Home appraisals are critical in refinancing

Q:

We want to refinance our home into a lower interest rate mortgage, but the appraisal of our home that the bank asked for came in too low.

The bank says because the value of our home has dropped, they can’t do the refinance because we owe more than the home is now worth. Can we appeal this appraisal?

A:

Unfortunately, yours is a common predicament. Interest rates are at historic lows, yet so many homeowners are unable to take advantage of them because home values have declined so much.

As part of a refinance application – and also for a purchase mortgage – lender will require an appraisal of the property to be done to ascertain its value.

Generally speaking, a lender wants to see a loan-to-value ratio of 80 percent or less, although this ratio might be higher, depending on the lender. Some of the other factors that can influence the lender’s loan-to-value ratio are the property type, the amount owed and your personal financial situation and repayment history.

To determine the home’s value, the lender relies on the appraisal, an inexact practice, at best. Appraisers determine the value of your home by comparing it to recent sales of comparable properties in your neighborhood. If there are no recent sales, the appraiser may use foreclosures.

Because the appraisal is so critical to obtaining a refinance, or a purchase mortgage, and because you don’t want your property to be undervalued, you need to be proactive.

If you have an appraisal scheduled, meet the appraiser at the door and walk him/her through your home, pointing out features that add to its value: new roof, new furnace, renovated kitchen, baths, finished basement, glassed-in porch, etc.

After the appraisal is completed, ask your lender for a copy of it and go over it carefully to make sure there are no errors. Review the property sales the appraiser compared your home to. Are the properties similar to yours? Are they in similar locations?

Do you know of a recent sale that is higher and not included in the report? If so, make a note of it and of any other omissions or errors in the appraisal, and submit it to your lender. You can appeal an appraisal, but for it to be successful, you must submit detailed documentation and reasons why the appraisal of value should be reconsidered.