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When a Mortgage Hinges on Home Values

A home appraisal that comes in low can reduce the amount a home-buyer can borrow for a mortgage; why the loan-to-value ratio matters

mortgage appWhen deciding who gets a home loan and who doesn’t, lenders heavily rely on one number: the loan-to-value ratio, or the LTV.

This stat weighs the loan amount relative to the value of the property being purchased. Most lenders require an LTV ratio of 80% or lower for jumbo mortgages—loans that exceed $417,000 in most areas and $625,500 in some high-price places. A borrower seeking a $1 million loan for a house listed for $1.2 million would have an LTV of 83%, exceeding the 80% lender threshold.

Complicating this formula in today’s marketplace, however, is the “value” part of the LTV. An uneven recovery in some areas is leading to some appraisal-related challenges for borrowers. High-end homes with unique or custom features can be difficult to appraise. Similarly, a luxury home located in a less affluent area may also get a skewed appraisal.

If an appraisal comes in low, a borrower will need to come up with a higher down payment to improve the LTV, or in some cases pay a higher interest rate, says Mathew Carson, a broker with San Francisco-based First Capital Group.

He cites the case of one of his clients who was trying to refinance his mortgage. One appraiser valued his home at $2 million in July. But when the client switched lenders, another appraiser valued the same home at just $1.4 million in October. That difference increased the LTV enough to raise the interest rate by a quarter point on a seven-year, adjustable-rate mortgage, so the borrower plans to file a rebuttal with the appraisal management company, Mr. Carson says.

Appraisal discrepancies are more likely to occur with refinances than with new home purchases, he explains. By law, the lender in a refinance can’t tell the appraiser the loan amount sought, whereas in a home purchase, the appraiser knows the purchase price and is likely to seek out comparable nearby homes in that range, Mr. Carson says.

Another complication: Some lenders require two appraisals for luxury homes. And when the appraisers’ valuations differ, the lender will use the lower amount. Luxury-home appraisals can also take longer, meaning not only more waiting and uncertainty for a seller but also that a borrower locked-in on an interest rate can lose it.

In competitive, high-end markets, appraisal-related delays could scuttle a deal. Peter J. Goodman, a broker with VA Loan Captain Realty, recently had a seller in Brooklyn, N.Y., accept an $825,000 all-cash offer over two separate mortgage-backed borrowers who bid $850,000 and $875,000. Because the property had been listed at $815,000, the seller was worried the appraisal would come in low and the mortgages would fall through, Mr. Goodman says.

To compete against cash offers, buyers may decide to waive the mortgage contingency or a seller won’t consider their offer, Mr. Goodman says. But they’re playing a real-estate version of Russian roulette. Waiving the mortgage contingency clause means that the buyer agrees to the home purchase even if there are problems with loan approval due to an appraisal or another reason, he says.

‘In competitive, high-end markets, appraisal-related delays could scuttle a deal.’
Recently, the real-estate market has been improving at the high end, giving appraisers more comparable sales to consider when evaluating a home, says Lawrence Yun, chief economist for the National Association of Realtors (NAR). Sales of existing homes priced from $750,000 to $1 million-plus represented just over 2.1% of the real-estate market in October, compared with 1.7% of the market in October 2012, NAR data show.

“The stock market is at a 12-year high, and when the stock market booms, the upper-end market for home sales begins to pick up,” Mr. Yun says.

Low appraisals are rare for Bank of America ’s jumbo mortgages compared with two years ago, says John Schleck, senior vice president, centralized sales executive for Bank of America. “With rates this low and values pretty stable, it may be a good time for a borrower to step in before values go higher,” he adds.

If an appraisal does come in lower than expected, here are a few tactics a borrower can try:

• Higher LTV jumbos. More lenders, including Bank of America and Wells Fargo , are offering jumbo mortgages at 85% loan-to-value ratio.

• Inform the appraiser. While federal regulations forbid lenders from interacting directly with an appraiser, a refinancing homeowner can drop the needed loan amount into conversation during an appraiser visit, Mr. Carson says. Real-estate agents also can provide information about a property to the appraiser.

• Rebuttal. A last recourse is for the lender to file a rebuttal to the appraisal- management company, pointing out errors and suggesting alternate comparables. However, these rarely result in an amended appraisal, Mr. Carson says.

By:  ANYA MARTIN at The Wall Street Journal

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