When the Lender Says “No” (Part 1 of 2)

by Bernice Ross, Ph.D. MCC
Owner, Teleclass4U.com, LLC and RealEstateCoach.com

Copyright © 2007
RealEstateCoach.com and Teleclass4U.com
All rights reserved in all media.

You have a property under contract, the buyer is pre-approved, and the lender says, “Your buyer no longer qualifies for this loan.” What do you do?

There has been a quantum shift in the mortgage market. A new credit crunch is making it more difficult even for even “A+” borrowers to obtain loan approval. The days of lax underwriting are gone. For the first time in many years, agents are going to hearing “No,” even when their buyers may be highly qualified. The issue is how to avoid being turned down in the first place and secondly, if the lender does turn down your qualified borrower, what you can do to keep the transaction together.

According to Lou Barnes in his July 27, 2007 column in Inman News,

“A ‘credit crunch’ is a lender strike, and a bad one is a common initiator of recession: not just raising rates for risky deals, but choking off credit altogether.”

Barnes reported in an earlier column that the regulators at Freddie Mac and Fannie Mae are tightening standards on “A” borrowers. Barnes’ comment about a credit crunch seems to accurately portray what many borrowers are encountering all over the country. Buyers who would normally have no trouble closing are being subjected to a completely new set of underwriting standards in order to close what would normally be straight-forward transactions. Based upon previous markets where prices were declining and foreclosures were increasing, here are some of the common challenges that you may encounter.

Low Appraisals
Several weeks ago, I wrote two columns on the changing mortgage market. Several people took me to task for discussing how to keep the transaction together when the appraisal comes in low. Their concern was that I was recommending that the buyer should over pay for the property. There’s an underlying assumption here that the appraisal is correct. During my 29 years in the business, I have seen numerous instances where different bank appraisals came in at very different values. An appraisal is a snapshot of the value at a given moment. It is an opinion based upon objective data. The data is open to interpretation, however. Who’s to say which appraiser’s value is more accurate? Even more importantly, is the appraiser’s value more accurate than the amount that a qualified buyer elected to offer?

The crux of the issue is estimating the value for various improvements. For example, two properties may have exactly the same floor plan and virtually identical amenities. One has a pool and no view and the other has view but no pool. How much does the pool or the view add to the property? If the appraiser has no comparable sales with a view or a pool to work from, he or she will have to guess the value of those amenities. This is just one example of how appraisals can differ substantially based upon the fact that the appraiser has to estimate those values. This is also the same challenge that on-line valuation models encounter.

One of the best strategies to circumvent getting a low appraisal is to make sure that either the listing agent or the buyer’s agent provides the appraiser with the most complete set of comparable sales available. Many times the appraiser is relying on closed sales data and may not include properties that are still under contract. Be sure to include both sets of data, even if the appraiser elects to only use closed sales.

It’s also imperative that the comparable sales data be as detailed as possible. Determine if there was a virtual tour for each of the properties that you included in the comparable sales. If so, include a link or any pictures that are available on-line. If the pictures are no longer available, contact the listing agent to see if he or she can provide them. The more data you give the appraiser, the less likely you will be to have problems.

When prices are declining, appraisers tend to be very conservative. Since the buyer generally pays for the appraisal, most lenders will provide the buyer with a copy if asked. It’s an excellent practice to see what comparable sales were used in the appraisal. Sometimes, out of area appraisers will select comparable sales that are in two completely different market areas, even though they may be close to each other geographically. There may be new comparable sales since the appraisal was completed. If this is the case, submit the updated comparable sales to the lender along with a letter explaining the reasons the property should be appraised for more.

Bottom line: avoid these hassles by making sure that the appraiser has the best comparable sales available prior to making the appraisal.

Need more help with lending challenges? Look for Part 2 next week.