- The Washington Times - Wednesday, July 20, 2005

Q: We are in the middle of the loan process to purchase our first home. We were

very disappointed to find out from the loan officer that the appraisal came in at $375,000, only $5,000 over the contract price. Our real estate agent says the appraiser is an “idiot” and that it should have appraised for at least $400,000. She kept telling us what a great deal we were getting. Now I’m not so sure.

We spoke to the loan officer who reviewed the appraisal with me, and it appears that the comparable homes that were used made sense. He noted that they might be on the low side but were certainly reasonable. He also explained that few adjustments were made, indicating that they were good comparables. Besides, he said, the report came in $5,000 higher than the purchase price, so it doesn’t matter. My real estate agent is livid and showed me other comparable homes that sold closer to $400,000. Should I appeal the report directly to the appraiser?

A: My first reaction is this: Why? Your loan officer is exactly right. Before I get into the details, let me explain how this works.

Standard underwriting guidelines dictate that the lower of either the contract price or the appraised value be used to determine the loan-to-value ratio, or LTV.

If you buy a house for $370,000 and put 20 percent down, your loan amount would be 80 percent of $370,000, or $296,000. If the appraisal comes in at $360,000, your 80 percent loan amount would be calculated at 80 percent of $360,000, or $288,000, because the appraisal came in $10,000 low.

If you don’t pay the extra $10,000 in cash, you would have to change your financing plan because your LTV would exceed 80 percent.

Such a scenario would cause a problem. Your situation causes no problem because it doesn’t affect the original contract or financing plan. It sounds to me that the real estate agent’s ego is bruised.

The purpose of the appraisal is solely for the lender to get an expert’s opinion of the property’s value on the open market.

If the expert, a licensed appraiser, compiles a report using what may be conservative comparables and still determines the value as $5,000 more than the contract price, why do you care? Nothing changes. Nobody except the lender and the borrower needs to see the report.

In fact, my guess is that the appraiser did you a favor. Let’s say, as your agent suggests, that there are other comparable homes that sold for $400,000, which the appraiser chose to omit from the report. If he used those comparables, he would have had to compare the amenities of each home with the subject property and make adjustments indicating that the subject property has some inferior features, which would explain the lower contract price.

You indicated that the loan officer noted that there are few adjustments in the report. I can tell you that this is a good thing from an underwriting standpoint.

Underwriters like appraisal reports to include comparables that are as similar as possible to the subject. The more similar the comparable property, the fewer adjustments. The fewer adjustments, the easier the report goes through underwriting. The easier your loan goes through underwriting, the quicker you can go to settlement.

If the appraiser truly cannot find anything to explain why your house sold for so much less, he, indeed, might use the expensive homes as comparables, make few adjustments, and appraise your property for $400,000.

Great. Your real estate agent gets an ego boost and can brag to you about what a great deal she found for you. And you can go around to your co-workers and tell everyone what a great deal you got.

That’s all fine and dandy, but it doesn’t change anything. The loan’s the same, the rate’s the same, and the settlement date is the same. The lender will still treat the property as if it’s worth $370,000 because, as I said, lenders use the lower of the contract price and the appraised value for underwriting purposes.

Here’s where the appraiser could have done you a favor. You would think that an appraisal report with a determined value that’s $30,000 over the contract price would be of comfort to the lender. Not from my experience. In fact, depending on the lender and the underwriter, there might be a question: “Why is this property being sold so cheap? There must be something wrong.”

Although I have seen few such inquiries in my mortgage career, I can tell you that it happens.

In fact, it’s something you should ask yourself. Remember that the appraiser is not a structural engineer or a professional home inspector.

Homes are sold under market value for a variety of reasons, primarily because the house is cluttered, dirty, and needs a fresh coat of paint and new carpeting.

A house that doesn’t show well will attract less attention. Perhaps this is true in your case.

But to be safe, if you truly believe that the house is $30,000 under market value, I would pay for a home inspector to make sure there are no serious problems.

My guess, however, is that you have a good, solid deal that your real estate agent trumped up a little more than she should have.

At any rate, the appraisal report shouldn’t cause any problems getting the loan, which is the primary objective.

Your real estate agent should have explained to you that the purpose of the report is solely for the lender to approve the loan and that as long as the report doesn’t cause a problem, there’s no need for alarm.

This would have been a much better approach than becoming livid and calling people names. Next time, use a different real estate agent.

Henry Savage is president of PMC Mortgage in Alexandria. Contact him by e-mail (henrysavage@


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