One of the uncomfortable truths around buying OR refinancing a home is that you spend a lot of money that benefits other people. For example; as a buyer, If you can’t put down 20 percent, you’re going to pay private mortgage insurance (PMI) premiums. So if you end up defaulting on the loan, the insurance kicks in – but it doesn’t go to you, it goes to the lender.
The appraisal of the property is another process that you pay for – but it goes to the lender, and you don’t even get to see it. Brokerages, lenders and appraisers cannot just show the buyer the appraisal on a property, even though the borrower is the one who pays for it.
Why? Well, the appraiser considers their obligation to be to the lender. The lender prepares the guidelines for the appraisal, and the appraiser prepares his report according to those parameters. But who pays for it? The borrowers. The lender is free to share the appraisal with the borrower, but the appraiser cannot share it because even though the borrower is the one paying for the appraisal, the borrower is not the client. It is rare for Lenders to share the report. With many companies, the appraisal is only provided after the closing of the mortgage transaction and with the lender’s approval.
However, in cases where the appraisal does not come back in a manner favorable to the loan that the borrower wants to take out, the lender will often hold onto the appraisal and refuse to release it. There are a lot of prospective borrowers who place angry calls to the Appraisal Institute of Canada (AIC), and the answer they have to give is that the Brokerage or Lender is the client of the appraiser, and as such has ownership of the report. Also, Lenders are sensitive to the fact that buyers could take that appraisal and shop it around with some other Lenders to try and get a a better deal.
This is why many realtors and mortgage brokers prepare buyers for the fact that paying for the appraisal is more like settling an administrative fee than actually purchasing something. Even if the bank ends up denying the loan – and denying the buyer access to the appraisal – the buyer still has to pay for it, which is one reason why many appraisers and lenders require that the client pay for the report up front. There are some cases where the broker will refund the appraisal fee after closing of the mortgage, and there other cases in which the lender agrees to reimburse for the cost of the appraisal after the mortgage has funded. But if there is any problem with the mortgage, the lender does not want to be stuck with the cost of the appraisal.
But what if your initial lender turns down the loan? Do you have any likelihood of getting that appraisal? Well, it’s not beyond the realm of possibility. However, the Lender has to give approval, and the appraiser must also provide a letter of transmittal and, in some cases, an update on the appraisal. That way, if the buyer takes the appraisal to a new lender, the information will be as up to date as possible. If it’s too far out of date, though, the new lender might require an entirely new appraisal.
This is why brokers are often cautioned to advise that if the bank releases the appraisal, the purpose of that is for information purposes only rather than for securing financing with a second lender. If the broker provides the appraisal to a second lender or other party without a transmittal letter from the appraiser, that can cause some uncomfortable legal liability. If a broker provides a private lender an appraisal that a different lender provided, but then the property enters default and has to be sold for less than what the appraisal indicated, it is possible that the private lender would sue the broker, as well as other parties.
It is worth noting here that while a lender does not have to release the entire appraisal, there are some pieces of information that remain the personal property of the buyer, and PIPEDA legislation guarantees them access to that. However, any information on the report that does not relate to the property itself (such as the neighboring properties or other data about the community) would come off the report before the bank provided it.
Your Home Appraisal: Secrets for Success
When you are getting ready to sell a home, you likely go all out to make sure that the presentation is perfect. You bring in a landscape company to spruce up the outdoors, you get the carpets steam cleaned, and you banish the Labrador retriever to the back yard.
However, if you’re applying for a mortgage on a property where the seller has let things go a little bit, you know that the lender is going to send out an appraiser. You might enjoy the fact that the disheveled nature of the house brought the price down for you, but you won’t like what happens if the appraiser shows up and recommends an even lower amount for mortgage approval on the basis of the condition of the property.
So what can you do?
It’s important to remember that the lender is almost never going to approach the property personally as part of the approval process. Instead, he is going to send an appraiser and read the report that the appraiser submit. This involves a text summary as well as some pictures. Appraisers are supposed to render their perspective about the property’s value, and their job is to provide a judgement that is down the middle, designed to form a middle point between what the borrower wants and the lender is willing to extend. The lender uses these pictures to figure out anything they can about the property (and, by extension, the borrower).
The first thing you need to do is straighten up the property. If the seller hasn’t done much (or any) staging, you need to think like a motivated seller. That means getting rid of clutter and cleaning the house from top to bottom. If the seller still has his furniture in the house and belongings in the garage, obviously you won’t get rid of them, but you can make everything look as neat as possible. Then, go around the outside of the house, and make sure the lawn and landscaping are in great shape.
One temptation you might face is to throw a bunch of the seller’s belongings into one mostly unused bedroom, or perhaps the garage. That’s a mistake, because the appraiser has to see all of the rooms in the house. If you tell the appraiser to stay out of a particular room, that is a big red flag for the lender. Obviously, you don’t want the appraiser taking pictures of your grandfather while he’s snoring in his afternoon nap, but you can let him quietly peek into the room and evaluate its condition for the report.
Even if you have the house looking perfect, the appraisal value may come back for less than you think it is. Just because the house down the street sold for $400,000 and it has largely the same floor plan as the one you need the loan to buy does not mean that your appraisal will come back at $400,000. It might come back at $360,000. That could influence the amount of credit the lender will extend to you.
Remember to have cash or a check ready for the appraiser when you meet him at the property, unless you have paid in advance with a credit card. Most appraisers want their money up front, and if there is a question about the money, that could work against you.
Last but not least, almost every lender has an approved appraiser list and requires that the appraiser has the appropriate designation. Lenders do not like and regularly reject appraisals that are ordered directly by property owners. Both traditional and non-traditional lenders alike will want the appraisal to be ordered by the designated brokerage or the lender itself. There are several reasons for this, but the primary reason is to avoid any potential interference from the property owner.
If you have more questions about how appraisals work, Call Amansad Financial today to get perspective on your own situation and to get our very best advice. Contact us at 1-877-756-1119.