You are gearing to refinance your stated income loan and getting your home appraised in the process. You are thinking of using the extra value your home has gained to get a higher loan amount. Unfortunately, your home scored low in the appraisal. What to do? Will the lender refuse to make the loan on account of the low appraisal?
Good thing a low appraisal is not a dealbreaker and there are many ways to deal with it.
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LTV and Low Appraisal
Generally speaking, you could refinance up to 80% loan-to-value of your home. LTV is your loan amount divided by your property value.
Suppose you take out a $100,000 loan on your home you valued at $200,000, your LTV will be 50%. The appraiser visited your home, checked its appearance and condition, and submitted to the lender an appraisal report of $180,000. This puts your LTV at 55%, which is quite close to what you expect and places your LTV in a safe zone.
But what if the appraiser values your home at $120,000? Your LTV will then drop to 83%, above the standard ratio. This puts you in an uncertain mortgage situation especially that it could trigger a private mortgage insurance, an expense you could avoid with a low LTV.
Against this backdrop, you can do any of the following:
1. Challenge the appraisal. Get a second appraisal opinion.
2. Push through with refinance and (a) lower the amount you want to borrow at a level that it reaches 80% LTV; or (b) limit the cash amount you’ll be taking out on a cash-out refinance.
3. Back out of the refinance and pend it until such time your house has gained value.
Second Chances With a Second Appraisal?
Submit a formal rebuttal letter to the lender, challenging the home’s stated fair market value. Independent appraisers often employ the sales comparison approach in appraising single-family homes.
Under this method, appraisers identify three or four properties sold within 90 days and located within mile-radius of your property. They will then compare these properties with your home in terms of property condition, age, square acreage, bedroom and bathroom count, etc.
In your rebuttal letter, you could point out that the appraiser had not selected a sample of comps that truly represent the going prices in your area. Enlist the help of realtors to support this claim.
Another tack for lenders to change their mind is to get a second opinion from another professional appraiser. This second appraiser may be able to spot errors the first appraiser could have done. It’s up to the lender to agree with you or not.
Refinance But Lower Your Loan, Cash-Out
With a low appraisal and higher LTV, your lender won’t naturally approve the loan at the amount you originally sought for.
You can opt to lower the amount you seek to borrow pegged at 80% LTV to avoid any PMI. Settle any remaining loan amount in cash. This is also called cash-in refinance.
Or you can reduce the cash you’d be taking out of your equity. This will keep your loan size smaller.
Save for Equity Now, Refinance Later
If you feel that a refinance now is counterproductive because of the low appraisal turnout, you can always come back when your home has strengthened in value to tap its full potential.
Equity works best when home prices are rising and you’ve substantially paid down your loan.
In canceling the refinance application, you will still pay for the appraisal bill. Even more so when you request for another appraisal, you will pay for two reports.