subject: How Much Can Lenders Get Away With Appraisal Cutting [print this page] It is common practice that an appraisal is requested during the process of purchasing or refinancing a house. Undertaken by a trained and licensed agent, the appraisal offers the agents estimation on the value of the property.
If the homeowner is looking to sell their house, they typically come to an agreed figure with the prospective buyer beforehand. An appraisal is then undertaken and sent to the lender that is considering granting the buyer the loan. If the loan is granted, then it is often done so with this appraisal figure in mind.
When an individual looks to refinance their home, they are generally looking to raise funds to pay off existing debts, just to have some additional money to spend, or a combination of both. Again, an appraisal is required in this scenario and a licensed agent is required to provide their opinion on the value of the home.
Appraisal cutting is the practice of the underwriter reducing the appraisal value given by the agent, meaning that a loan of lesser amount would be granted.
This could cause several problems for all the concerned parties because the transaction amount is now less than what it was estimated to be. A house owner who was looking to sell their home now finds them self in a position where they have to accept the lower amount or reject the sale. Typically, a house owner would be looking to buy another property after the sale which means that accepting a lower value for their existing house means that they can no longer afford to buy the new home. This usually leads to the deal being cancelled, making it extremely inconvenient and costly for the seller, buyer and real estate agent.
In the case of re-financing their home, the house owner might find themselves in the position where they cannot raise as much funds that they had originally thought. This could then mean that after re-financing their house, they can't afford to repay that loan after all, leading them to cancelling the deal or leaving them out of pocket.
The underwriter is not qualified to appraise the value of a property. They will have had no pertinent coaching on the matter, aren't licensed to do so and it's even highly unlikely that they have even looked at the property in question. If the underwriter does not agree with the appraisal, then it's up to them to request a second appraisal from a licensed agent rather than just modify the valuation themselves.
The good news for homeowners, buyers and real estate agents alike is that as from 1st September 2010, underwriters are now outlawed from changing the appraisal amount themselves. In an economic environment where several homeowners are in a situation where they require economic assistance through no fault of their own, this move by Fannie Mae is something that can give a little more economic security and peace of mind at a time when it's critically needed.
