A new federal rule meant to make it easier for homebuyers to get appraisal information went into effect the other day, requiring lenders to spill the beans for mortgage applicants.
Buyers — borrowers — are to get copies of appraisals, reviews, computer valuations and other documentation promptly after a appraisal report is filed or three days before the loan closes, whichever is earlier. This includes follow-up reviews by a second appraiser, multiple automated valuations and “broker price opinions” used to supplement an appraisal.
Technically, the rule, overseen by the Consumer Financial Protection Bureau, requires the lender to reveal any information that went into a property valuation, without being asked — although the rule also allows buyers-borrowers to waive their right to the information, so watch what you sign.
Forgive my lack of faith here. As with any new rule or reg, you can be sure lenders have already figured out how to do the least required and plan to wait until pushed to comply fully. They've had time. This didn't come out of the blue: The bureau proposed it two years ago to implement changes to the Equal Credit Opportunity Act made by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.
The rule, in effect for any loan application dated Jan. 18 or after, is limited to mortgages that are first liens, including reverse mortgages and construction loans. Lenders of second mortgages or home equity lines of credit secured by a secondary lien are not required to provide the information. Ask anyway.
You may need to know what to ask for. Here are some home appraisal basics.
The value of existing homes — as opposed to newly built or never occupied — is determined with a sales comparison called a market data approach. Information from the recent sale of similar houses — “comparables” — is compiled, then adjusted, then compared to the one you're trying to buy, called the subject property.
Adjustments are necessary because no two properties are alike. Construction materials used, architectural and mechanical features, size of lot, location and other factors should be taken into consideration and used to adjust the estimated value of the comparables.
It sounds simple, but it's not necessarily, which is why reviewing appraisal documents is a good idea. If a comparable has features the subject property (your dream home!) does not, then the last sale price of the comparable is decreased; if your dream home has features a comparable does not, then the price of the comparable is increased. The point is to get a fair comparison.
This is right out of a real estate textbook: “Remember, when deciding whether to add or subtract for a feature, it is the sales price of the comparable property that is being adjusted, not the value of the subject property. Therefore, if a feature makes the comparable property better than the subject property, we reduce the comparable's sales price; if the feature is lacking in the comparable property, we add to its sales price.”
It's not just the lack of granite counter tops or the presence of extensive and cool landscaping that can cause adjustments. Gerald R. Cortesi outlined four categories in his textbook “Mastering Real Estate Principles,” which saw several editions.
• Terms or conditions of sale: The sale of the comparable may have involved favorable loan terms by the seller, or the seller might have granted cash or other incentives to attain a certain sale price.
• Date of sale: The market may have changed since the sale, which is why comparables should have been sold within six months, or more recently in an active market.
• Location: The appraiser had to go out of the neighborhood, or into another part of town, to find comparables.
• Finally, the things, aside from location, that most everyday buyers and sellers probably think of first, physical condition and features: age, size of the house, lot size, landscaping, number of rooms, construction quality, garage size and type, type of heating and air conditioning.
People who have bought and sold a house or two may know most of this. New homebuyers should get it in a homebuyer education class. Sign up for one if you haven't. Not all buyers do. Caution, first-timers: This is just the beginning of what you need to know.