Appraisal Cutting - How Much Can Lenders Get Away With

It is common practice that an appraisal is requested during the process of buying or refinancing a home. Undertaken by a trained and licensed agent, the appraisal gives the agents estimation on the price of the property.

If the homeowner is looking to sell their home, they usually come to an approved figure with the prospective buyer in advance. 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's often done so with this appraisal figure in mind.

When an individual looks to refinance their house, they're usually 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 needed in this situation and a licensed agent is needed to provide their opinion on the value of the home.

Appraisal cutting is the practice of the underwriter decreasing the appraisal value given by the agent, meaning that a loan of lesser amount will be granted.

This can lead to several problems for all the concerned parties since the transaction amount is now less than what it was estimated to be. A house owner who was seeking to sell their house currently finds their self in a position where they have to agree to the lower amount or reject the sale. Typically, a home owner would be seeking to purchase another property after the sale meaning that accepting a lower value for their existing home means that they can no longer afford to buy the new house. 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 home owner may find themselves in the position where they can’t raise as much funds that they had initially thought. This could then mean that after re-financing their home, they cannot afford to repay that loan in the end, 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 would have had no appropriate training on the matter, are not licensed to do so and it is also highly unlikely that they have even looked at the property in question. If the underwriter doesn’t agree with the appraisal, then it is up to them to request a second appraisal from a licensed agent rather than simply modify the valuation themselves.

The great 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 a financial environment where many house owners are in a situation where they require economic assistance through no fault of their own, this move by Fannie Mae is something that could offer a little more financial security and peace of mind at a time when it is critically needed.
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