All About Appraisals

An Appraisal is an estimate of a property's fair market value. It's a document generally required (depending on the loan program) by a lender before loan approval to ensure that the mortgage loan amount is not more than the value of the property. The Appraisal is performed by an "Appraiser" typically a state-licensed professional who is trained to render expert opinions concerning property values, its location, amenities, and physical conditions.

Why Get An Appraisal? Obtaining a loan is the most common reason for ordering an Appraisal, however there are other reasons to get one:

• Contesting high property taxes
• Establishing the replacement cost for insurance purposes
• Divorce settlement
• Estate settlement
• Negotiating tool in real estate transactions
• Determining a reasonable price when selling real estate
• Protecting your rights in an eminent domain case
• A government agency requirement
• A lawsuit

There are 3 common approaches, or Appraisal Methods, used by Appraisers to establish property value. After thorough exercise of all 3, a final value estimate is correlated. When evaluating single-family, owner-occupied properties, the Sales Comparison Approach is heavily weighted by an Appraiser.

• Cost Approach – A formula is used to obtain the property value: Land value (vacant) added to the cost to reconstruct the appraised building as new on the date of value, less accrued depreciation the building suffers in comparison with a new building.

• Sales Comparison Approach – The Appraiser identifies 3 to 4 comparable comps, recently sold properties in the neighborhood, ideally, sold in the previous 6 months and within ½ mile of the subject property. A comparison is done between the recently sold properties and the subject property including square footage, number of bedrooms and bathrooms, property age, lot size, view, and property condition.

• Income Approach – The potential net income of the property is capitalized to arrive at a property value. Capitalization is the process of converting a future income stream into a present value. This approach is suited to income-providing properties and is used in conjunction with other valuation methods.

Who Owns The Appraisal? The mortgage company owns the appraisal even though the borrower paid for it. This is because the mortgage company orders the appraisal on the borrower's behalf, and the Appraiser lists that mortgage company on the report. The borrower does have the right to receive a copy; however it's the mortgage company's discretion to give the borrower the original appraisal report.

Who Determines The Market Value Of Your Property ?

The property seller sets the price, especially for residential property, not the Appraiser. Sellers usually don't order an appraisal because they want to obtain the highest price for their home and therefore don't want to be bound by the Appraiser's assessment.

The real estate agent receives a percentage of the price as compensation and often represents the seller in the transaction and assists them in setting the sale price. They perform a Comparative Market Analysis (CMA), which real estate agents in most states are allowed to perform without an Appraiser's License or Certification. The CMA is vital to the agent’s preparation for a listing examining recent property sales in the neighborhood to arrive at a listing price. Typically the agent will suggest a price to the seller based on the CMA however the seller may choose to list their property for a higher price. Source

DRE ID # 01769353

NMLS ID # 394275

What Are Some Mortgage Requirements?

Lenders set minimum mortgage requirements you’ll need to meet to get pre-approved for a home loan;

The higher your credit score, the lower your interest rate will be

A lower interest rate means a lower monthly payment, which makes homeownership more affordable.

The higher your down payment, the lower your monthly payment

A down payment of 20% will help you avoid mortgage insurance if you’re taking out a conventional loan. Mortgage insurance covers the lender’s foreclosure costs if you default on your loan.

The longer the term, the lower your monthly payment

First-time homebuyers typically choose 30-year terms to get the lowest monthly payment.

The less monthly debt you have, the more you can borrow

Clear out those car loans, student loans and credit card balances if you want the most mortgage borrowing power. Source

DRE ID # 01769353

NMLS ID # 394275

How Does Inflation Affect Mortgage Rates?

High inflation often leads to higher mortgage rates by pushing up interest rates, reducing purchasing power and influencing housing demand, ultimately making home loans more expensive overall.

Inflation can affect mortgage rates in a few different ways, both directly and indirectly. When inflation is high, borrowing money becomes more expensive, and that can influence not only the cost of buying a home but also whether it's the right time to do it.

Understanding the relationship between inflation and mortgage rates can help you make informed decisions about homeownership.

