If you’re reading this, it’s highly likely you are attempting to sell your property or buy a home and have just learned the bank is ordering a second appraisal...that much is obvious. Now, you want to know why the mortgage lender is doing so and what it means to you--more precisely, the transaction. It’s got you not only wondering but more than a bit worried. Those feelings you’re experiencing aren’t unnatural, but it does put what’s already a stressful situation into a whole other category.
The biggest question is what was wrong with the first appraisal? Was it done by someone found it be totally incompetent and the bank just found out? Was it not adequate because of something that was missed and now has been discovered? Is the bank trying to get out of an approved mortgage application? Is it because there are new regulations that just went into effect?
Unfortunately, the answer could be a number of things, it really depends on the situation. One clue can be found in lending practices. For instance, mortgage lenders often run a second credit file review only a day or two before closing. This is done because it’s well known in the banking industry buyers will increase their debt obligations before they even sign on the dotted line. It’s not at all uncommon for a homebuyer to take on a new line of credit for furniture, appliances, or other improvements. A second appraisal is typically due to the fact that the mortgage lender is making a smart loan.
Understanding Home Appraisals
First of all, it’s important to understand just what a home appraisal is and how it’s calculated. You likely know the appraiser is chosen by the lender, not the buyer or seller. You also probably know that a valuation is based on the home’s condition, it’s location, it’s features, and size. In addition, it’s safe to state you are aware that an appraisal is used to find the true worth of a home, not the asking price or what the buyer wishes to pay.
“Homebuyers and sellers who expect an appraisal to sail through to closing without a hitch may be surprised to discover that home appraisals today can be problematic. The reasons for the change are complex, but there's no question that mortgage lenders have started to demand more reviews and do-overs. For example, a mortgage lender might demand more scrutiny of an appraisal if the borrower has a marginal credit score or high debt level relative to income or if the property was a foreclosure that was fixed up and flipped by an investor.” --MSN Real Estate
What you likely don’t know is that an appraisal has a shelf life. If it’s a short sale or foreclosure, the deal can take months. That amount of time has an impact on a home’s value, although it might be small, the lender isn’t going to ignore it. What’s more, is lenders generally use AVM’s or Automated Valuation Methods. This is a mathematical formula which doesn’t have a great track record for accuracy and is used to get a ballpark figure during the loan approval process. Unfortunately, most borrowers and sellers don’t know this and are caught by surprise when a second appraisal is ordered. This time around, it will be an actual professional which values the property.
Reasons for a Second Appraisal
Whether you’re the seller or buyer, you ought to take comfort in the fact this isn’t at all unusual; however, it can be a deal killer. There are a few reasons banks request a second appraisal and here are the most common:
Too much time has elapsed. If it’s been three to six months since the first appraisal, the lender is highly likely to order a second appraisal to compare it with the previous one. Based on that comparison, which will not be a great difference, the closing will move ahead as planned.
The type of loan involved. If the buyer’s financing is garden variety, a traditional thirty year mortgage for instance, a second appraisal isn’t as likely to be ordered. However, if financing is being done through an FHA loan, then the opposite is true.
The seller doesn’t like the deal as is. It might not be fair but, it certainly does happen. A seller might not like the appraisal value, believing their property is worth more and wants to prove it. If the seller provides the lender with recent comparable sales of similar properties which are higher than the appraised value, the bank can up the financing amount or back out.
The buyer has taken on new debt. As previously stated, banks do a second credit check and if they discover the buyer has new debt, they might order a second appraisal before instanting withdrawing financing. Depending on the two figures and the buyer’s income, the deal may or may not go through.