Why
is an appraisal needed to obtain a loan?
Usually,
individuals applying for a loan are only interested in obtaining
the loan and unfortunately are not worried about the prudence of
buying the property at the agreed price. In fact, many purchasers
will try to encourage appraisers to increase the appraised value
so that they can purchase the home regardless of its value.
The
majority of real estate appraisals are requested by mortgage companies
to validate the property's purchase price for loan purposes. Except
for periods of very low interest rates when everyone is refinancing,
most loans are for the purchase of real estate and ordered after
a sale price is negotiated. Purchasers mistakenly assume that mortgage
companies are looking after their interests in the purchase transaction.
The
law states that if the mortgage company orders the appraisal, the
appraiser is responsible only to the mortgage company. We expect
mortgage companies to be prudent and they should be, but being prudent
is protecting their interest, not necessarily the purchaser's. The
mortgage company's position:
- It has
two sources of repayment: the purchaser's income and the property.
- The responsibility
to repay the loan is not based upon the property's value, so
the purchaser is obligated to pay the note even if the property
value declines to zero.
- The loan
may be insured or guaranteed by a government agency.
- The government
does not promise to pay the purchaser's debt if the property
value is wrong.
- If the
loan is greater than 80% of the value, a portion of the loan
may be insured by a private mortgage insurer.
- There is
no decrease in risk for the purchaser regardless of the loan-to-value
ratio. The investment by the purchaser is the same, a mixture
of personal cash and a loan that must be repaid.
When To Order An Appraisal
