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Appraisal Issues During a Mortgage Application

April 4, 2024

Mortgage Appraisal Issues

In this article, we’ll discuss the relationship between a real estate appraisal report and its evaluation by a mortgage lender’s underwriter. Then, we’ll cover how that can affect the buyer, seller, or real estate agent in a purchase transaction.

Scenario #1: The appraisal has the value desired, but underwriting isn’t accepting it.

You’re in the middle of a real estate purchase transaction; the appraisal has been prepared, but the lender isn’t accepting the value. The lender and the appraiser won’t talk. So, you’re in the middle and not getting the result you want.

Scenario #2: The appraisal doesn’t support the purchase price, and you feel it’s not a fair value. 

You’re in the middle of a real estate purchase transaction. The appraisal has been prepared, but it is far below the expected value.

If these are situations in which you have been or are trying to navigate, keep reading. But first, we need to frame this with some definitions.

What is an appraisal?

A home appraisal is an unbiased evaluation conducted to determine the market value of a property. For mortgage lenders, an appraisal is crucial as it helps them ensure that the property being financed is worth the amount of money being borrowed. By determining the property’s value, lenders can gauge the level of risk associated with the loan and make informed decisions regarding lending terms and conditions. Ultimately, an accurate appraisal protects both the lender and the borrower by providing a realistic valuation of the property.

What is a residential appraiser?

A real estate appraiser is a trained and licensed professional who evaluates a property’s value based on various factors. Comparable sales, market trends, physical condition, build quality, and amenities are some of the criteria the appraiser will evaluate in accordance with USPAP, or Uniform Standards of Professional Appraisal Practice. Licensing is usually administered at the state level.

Appraisers typically perform appraisals before a property is sold, mortgaged, taxed, insured, or developed.

The appraiser produces a report called the “Uniform Residential Appraisal Report,” which is also known as URAR or Fannie Mae 1004.

Uniform Appraisal Report

Above is a peek at what this report looks like – click to see the full report.

Appraisers are independent contractors who are paid for the independent assessment of opinion value. In this case, real estate. Their compensation is NOT contingent upon their opinion. Appraisers are required to meet standards issued by the USPAP.

Appraisers can be at risk for issuing a report on the value that won’t hold up to quality control checks after the loan has been made. Should the appraisal contribute to a material loss on a transaction, the appraiser risks losing their license and civil liability for damages.

What is a residential mortgage underwriter?

Residential mortgage underwriters are professionals who asses the creditworthiness and risk of borrowers who apply for home loans against a standard set of underwriting guidelines.

Standard underwriting guidelines could be FHA, Fannie Mae, VA, or USDA. Each loan provider has different guidelines that need to be met.

Mortgage underwriters compute the applicants’ income, assets, liability, credit score/history, and property details to determine if they meet the lender’s criteria and guidelines. You can read more about what affects a mortgage application here. Underwriters also ensure that the loan complies with any federal, state, or local regulations.

The appraisal is part of the evaluation process. The data from the appraisal is fed into a database called “Collateral Underwriter” which is a service from Fannie Mae.

Underwriters are nearly all employees of the lender, and the lender has a risk of recourse should the value not hold up to quality control evaluation after the loan is consummated.

How does the Collateral Work?

A Collateral Underwriter (CU) score of 1 is great, but a score of 5 is really bad. Most lenders will not approve anything over a 4. Keep in mind that depending on the type of loan you are getting, there may be different requirements to be met. VA mortgage appraisals and FHA mortgage appraisal requirements might be different than those of a Conventional or USDA loan.

How the Process Can Break Down

Since the appraiser’s compensation is guaranteed, appraisers often don’t reconsider value for fear of appearing influenced. They must follow USPAP guidelines.

Many appraisals are ordered through an Appraisal Management Company or an AMC. An AMC serves as an intermediary between the Mortgage Loan Originator (MLO) and the appraiser. Federal law requires intermediaries for fear the MLO would have too much influence over the independence of the appraiser.

Like all things with too many middlemen, quality of service can often be a casualty.

Since the lender bears risks of assessment of value, they often will ask appraisers to make changes or clarifications on appraisals to improve the appraisal quality and CU score.

While it doesn’t always happen, the two parties can get into a standoff with the customers in the middle, and nothing gets accomplished.

What can you do if you’ve found yourself in one of the situations above?


Work with a Quality AMC

While no one is allowed to try to influence an appraiser’s opinion of value, a good AMC will help work with the lender by providing statements of fact that impact value and provide the right transparency on the process.

Remember, appraisers are humans, too, and do make mistakes. When it comes to an appraisal, what you may think are minor details can become very important to the property’s value. Minor details can be missed and overlooked by an appraiser, or they may not have been available to the appraiser. An AMC that provides top-tier customer service is key to resolving any issues that arise before, during, and after the appraisal process.

Work with a Lender with Quality Underwriting and a Good Working Relationship with an AMC

Quality underwriters understand all of a mortgage’s moving parts. By coming to a mutual understanding of CU ratings, underwriters, and appraisers often find a great deal of common ground.

Check out some of our tips on how to ensure a smooth appraisal as well as if you should remove an appraisal contingency on your home purchase.

At Homestead Financial Mortgage, applying costs nothing out of pocket—NOOP. We make the application process simple, and we’ll work with you over text, email, or on the phone. Uploading your documents is easy, and we’re available via email and text seven days a week to answer questions quickly.

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