value is a pretty straightforward process: the appraiser looks at the home you want to buy, and compares it to other sales of similar homes in the neighborhood. They would consider what has sold, for how much it has sold, and also what is on the market, but has failed to sell. Typically, the appraiser would visit the house and take a tour. They would carefully examine the house in terms of size, and condition, and upgrades. Based on all those factors, the appraiser will determine the home’s value, and report back to the lender, telling them whether the house is worth the selling price, or not.

That is, this is how appraisals are handled in a normal market.

But as we all know, today’s market is anything but normal. For many months now, home prices in many parts of the country have been falling. And some lenders want to know not only what the house is worth, they sometimes want to know what it is going to be worth, in six months or a year’s time. And if an appraiser tries to determine property value into the future, sometimes the value projected will kill the deal because the appraisal comes in much lower than the sales price.

If you are buying, you want to get the place for the best price possible. If the appraisal comes in too low, you will not get the mortgage, and perhaps not get the property at all. Here is what to expect: if the appraised price comes in lower than the sales price, the first step belongs to the seller. They might be asked to lower the sales price, to match the appraisal. If they do it, you might just get the house for less money. If they do not lower the price, then you might be asked to come up with the difference. If you have a lot of cash, and you are willing, that is your decision. This is a good time to consult with a REALTOR®, to get their advice.

What can you do if your appraisal comes in low and you want to walk away? In many cases, an appraisal clause in the contract, or your financing clause, might give you the right to cancel the contract. Again…talk to a REALTOR® before placing a contract on a house you want to purchase.

You never want to pay too much for a property and the appraisal can help protect you from being overcharged at the settlement table. But if you truly believe the appraisal is wrong, then talk to your lender. Tell them your concerns. They might be willing to do a second appraisal and keep the deal on track.

Mullins says that the three most crucial factors in securing a mortgage are:

1. have good credit
2. have enough money for down payment
3. have a stream of income
4. if you are self employed, document everything

Mullins suggests a obtaining a pre-approval while locking in your rates. Some lenders offer a float-down rate, where you pay a little extra but are guaranteed the ability to take advantage of rates if they go down. This also protects you should rates go higher, ensuring you will still have the agreed-upon rate.

Compared to two years ago, mortgages are much harder to get. One thing to keep in mind is down payments. A couple of years ago, they were non-existent in many cases. Most people could get a mortgage loan, with no down payment, fairly easily. Now, the lowest down payment loan you can find is 3.5% for FHA loans which have become very significant in the mortgage industry. These government-backed loans comprise one-third of all mortgage loans today.

Mullins recommends that you budget a 10% down payment when you are thinking about buying a home. Down payments vary depending on the market and credit conditions but 10% is a good benchmark.

Finally, consider your FICO credit score. For the best financing, you need to have a FICO score of approximately 720; not perfect but still strong. If you have a lower score, you could end up paying more. The main thing is to take a look at your debt and start to pay your bills on time. Do not open a new card, close an old one, or make a large purchase right before you buy a new home as those are all things that could decrease your credit score. Try to reduce your debt as much as you can, as it can be a large determinant in whether you get the mortgage loan or not.

The Wall Street Journal reports that the administration is also putting more pressure on mortgage-servicing companies to step up their efforts to modify those troubled loans. In a letter sent last Thursday to the major lenders, both Treasury Secretary Timothy Geitner and Housing and Urban Development Secretary Shaun Donovan said there is a need for more resources in order for more loan modifications to happen. More than 270,000 borrowers have received modification offers under the program, but the need is far greater than that.

In addition to forbearances, the market is seeing an uptick in ‘strategic foreclosures’. Some homeowners are actually defaulting on their mortgages on purpose, even though they are able to pay their bills. The Wall Street Journal cites a new study from the University of Chicago that sampled two groups of one thousand households each — It found some 26 percent of defaults were so-called strategic foreclosures. The main reasons for the defaults were the severity of the borrowers’ negative equity, plus moral or social considerations.

If you are faced with multiple contracts on a property you would like to buy, how do you win? For that… We turn to Elisabeth Blakeslee, a REALTOR® with Coldwell Banker Residential Brokerage, in Washington DC.

She suggests that to win, your offer needs to be clearly superior to every other offer.

How do you do that?

• Put down the biggest, earnest money deposit that you possibly can. If you don’t win, don’t worry. Your check won’t be cashed.
• Write a clean contract, with as few conditions as possible (hint: try to do a home inspection before writing the contract so that you don’t have that roadblock to a seller’s peace of mind)
• Find out what the seller needs, and try to give it to them. For instance, if they need to close before the first of the month, make it happen!

And, finally… talk to a REALTOR® who is skilled in competitive negotiations — this could be your edge to winning the deal!