What Is Inflation?

Inflation refers to the general increase in prices of goods and services over time, which leads to a decrease in purchasing power. In other words, when inflation rises, each dollar you have buys a little bit less.

The most commonly used measure of inflation is the consumer price index (CPI), which tracks the average change in prices paid by consumers for a basket of goods and services.

How Does Inflation Affect Mortgage Rates?

When inflation rises, mortgage rates tend to follow suit. Here are a few key ways inflation can influence mortgage rates.

Higher Interest Rates

The Federal Reserve often raises the federal funds rate to combat inflation, the idea being that higher rates can help curb consumer and business spending and help bring high inflation down.

While the Fed doesn't set mortgage rates directly, its actions influence them indirectly. More specifically, the Fed's monetary policy decisions play a major role in shaping investor expectations. In turn, those expectations directly influence the yield on the 10-year Treasury note.

Because the 10-year Treasury yield serves as a key benchmark for mortgage rates, changes in Fed policy often ripple into the housing market, pushing mortgage rates up or down accordingly.

Reduced Purchasing Power

When inflation is high, it erodes the value of money. For lenders, this means that the money they get back in the future will be worth less than it is today. To compensate, they may increase mortgage rates to protect their profit margins.

Market Sentiment

When inflation is high, rising prices for everyday goods and services can erode consumer confidence and make potential buyers more hesitant to take on a large, long-term financial commitment like a mortgage loan.

If enough buyers pull back, housing demand drops, which can put downward pressure on home prices and, in some cases, mortgage rates. Additionally, individual lenders may lower rates to attract new borrowers and keep loan volume steady.

Does Inflation Affect Fixed-Rate Mortgages?

Once you lock in a fixed-rate mortgage, your interest rate won't change for the life of the loan, even if inflation continues to rise. However, inflation can affect fixed-rate loans in several indirect ways:

• Higher rates: When inflation is high, fixed mortgage rates are likely to be higher than they would be in a low-inflation environment.
• Reduced affordability: With inflation driving up prices, including interest rates, your monthly payments may be higher than if you had locked in your mortgage during a period of low inflation.
• Opportunity costs: On the flip side, if you already have a fixed-rate mortgage at a lower rate, you're protected from rising rates and your loan becomes more valuable compared to new mortgages.

Source

Mortgage Contingency

Mortgage contingencies are important clauses in a purchase and sale agreement that can help protect buyers and sellers during the process of buying/selling a home. These contingencies can release either party from the contract if certain criteria aren’t met.

A typical mortgage contingency clause may specify that the buyer is required to secure financing of a certain amount by a certain date before closing.

In other words, the buyer’s commitment to purchase the home depends on securing financing that meets agreed-upon terms. In this example, if the buyer is unable to get approved for said financing, they can walk away without losing their earnest money deposit.

Why It Matters:

• For Buyers: It’s a safety net so they’re not stuck with a mortgage they can’t afford.
• For Sellers: It sets expectations and keeps financing on track with deadlines.

Types of Mortgage Contingency

1. Financing Mortgage Contingency

Financial contingency clauses will vary from contract to contract, but their general format is this: They typically allow the purchase and sale agreement to be canceled if financing cannot be secured in a specific timeframe. This contingency sets a window—perhaps 20 days, perhaps 60—for the buyer to lock in financing.

This contingency also usually states a minimum loan amount needed to complete the purchase. If the lender approves less, the buyer can be released from the agreement without penalty. But if the buyer fails to secure financing at all within the deadline, they may lose their deposit.

This contingency may also specify a maximum interest rate and loan type, such as an FHA or VA loan. If the buyer is unable to get approved for the target rate or below, the buyer can leave the contract.

2. Inspection Contingency

In this instance, the contingency clause could specify that the purchase of the home hinges on the property passing inspection. If the home doesn’t pass, the seller might have to make repairs or bring down the sale price. Otherwise, the buyer might walk away.

3. Appraisal Contingency

This contingency states that the property must be appraised at a certain value or higher. If the appraisal falls below that, the buyer may negotiate the price or leave the agreement. Appraisal contingencies can also include a time limit within which the property must be appraised.

