Refinancing 101:  Valuation

The appraisal process is an extremely important step when refinancing as your loan to value can determine your rate, your loan amount and the amount of cash you are able to take out.

If you bought a house several years ago, you'll find that the appraisal process has evolved. The apprasier is still there to give you an independent opinion of value on your home and will take into account overall market values and past sales of comparable homes in the area. But a few things have changed.

First, legislative reforms have created new safeguards to assure that appraisers can value a home without pressure or intimidation from lenders, brokers or borrowers. Appraisers must also now use a standardized format.

Second, the days of drive-by appraisals are over. Today's lender instructions require appraisers to perform a complete visual inspection of the interior and exterior areas of the subject property. You can expect an appraiser to be at your home from 20 minutes to two hours, depending on the size and complexity of the property. and they must take photos of all living areas to document and confirm the condition of the home. 

Keep in mind that there is a big distinction between appraisals used in home sales and those used to refinance a porperty. When a home is changing owners, the purchase agreement (sale contract) is part of the appraiser's scope of data and is considered a powerful indicator of value.

In a refinance, there is no purchase agreement and thus no conter-balance in the transaction to offset an appraiser's valuation. As a practical matter, the appraiser's word is final. 

Ways to optimize your appraisal

You will get a call from the appraiser to set an appointment. Start off on the right foot by setting a time and date convenient for your appraiser and make sure you are at the property when he or she arrives. 

• The inside and outside of your house should be in perfect working condition, the way it would be if you were selling it.

• The exterior of the home should be landscaped with lawns mowed and bushes trimmed. If you can arrange to have blooming flowers when the appraiser arrives, so much the better because curb appeal really does count. Also, appraisers need to measure the exterior, and overgrowth makes that difficult.

• The house should be as clean as possible inside and out. Go the extra mile to get rid of any and all clutter, even if it means putting some items in storage or temporarily leaving with a neighbor. Too much clutter and furniture makes a house feel crowded and disorganized. Create a greater sense of space by mimizing your "stuff". 

• If you have pets, they need to be out of the house because some people - including, perhaps, your appraiser - are discomforted by dogs or are allergic to cats.

• Create a "brag file" for the appraiser that shows recent repairs and improvements, including appliances and landscaping, and the dates when something was improved, installed or replaced. Example: "New roof, September 2013.  New refrigerator, January 2010." etc. Next, have copies of the bills to prove when the work was done and how much was paid. Appraisers have to report upgrades and the current condition of all materials. 

• In the end, the important point is that you have the ability to help increase appraisal results, within the rules, of course. The keys are to prepare, provide documentation, and be pleasant - a formula which works in most financial situations. 

Dealing with a "low" appraisal

The scourge of every real estate sale is the possibility of a low appraisal. With a home sale, low appraisals can be deal killers. As a seller, if you think your home is worth $300,000 and the appraiser says $290,000, both you and your buyer could have a problem. The loan is going to fall $10,000 short of what you need to do the deal. You will have to lower your price or the buyer will have to bring additional cash to closing. 

In a refinance, however, a lower appraisal may not be a deal breaker. Let's say your lender is willing to loan you as much as 80 percent of your home's value. If the property is appraised for $300,000, you can get as much as $240,000 in financing. If the appraisal comes in at $290,000, the maximum loan amount is $232,000. There's an $8,000 difference between the desired appraisal and the actual valulation. Would you decline the lender's offer? If you need $240,000 and not a dime less, then perhaps. But for many borrowers, the $232,000 would be adequate. As always, you have to think about your needs and preferences. 

Should the appraisal come in below what you think is accurate and below what you need it to be, you don't need to give up. Carefully review the report and bring any errors or misperceptions to your lender's attention. Back up your concerns with facts and make your arguements succinctly. The rules say the owner can provide "appropriate property information, including the consideration of additional comparable properties, to make or support an appraisal" when appealing a value. That means you can prepare and submit printouts of nearby homes of the same size that are for sale or have recently sold to support the value you think is correct. In other words, produce your own set of "comps", or comparable properties. If you need to, consider consulting a real estate agent.