When consumers apply for a home loan, they are often aware of the basic approval guidelines. Yet, the property itself has to be approved; and certain negative aspects of the property can kill a mortgage.
Here are some things to watch out for if your mortgage application will require an appraisal.
1. Appraised Value
Regardless of what your sales contract says about the value of your property, the mortgage company will make their own determination. Lenders use an independent evaluation of the current market value of the subject property as reported by a licensed appraiser. The appraiser evaluates current market value by researching public records about the property in addition to searching for recent sales in the area that might support a specific value.
For instance, you make an offer on a home listed at $200,000 and the home is 2,000 square feet, or $100 per square foot. The appraiser researches a database that lists all previously sold homes and compares the sold homes with your home. These previously sold comparable homes are referred to as “comps.”
Three comps sold for $80 per square foot, not $100. The appraiser researches a bit more and makes a physical appearance at your home, trying to justify the $100 per square foot price.
If the appraiser can’t find out why the home is worth $20 more per square foot, the appraiser will state a value closer to $160,000. The seller would need to drop the price to the appraised value, or you as the buyer would have to come up with the difference in cash. Option two is never advisable, since the appraiser does not believe the home is worth the sale price.
2. Deferred Maintenance
Properties must meet certain minimum standards before a lender will place a loan, and if there is evidence of any deferred maintenance on the property, the mortgage will be declined. What is deferred maintenance?
When existing properties are appraised, they’re typically evaluated on an “as is” basis, which means the property is inspected based upon its current condition and not including any future improvements. Yet homeowners who defer or delay required maintenance on a home may halt the approval process altogether.
Deferred maintenance such as weeds in the garden or the dishwasher not working is not an issue.
However, broken window panes, leaking water lines or noticeable electrical problems will cause the appraiser to make note of such problems and the lender will ask that the problems be fixed before issuing a mortgage loan.
A very common maintenance item is the roof. If the roof looks bad in the appraisal pictures, the lender will ask for a certification from a roof inspector estimating the remaining life.
For government-backed loans such as VA, FHA and USDA loans, for all properties built prior to 1978, require peeling paint to be repaired due to lead paint concerns.
An advanced stage of deferred maintenance addresses the physical condition of a property that can affect whether or not the property is indeed habitable. For example, an appraiser may notice that some shingles are missing and the mortgage company might let that slide.
However, if the appraiser notices that the roof is sagging and there are interior water marks on the ceiling, the lender can require the roof be both repaired and inspected before a mortgage can be approved.
Other physical problems with the property such as noticeable cracks in a foundation suggesting unstable settling of the property will prompt an engineer’s report that determines whether or not the foundation is in proper shape.
4. Unique Property
When a lender orders an appraisal, the appraisal reflects data about similar properties having sold in the area. The key word here is “similar.” For example, if you’re buying a duplex and there are no duplexes around for miles, there are no comparable sales with which the appraiser can determine value.
An extreme example would be a geodesic dome or log cabin that are atypical for the area.
5. Declining Market
Finally, if a property is in a neighborhood that has experienced declining values over the previous 12 months, the appraiser will check one of three boxes on the appraisal labeled, “Increasing”, “Stable” or “Declining” market.
If the appraiser marks “declining” on the appraisal report, regardless of what the final value may be, the lender can ask for more money down. If the borrower doesn’t have the extra money for the down payment, the mortgage could be declined.
If you’re concerned about the property you’re looking to refinance or purchase, it’s best to get the lender’s opinion before making an offer or paying for an appraisal.