My House Appraisal is Low – I Cannot Refinance My Mortgage!

Every mortgage news story is filled with details of banks going under and the tightening of home loan credit lines. Homeowners looking to refinance are often finding it more difficult than it was a few years ago. First, they now have to meet a set of stringent new requirements; then they risk a low house appraisal.Unfortunately, this problem of low house appraisals is occurring across the country. Homeowners who purchased several years ago are often being told that their homes have fallen in value and that the appraisals on them are insufficient for the lender to make a new loan. This is happening even in cases where you may already have a loan with the mortgage lender you are trying to refinance with.Since there are few sources of mortgage news that really explain to a homeowner what an appraiser does when he determines a value for your home, I have prepared this “nutshell” version. I have also explained one of the major reasons why appraised values are currently much lower than only a few years ago. The actual reasons for a low appraisal may be much more complex, but this is usually the primary culprit.When the appraiser looks at your house, it is his job to estimate the probable selling price on the date that he views the property. The main factor that determines the probable selling price of your house is the real estate market in the area where the house is located. If the area has many repossessed homes that are actively “for sale,” it may drive down the probable selling price of your home.How? It is a matter of simple economics. The appraiser looks at what your house would need to be priced at to compete with all of the homes that are “for sale” in your neighborhood. There are only so many buyers who are willing to buy in any individual neighborhood, and when two homes offer the same features, buyers will usually go with the lower priced choice. This is the same principle that shoppers use when comparing two boxes of crackers at the grocery store. If both brands taste nearly identical, but one brand offers 50 more crackers or is 50 cents cheaper, shoppers will usually choose the better price or value.The problem for house appraisals comes in because, often, banks sell their repossessed homes at below market value in order to liquidate those assets faster and raise capital to make new, hopefully more stable, loans. So, if your neighborhood has a lot of repossessed homes being sold, they may pull down the market value of your own home when the appraisal is done for the mortgage refinance company. This happens because in order to compete with these lower priced homes, private homeowners are forced to reduce the prices they ask for their own homes. This in turn creates a pool of low priced privately owned homes that your house would have to compete with in order to sell.While it is important for the appraiser to know what you paid for the house, the current appraisal must be based on the sales prices of homes that have sold in the last 90 days to 6 months. So, if you bought your home 3 years ago, the price you paid then may have very little do with the price you could get out of it now.Likewise, it is okay to tell the appraiser what you think your home might be worth, but don’t expect him to necessarily agree with you. The question the appraiser is trying to answer for the mortgage refinance company is not what you think your home is worth, or what you think you would like to sell it for, or even how much you have invested. The question is “What would this home need to be priced at in order to sell in a reasonable time, all things being equal?”