“I’m thinking of a number . . .”
Unless you’ve been living under a rock for the past 10 years, you've seen the ubiquitous FreeCredit.com commercial featuring a too-smart-for-his-own-good looking guy in a director’s chair and those 5 famous words.
In fact, I apologize if you’ve somehow finally succeeded in banishing this annoying phrase from your mind only to be reminded again by this post.
In fact, I apologize if you’ve somehow finally succeeded in banishing this annoying phrase from your mind only to be reminded again by this post.
As annoying as this guy was, the commercial helped wake America up to the importance of the mysterious 3 digit number known as your credit score. Without the right number, your chances of qualifying for favorable interest rates—or qualifying for a mortgage at all—are often doomed from the start.
These days, however, there is a new number wreaking havoc with borrower’s attempts at obtaining mortgage financing. And unlike the credit score, there is virtually nothing borrowers can do to change it when it doesn’t come in at the right level.
The new number killing otherwise successful loan applications today? Appraisal value.
Several factors, all a function of the collapse of the mortgage market and subsequent declining home sales, have converged to give appraisal value an increasingly prominent role in loan approvals:
Several factors, all a function of the collapse of the mortgage market and subsequent declining home sales, have converged to give appraisal value an increasingly prominent role in loan approvals:
Declining markets
A new “declining market” designation has meant tighter lending guidelines for certain properties, reducing the maximum loan-to-value allowed on a given loan by as much as 5%. A loan originally approved for $285,000 on a $300,000 property in a declining market is now limited to $270,000—a $15,000 reduction in funds available to the borrower.
A new “declining market” designation has meant tighter lending guidelines for certain properties, reducing the maximum loan-to-value allowed on a given loan by as much as 5%. A loan originally approved for $285,000 on a $300,000 property in a declining market is now limited to $270,000—a $15,000 reduction in funds available to the borrower.
Tougher appraisal review
Appraisal reviews by lenders have resulted in greater scrutiny of appraisal reports. After reviewing an appraisal, the lender’s market review “experts” often order values to be reduced by tens of thousands of dollars before approving a loan. A recent legal settlement regarding mortgage broker-appraiser relationships will place even further restrictions on appraisal practices.
Appraisal reviews by lenders have resulted in greater scrutiny of appraisal reports. After reviewing an appraisal, the lender’s market review “experts” often order values to be reduced by tens of thousands of dollars before approving a loan. A recent legal settlement regarding mortgage broker-appraiser relationships will place even further restrictions on appraisal practices.
Foreclosure and short sales
Perhaps most important has been the rise in housing inventories, foreclosures and short sales. Slow sales and increased supply places downward pressure on home prices, while below-market sales resulting from foreclosure and short sale prices compound the pressure.
Perhaps most important has been the rise in housing inventories, foreclosures and short sales. Slow sales and increased supply places downward pressure on home prices, while below-market sales resulting from foreclosure and short sale prices compound the pressure.
While it is illegal for loan officers to consult with or advise appraisers concerning home valuation, some lenders are setting up “valuation desks” independent of their appraiser to conduct preliminary searches of recent comparable sales data before ordering an appraisal. By considering whether recent comparable sales figures are likely to support the value needed for a loan to work, borrowers can better determine whether it’s worth it to order and pay for an appraisal for a property that may come up short in value.
Short of picking up and moving a house to a neighborhood that is retaining its values, there is little a borrower can do to compensate for the new threat to qualifying.
But judging from the number of borrowers stopped in their tracks by unfavorable appraisal values, the grating memory “I’m thinking of a number” conjures may help keep expectations realistic, and could even help save a few hundred dollars when the numbers don’t add up.
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