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Mortgage Underwriting and Appraisal Clarification for Home Buyers

woman holding out a house model

Prospective home buyers are likely aware of the importance of the mortgage underwriting and appraisal processes, but there are concerns from various industry members that misconceptions are rampant. To start with, buyers need to understand the difference between an inspection and an appraisal, as the two serve very separate and distinct functions, and they should also be educated on the realities of the Qualified Mortgage-era lending environment.

Lisa Marquis Jackson of John Burns Real Estate Consulting recently attempted to dispel many of the erroneous assumptions associated with the market in a research note titled "The Truth about Mortgage Underwriting," which was recirculated by HousingWire. Jackson emphasized that, thanks to a preponderance of available FHA and VA loans, lower-income buyers—even those with poorer credit—actually have it easier than they did a few years ago. Yet many consumers have fallen victim to the perception that because of tightened post-recession regulations, it's nearly impossible to buy a home without meeting Qualified Mortgage standards.

Program Loans Abound

As Jackson notes, entry-level buyers have opportunities, and the more they seize them, the better off the market will be. The FHA has steadily increased its annual loan share for buyers with lower credit scores, and the agency federally insures 95 percent loan-to-value mortgages for those who wouldn't meet QM terms. These borrowers range from those with a previous foreclosure on their record to those who allocate more than 50 percent of their incomes toward debts and those on fixed incomes or disability.

"Buyers with poor credit and low income are finding it quite easy to buy a home below the FHA limit," Jackson wrote, adding that "many qualified people are not even shopping for a home because they presume they cannot get a mortgage."

The hope is that, as more lenders and mortgage servicers become comfortable with QM standards and other regulations, new products will continue to saturate the market and more buyers will be approved. Not everyone fits squarely into the QM-criteria box, which is why jumbo loans and other alternative offerings have been making comebacks. But some seemingly qualified buyers have still encountered difficulties simply because their incomes are not as thoroughly documented. This has been true for relocating professionals, in particular, and Jackson and other industry analysts are holding out hope that a more common-sense approach will eventually prevail, benefiting the industry as a whole.

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Appraisers as a Neutral Party

Meanwhile, buyers who aren't deterred need to be fully aware of the nuanced exercise that is the valuation process. As a recent Los Angeles Times piece explored, disconnects still exist between lenders, buyers, sellers and various other market participants when it comes to how and why an appraisal is conducted. Rather than serving as a vehicle for consummating the deal, the appraiser is actually only required to offer their professional assessment of the home's worth. The seller's asking price and what prospective buyers might be willing to pay are technically irrelevant. Rather, the appraisal is based on the condition, age and amenities of a home and what comparable properties in the area have sold for. Buyers are welcome, even encouraged, to hire their own appraiser, but it's important to understand that the assessment is an objective one, regardless of who is paying for the service.

In that same vein, the appraisal is a wholly independent aspect of the buying process from the home inspection, and it's imperative house hunters understand what each process entails. Put simply, the inspector is investigating the structural condition of a home and examining whether any repairs might be needed, as well as what they would cost. The appraiser, on the other hand, is essentially operating under the assumption that the property is in good working condition and estimating the value accordingly.

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