4. Sale of Previous Home Contingency

This contingency could protect buyers who need to sell their current home to finance the new purchase, enabling the buyer to leave the contract if their existing home doesn’t sell within a certain timeframe.

How Mortgage Contingencies Can Protect Buyers and Sellers

Buyers:

• Financial Safety Net: If financing falls through, buyers aren’t forced into a purchase they can’t afford.
• Earnest Money Protection: Buyers usually can keep their deposit if they cancel for valid financing reasons within the contingency period.
• Minimized Property Surprises: Appraisal and inspection contingencies can help ensure the buyer knows exactly what they’re getting for their financing.

Sellers:

• Structured Progress Tracking: Sellers can be assured of financing deadlines, helping them to plan next steps.
• Ability to Terminate if Financing Falls Through: If buyers miss deadlines or are unable to lock in a loan, the contract can be canceled.

What Happens if the Mortgage Contingency Expires?

If a purchase and sale agreement contains a mortgage contingency that specifies a deadline for the buyer to find financing, for instance, and the buyer misses that deadline, the buyer could lose their deposit.

Why It Matters:

• Buyers risk losing deposits or facing legal consequences if financing fails.
• Sellers gain full leverage to enforce the contract or move on to other offers.

Best Practices for a Smooth Financing Process

For Buyers:

• Contact us to get pre-approved* before making an offer. A pre-approval letter shows sellers you’re a serious buyer, and also helps you get a clear idea of how much house you can afford.
• Monitor interest rates and lock in when favorable.
• You have the option to ask for an inspection contingency to help ensure the property is up to par.
• Ask for extensions early if delays arise so you don’t lose your deposit.

For Sellers:

• Verify the buyer has a pre-approval.
• Set realistic contingency deadlines.
• Request regular updates on financing progress and keep open lines of communication.
• Keep backup offers in play just in case.

Source

How Power of Attorney Applies to Mortgage Borrowers

In times when a homeowner becomes unable to handle tasks related to their mortgage, a Power of Attorney (POA) may come into play. POA is a legal instrument that allows an authorized person to act on behalf of the borrower to manage the home loan.

Understanding Power of Attorney

Power of Attorney allows an authorized individual (the “agent”) to handle mortgage matters for the original borrower (the “principal”). This is especially relevant when the borrower is unavailable, incapacitated, or otherwise unable to handle loan servicing tasks directly.

POA Requirements

In order for someone to assume POA on behalf of a borrower:

• A valid, notarized POA document with clear authority to act on mortgage matters.
• The POA must be specific enough to cover the intended actions (e.g., “authority to manage mortgage obligations”).
• In some cases, a durable POA is required. In contrast to a regular POA, a durable POA retains the power to act on the borrower’s behalf even if the borrower becomes incapacitated.
• We may request verification of the principal’s (borrower’s) status (for instance, proof of incapacity or a death certificate).

Common Uses in Mortgage Servicing

Once someone takes up POA for a borrower and becomes their “agent,” they’re typically able to make decisions related to the mortgage that might include:

• Loan modification requests: Negotiating or submitting documents on behalf of the borrower.
• Payment management: Making payments, setting up auto-pay or resolving any delinquency issues.
• Loss mitigation: In cases of hardship, the agent may initiate forbearance or repayment plans.
• Foreclosure prevention: The agent can respond to notices, request reinstatement quotes or pursue alternatives like short sales.

Source

Common Mortgage Mistakes to Avoid

Securing a mortgage for your home is a major financial milestone. You want to ensure you choose the right mortgage and experience a smooth application and approval process. 

