I don’t know how many times I’ll have to say it, “WHEN SHOPPING FOR A MORTGAGE ASK ABOUT THE APPRAISER!” In fact, don’t ask, just read what I have to say first. I have repeatedly said on this blog that many sources for mortgage loans are not to be trusted when it comes to the appraisal. Why?
Most lenders use large Appraisal Management Companies
Because most lenders use large Appraisal Management Companies (AMC’s) populated by dozens and dozens, usually more like hundreds of appraisers, that are coming from all over the place geographically.
Why is this a problem?
What has happened is this:
-The Feds changed the laws, because they are so smart, and said that individual loan officers cannot choose the appraiser, because the Feds feared collusion between the loan officer and appraiser, or the Realtor and the appraiser, on the appraised value.
-Now appraisals are ordered through the bank or lending institution, and the appraisal is ordered through a large AMC. The appraisal order is put out for bid, or ordered from the next appraiser in line. This almost assures you’ll never get the highest quality appraiser. You’ll get the cheapest or the lowest quality, which is inane on a mortgage application. The AMC gets an appraiser to do a $400 appraisal for $250 and pockets the difference. The large banks have turned this into a profit center. Guess what type of appraiser you’ll get for that type of discounted fee? Do I even need to say it….I did not think so.
Don’t just shop by price
You CANNOT simply shop mortgage lenders by price, or some promises made. You have to shop appraisers, experience, fees, service, turn time, and on and on. Just picking the lowest rate is almost guaranteed to cause problems. Never in history has there been a more critical time to ask a lot of questions, and shop service first and price second.
Large banks use large AMC’s where appraisers come from all over geographically. And if you get a loan through a mortgage broker you should question who they are brokering the loan through, and what the AMC is like, and where the appraiser may come from. If a mortgage broker ends up brokering a loan through a big bank, its the same result as going direct to the big bank, which means a large, unresponsive and unaccountable AMC. Make sure a mortgage broker goes to a small-medium sized mortgage banker as the source of the loan, or someone they have used before and whose AMC they know and trust.
How do mortgage bankers do it?
A mortgage banker (i.e. a Direct Lender) usually sets up their own AMC, populated with a small group of appraisers who are all local, and whom they know, and as a result they can trust the quality of the appraisal work. So these days, a mortgage banker/direct lender is always a good source for a sound appraisal.
“Why does this really matter”, you ask? “What is the harm in letting any licensed appraiser come out to appraise the home, right?” “Isn’t the appraised value of the home the appraised value of the home, no matter which appraiser comes out?” NO! If you send out 10 different appraisers to appraise a home, you’ll get 6-8 different appraisal values.
Below is a very recent story to help illustrate:
I had a potential refinance client who ended up using another lender. I tried to explain why a local lender like myself would be better able to get a more accurate and successful appraisal, and since my rate was the same as all others he had heard, he should use me. But he said:
“I am going to use the large bank I worked with before when I bought the place. They are going to make it easy on me.” I always fume when I hear that. What exactly does that mean, “make it easy”? How? Did you ask how? Or did they just say, “we’ll make it easy on you since we already have the loan” and you just believed it? I truly believe that in some big bank marketing manual it says, “tell people we’ll make it easy on them since we already have the loan, they’ll simply believe it without question.” Fannie Mae, Freddie Mac, FHA and VA all require the same paperwork of each lender, no matter who is presently servicing the loan. It is literally impossible for one lender to make it easier than another, the requirements are universal!
The client ultimately said, “I regret to tell you that I have decided to go with a different lender. I ended up choosing the same lender who carries the mortgage now. Turns out, they’ll make it easy on me, and I am comfortable since we have interacted with them for several years. But thank you for your time, I can tell you are efficient and anyone that my neighbor refers must be good, we have high regard for her. We will consider you in the future”
I thanked him for checking in with me, and wished him well. I followed up a few months later to make sure he got his mortgage OK, and that everything worked out as planned.
The end result of the story
His reply was astonishing:
“Brian, thanks for checking back in. It turns out the house appraised for $625,000, which is $85,000 lower than my lowest expectation. I had to bring $45,000 in cash to the settlement table to pay the loan down. On the positive side, they lowered the interest rate by 1/8% to 4.875% on the 30 year fixed. Thanks for checking in.”
Huh? I offered him 5% in the beginning which is where the market was at the time, and it sounds like the large bank he chose started him at 5% only to drop his rate 1/8% to 4.875% at a later date. So that is good for him, that interest rate drop saved him about $33/month on the size loan he was refinancing.
More importantly, had he had a local appraiser that knew the marketplace I bet his house would have appraised for what the thought it should, and he would not have had to pay his loan down by $45,000! Did you hear me? I said he had to pay his loan down by $45,000! Who does that? But hey, at least they made it easy on him, and he saved another $33/month on that lower rate they gave him.
The final math
Let’s see if I can do that math. He spent $45,000 to pay the loan down, he is saving $33/month more.
45,000 divided by 33 = 1,363
That means in 1,363 months he’ll break even on the $45,000 cash outlay. 1,363 is 113 years. Hope he is in good health….
ASK ABOUT THE APPRAISER!
To contact me to discuss your local housing market, mortgage rates, or other mortgage questions, click here to schedule a call or you can email me directly.
Brian Martucci is a loan officer for Capital Bank Home Loans, a division of Capital Bank, N.A. He has been in the mortgage industry since 1986 and has served in a number of roles, including loan processor, loan officer, mortgage broker, branch manager, and vice president. Brian Martucci – NMLS# 185421. His opinions do not necessarily reflect the opinions and beliefs of Capital Bank Home Loans or Capital Bank. Capital Bank, N.A.- NMLS# 401599. Click here for the Capital Bank, N.A. “Privacy Policy”.
Nice article. I am currently trying to refi and my biggest concern is the appraisal. So how do I find out about the appraisal? Would lenders be open about sharing information about appraisers?
You can ask your loan officer different questions about how their appraisal process works, and their appraisal management company. Ask your loan officer how many appraisers approximately are in their appraisal management company panel (if its a large amount, then its harder to quality control a large group). Ask them if they have any sort of geographic limitations as far as where the appraiser may come from. Ask them what their process is to do an “appraisal challenge”, if the appraisal comes in lower than you feel is deserved. And ultimately you can go to another lender if you feel their appraiser was uneducated as to your marketplace, however, at that point, rates may have gone up which would cost you more to switch.