The credit crisis profoundly affected the home loan business. Lenders’ underwriters now scrutinize every aspect of the mortgage approval process, including the property appraisal.

Most lenders now require that buyers make a down payment to ensure they have an equity stake in the property. Lenders are also concerned about declining property values.

Freddie Mac and Fannie Mae guidelines, which set the standard for the appraisal industry, require that an appraiser use comparable sales that closed within the last six months. However, today most underwriters want appraisers to limit their comparable sales to those that closed within the last two to three months.

Lenders’ underwriters also ask appraisers to provide more information about the local home sale market than was the case a few years ago. They want information about comparable listings that are pending and those that are currently on the market. A pending sale is one where the seller has accepted an offer, but the sale has not yet closed.

Closed sales, even if they are relatively recent, might not reflect current market value if the local market is declining. If the list prices of comparable properties that are active or pending are lower than the recent closed sale prices, this would indicate that the market has declined. An appraiser will take this into account in his or her valuation.

Be aware that if the appraiser checks a box on the standard appraisal report form that indicates "declining market," some lenders will automatically reduce the property valuation by 5 percent.

Due to today’s tight mortgage market, buyers should include an appraisal contingency in their purchase agreements. If the property doesn’t appraise for the purchase price, the buyer can usually withdraw without penalty if the purchase agreement includes an appraisal contingency.

Your deposit could be at risk if you backed out due to a low appraisal and there wasn’t an appraisal contingency in the purchase contact. Some buyers are asking sellers to renegotiate the purchase price based on a low appraisal. If the seller agrees, the sale proceeds. If not, the house goes back on the market.

Some lenders want more than one appraisal before they’ll give final loan approval. Usually, the appraisals come in at or close to the same value. However, a property in Berkeley, Calif., recently appraised $100,000 lower on the second appraisal.

Multiple appraisals and more rigorous underwriting have lengthened the time it takes to approve a mortgage. Check with your loan agent before you write an offer to make sure your time frames for the appraisal and loan contingencies, and for closing, are realistic. Make sure your loan agent is aware of your contractual deadlines.

In neighborhoods that haven’t suffered severe downturns, the appraisal process hasn’t changed drastically, except for the time element. However, in hard-hit areas where there are a high percentage of foreclosures, it’s possible to find two sets of valuations in a single neighborhood: one for distressed sales and another for nondistressed sales.

When appraising foreclosures, REOs (bank-owned properties) and short sales, appraisers try to use comparables that fall into these categories. A short sale is one where the purchase price is less than the amount of the loan(s) secured against the property.

Distressed sale properties tend to be in poorer condition than properties that are sold by a seller who is not selling under duress. In some cases, kitchen and bath fixtures have been removed from distressed sale properties by the previous owner.

THE CLOSING: Appraisers are cautioned to inspect for obvious defects like lack of functioning kitchen and baths or a dangerously rotted deck. The lender might require that these items be repaired or replaced before they’ll grant a loan.

Dian Hymer is a nationally syndicated real estate columnist and author of "House Hunting, The Take-Along Workbook for Home Buyers" and "Starting Out, The Complete Home Buyer’s Guide," Chronicle Books.


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