Mistake #1: Ignoring the Full Financial Picture

It’s critically important to understand what your monthly budget will look like as a homeowner. Your mortgage shouldn’t be a big burden on your finances. Follow these tips to maintain a comfortable budget:    

• Reference the 28% rule: Some experts suggest that your mortgage payment should account for no more than 28% of your income.1 You can use this as a benchmark to see what you can afford.
• Use a Mortgage Calculator: Have a price range in mind for a new home? 
• Factor in All Parts of Your Monthly Mortgage Payment: Mortgage payments typically aren’t limited to principal and interest – they usually also include homeowner’s insurance and property taxes, which will vary depending on the property’s location. 
• Add Up the Rest of Your Budget: Account for typical monthly expenses (groceries, gas, cell phone bill, etc.) and then add in planned future costs like childcare, education or retirement plans. Here’s a more detailed guide to budget setting.
• Leave Room for Emergencies: Don’t let unexpected costs knock your budget off balance. Budget some wiggle room for home repairs or other needs that arise.

Mistake #2: Getting Scared Off by the Down Payment

If you don’t have enough money saved for a 20% down payment, homeownership may seem out of reach. But you should know that there are loan programs that allow you to get a mortgage while making a smaller down payment, if you qualify.

• A Federal Housing Administration® (FHA) loan may enable you to qualify with as little as 3.5% down. It also offers flexibility on your debt-to-income (DTI) ratio, and you may qualify with less-than-perfect credit. Learn more.
• HomeReady® and Home Possible® loans are designed to grant homeownership to those with low-to-moderate income for as little as 3% down.
• Veterans Affairs (VA) loans are available to active-duty Military, Veterans and their families. Eligible borrowers may be able to put as little as zero money down. Learn more.
• U.S. Department of Agriculture (USDA) loans are available to those with low-to-moderate incomes living in less populated areas, and may enable borrowers to put no money down.

Mistake #3: Not Getting Pre-Approved**

If you’re putting an offer on a great home, there’s a good chance you’re not the only potential buyer vying for a seller’s attention. Don’t get lost in the buying crowd – make your offer stand out by adding a pre-approval letter from your lender.

• Give Your Offer Weight: Pre-approval shows sellers and real estate agents that you’re serious about buying and you’ve got the finances to back it up.
• Have a Clear Financial Benchmark: Pre-approval sets a clear financial limit on how much home you can afford so you don’t waste time during your search.

Pre-approval requires you to verify your financial situation to a lender with documentation. Your lender will also perform a detailed check of your credit history.

Mistake #4: Making Big Financial Changes During the Approval Process

Once your mortgage application is submitted, sudden financial changes may raise concerns for lenders, and might affect their approval determination.

• Notify Your Lender of Job Changes: Switching employers or changing to a new pay structure is material to your ability to repay a loan. Be sure to notify your lender as soon as possible if any details regarding your income change.
• Delay Large Purchases: Getting a new line of credit or buying big-ticket items like a car, furniture sets or large appliances may alter your debt-to-income ratio.
• Thoroughly Document Large Deposits: Any significant bank transfers – even between your own accounts – have to be documented to comply with underwriting guidelines.
• Delay Credit Inquiries: If you pull your credit or another party makes a credit inquiry, your lender will likely need to verify that no new debt has been incurred, which could delay or impact your loan approval process.

Mistake #5: Neglecting to Plan for Closing Costs

First-time homebuyers may forget about these costs until they’re committed to a new home, which could lead to stressful surprises at closing.

Closing costs are typically between 2-5% of the home’s purchase price and include things like appraisal fees, loan origination fees, discount points, real estate agent commissions, attorney’s fees, the title search, title insurance and more.

Make sure you’re prepared for these expenses, and know that closing costs typically vary depending on the price of the home, the property’s location and your lender, among other factors.

Mistake #6: Not Consulting with A Mortgage Professional

Sometimes, getting a mortgage can feel like a very impersonal transaction. At Newrez, we want to give our borrowers top-tier guidance so they truly feel they’ve found the right mortgage for their lifestyle and financial circumstances. Source

Happy Independence Day!

 

Happy Independence Day from us at Work and Associates Home Loans!

We hope you have a safe holiday weekend!

Phone: 916-847-3090

1350 Old Bayshore Hwy Ste. 520

Burlingame,  CA  94010

margeate@workhomeloans.com

NMLS ID 394275 | DRE ID 01769353