Profile picture for datimmerman11

Mortgage Lender Asked If I wanted to Skip The Appraisal

The lender has a special relationship with the developer/seller and is offering lower fixed interest rates than what is typically on the market right now. The seller offered to pay for some of my closing costs but they are adding up to be quite a bit more than I originally estimated.

One way of saving money, the lender suggested, was to skip the appraisal. Is this a good idea? I think that it's to my benefit to have someone independently verify that the house isn't extremely overpriced. If I pay for the appraisal, can I even trust that they won't just report back whatever the lender wants?
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May 09 2011 - Belmont
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Answers (26)

Profile picture for sunnyview
"It may look "independent" from the outside, but it appears that the appraiser has a vested interest in maintaining the relationship with the developer and lender..."

You are right that appraiser relationship may be mucky. The problem I have is that people who waive appraisals are often pressed to do so against their best interests. I have known several buyers who had more than 20% down where the bank was willing to do a catastrophic appraisal only. All that does is tell you yes the house is still standing, but no comps are used at all. 

2 out of 3 of those buyers I personally know overpaid (despite my yelling and pleading) and there were comps that they did not know about that would have been in an appraisal that had recently sold for less per comparable square than they paid.

Not scientific, but still enough to make me recommend that they buyer gets one more potential chance to look at their market before they sign. I prefer doing my own market research, but at least an appraiser is hopefully one step away from the transaction and does not have an interest in twisting the comps.
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May 11 2011
Profile picture for Pasadenan
"but if it's independent. it's the best shot you have at not overpaying." -

And that is the real question... if it is one development, and the developer won't allow units to be sold under a given price, and if the lender is either part of the developer or the developer's lender with special "arrangements" for the developer's "clients", and if the lender chooses the appraiser, and the appraiser appraises "all" the units in the development that are sold, is it at all "independent"?

It may look "independent" from the outside, but it appears that the appraiser has a vested interest in maintaining the relationship with the developer and lender, and would not depreciate their estimates with time even if a bubble is deflating around them.

So, in this limited case, the appraisal may be just throwing money away since the developer is not going to knock the price down any more anyway regardless of how the appraisal comes in.

I still would want the appraisal; but I don't see how one could consider it "independent" in spite of the change to appraisal regulations.

And if the "lender" needs the "construction loan" paid off?  Of course the lender is not going to worry whether it didn't appraise sufficiently for the loan value and stated debt to value ratio.
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May 11 2011
Profile picture for sunnyview
@Daniel I couldn't disagree more with your point. Many people do not know how to value a property and would benefit from a solid arms length appraisal. Think about all those people who bought during the bubble with shaky or dishonest appraisals. They would have benefitted from an experienced appraiser telling them wait a minute.

In the cost of buying a house, the $200-400 appraisal is about the cheapest insurance a buyer has. It's not perfect, but if it's independent. it's the best shot you have at not overpaying.
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May 11 2011
wow, thats quite an interesting deal.
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May 11 2011
Profile picture for Daniel1950
Don't do the appraisal, it all in what the banks wants to see, the amount they want it to be. To me it is a waste of money. Do your own research to come up with a fair appraisal. 
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May 11 2011
He is buying from a developer, not Fannie. If you wanted to compete with his offer you would have to give him 3.5% on a 30 year fixed in order for your monthly payment to be the same since he will have no MI.
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May 10 2011
Without an appraisal, it's a home path deal, meaning it's a fannie mae foreclosure.  It's hard to believe anyone will do a mortgage without an appraisal if it's not homepath or a refinance.

FHA 30 years are at about 4.25 so not sure if that's really below market or not.
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May 10 2011
Profile picture for datimmerman11
@Clay -- I suspect, although I didn't get this confirmed, is that the lender also financed the builder when this property was built, so it is within their financial interest to help move the units. It is a local/regional bank/mortgage broker, not sure what "underserved" is defined as but this is a normal small city of about 50,000.

It is 4.25% 30 yr fixed...

I am very pleasantly surprised at all the active feedback available on Zillow! I had only used it to scope out real estate...
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May 10 2011
It's crazy good. Here is how it translates: You are getting a no closing cost loan for 4.25% and no mortgage insurance. Now you have peaked a lot of interest by the lenders and brokers reading this. Do you happen to be dealing with a community bank and the property is located in an underserved zip code? That is the only way I see you could be getting this offer, unless the 4.25% is for a 15 Yr fixed or a 5/1 or 7/1 Arm.
BTW, it sounds like you are NOT doing everything wrong as you stated earlier :)
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May 10 2011
It may not be a bad idea to get a good RE attorney too.  An attorney can make sure the contract is written in your favor.  I know it cost but it may also save you in the long run.

Whatever you decide, read over all paperwork very, very carefully.  If you don't understand something thoroughly, don't sign it.
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May 10 2011
Profile picture for datimmerman11
No mortgage insurance required. I don't think the prepaids are outrageous, I just hadn't budgeted for them. House price is about 235k which given the features and square footage is easily in line with the area it is in. It's not in a highly volatile market but would still be unfortunate if the value dropped significantly over the next few years. That said, current rental prices in this market would cover the mortgage + city taxes.

I'm a marketing analyst so I have been doing my homework to make sure that this isn't a bad financial move... I expect interest rates are going to start going back up soon so I feel like this might be my best chance to buy for the near future... it's a balance between what rapid inflation and high interest rates will do to the housing market.


Numbers aside, the house is awesome, and in perfect condition (new in '09)!
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May 10 2011
Just from the figures you have given so far, that is an excellent offer
( unless the sales price is way over the appraised value ). Is there mortgage insurance? If so, what is the monthly payment and the loan amt? $2,000 for prepaids is typical ( new escrow acct, prepaid interest, 1 year insurance policy )
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May 10 2011
Profile picture for datimmerman11
@Clay -- The seller is paying up to $6900 is closing costs/prepaid items and I am getting a fixed rate of 4.25% with less than 10% down.
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May 10 2011
Profile picture for datimmerman11
OK the closing costs are coming in at 2.8% which doesn't seem that unreasonable. I just didn't anticipate dropping over $2,000 to fund the escrow for prepaid items.

I am definitely getting the appraisal done and seeing if they will let me adjust how much cash I am putting down so I can keep a comfortable amt of cash in savings.

I have shopped a couple of other lenders and they have all come in with a higher interest rate and other fees like interest points and mortgage insurance requirements. Hopefully they will be willing to work with me.
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May 10 2011
datimmerman11, use this thread to keep asking questions as the process moves ahead. You have access to many realtors and lenders to give their opinion should you question something else. Since it sounds like you will be using the seller's preferred lender, give us the details of their mortgage terms and closing costs. Also, what incentive are they giving you to use their lender?   
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May 10 2011

I have seen some lenders do an AVM instead of appraisals, which stands for Automated Valuation Method, but that went the way of the dinosaur years ago as far as I know. An appraisal is 350-400 dollars. Compared with most closing costs, that is not much of a savings to my mind.
I think the advice from most here is GET an appraisal, and I concur. I also suggest you shop the mortgage around too. Best wishes, and Good Luck whatever you decide! Jim

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May 10 2011
Profile picture for sunnyview
I am glad that you are not skipping the appraisal. Don't be afraid that you are doing things wrong. Just keep asking questions and trusting your gut about what the right thing to do is. Buying your first house can be overwhelming with all the details, but it's worth it. :)
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May 09 2011
Profile picture for datimmerman11
Thanks everyone for the advice.. I am not going to skip the appraisal. Unfortunately the realtor represents the seller and I didn't get a realtor to represent me. This is my first home transaction and I am afraid I've probably done everything wrong...
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May 09 2011
Profile picture for sunnyview
Please do not skip the appraisal. Appraisals are not perfect, but they are the best final way to make sure that you are not significantly overpaying for a property when you buy.

A house that does not appraise can be a gift for the buyer who can then go back to the seller and request a price reduction to match the appraisal. Buyers who waive the appraisal do themselves no favors and it is not worth taking that type of risk for a couple hundred dollars.
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May 09 2011
Profile picture for Pasadenan
Of course a seller or developer that is "self financing" and knows that the sale price is on the high side compared to present market value will want you to skip the appraisal!

Be very leery!
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May 09 2011
I have never heard of a lender skipping an appraisal on a purchase loan. How will the underwriter be able to assign value to the property? They can't just take the builders word for value. I would seek another person to assist you in the transaction and report to the builder what you were told.
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May 09 2011
To be honest with you, I have not come across a lender who will offer a mortgage without an appraisal.  By the way.....are you being represented by a buyer agent?  A buyer agent would have identified your closing costs for you prior to signing the offer and you would have known upfront what the anticipated expenses were.  Even without an buyer agent, the lender is supposed to provide you with a list of your closing costs as well, upfront.  How I wish you had a good  buyer agent...! 
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May 09 2011
I agree with the others, you NEED an appraisal for the reasons you listed. Are you paying cash? There are no lenders that will finance w/out an appraisal on a purchase. ( Fannie/Freddie/FHA/VA/USDA ) Who is the lender they use if you are financing?
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May 09 2011
Profile picture for B Mike West
As a REALTOR and licensed mortgage loan originator I would suggest that you do NOT skip the appraisal.  As the old adage goes, "penny wise and pound foolish."  It is not difficult, in the heat of the moment, to overestimate a property's value.  The appraisal should only cost you about $ 450.  Would you go to the hospital for open heart surgery without first having an X ray? (X rays cost more then an appraisal.)

Note that closing costs usually run about 3% of your loan amount.  If they are any higher than that you better have an independent professional look them over to ensure that someone is not trying to stick it to you.
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May 09 2011

Get the appraisal done. It's only a few hundred dollars & should be an unbiased opinion of value. Short money for peace of mind! I have never heard of the option of "opting out" in this circumstance... It would seem to me that the bank would want to have a record of what the current value of the home they are about to lend on would be.

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May 09 2011
First of all I think you should definitely get an appraisal.  If need be, get an independant appraisal.  In any event you can look at the appraisal report and see if they are using accurate comparable properties to determine a price.  Licensed appraiser must use a Uniform Residential Appraisal Report.
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May 09 2011
 
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Mortgage Lender Asked If I wanted to Skip The Appraisal
Profile picture for sunnyview
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May 11 2011 | 26 answers
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