SANTA CRUZ (June 20, 2009) - Even though the buyer and seller agree on the sales price in the purchase contract, the lender may not accept it as the value of the property. Furthermore, the lender does not always accept the value that the appraiser comes up with. The lender’s underwriter scrutinizes the appraisal to determine its accuracy and validity.

The lender sees the property through the eyes of the appraiser and reviews it to make sure that it is completed to the standards that Freddie Mac and Fannie Mae and/or HUD demand. The appraisal is reviewed for not only valuation purposes but also to determine the property’s condition, use, functionality and for health and safety issues.

In an attempt to take fraud and misrepresentation out of the appraisal process, the Home Valuation Code of Conduct (HVCC) that became enforceable on May 1 has instituted many measures that appraisers must adhere to. For better or for worse, one of the results that we are seeing is that there has been an increase in the number of appraised values that are not coming up to the sales price. Of course, much of this is due to the fact that appraisers must take into account all of the distressed properties that are being sold as short sales, bank-owned properties or foreclosed properties.

This is not a new problem. We have always had to deal with some of these situations in the past. It is just that now this problem is occurring more; the good news is that there is more than one solution. Recently a client of mine agreed to pay $480,000 for a home and we had approved him for an 80 percent loan-to-value (LTV) loan of $384,000. However, with the appraised value at $460,000 we could only lend him $368,000 if he was to keep the LTV at 80 percent. I explained to him that lenders will use the appraised value or the sales price, whichever is LESS, to determine the LTV.

He had five options: 1) He could go back to the seller and renegotiate the sales price down or 2) he could take the loan for $368,000, which would require that his down payment be increased from $96,000 to $112,000 or 3) he could ask the seller to carryback a second mortgage for the additional $16,000 or 4) he could still seek a loan of $384,000, which would require mortgage insurance because the loan-to-value ratio is at 83.5 percent and would, in turn, require a monthly mortgage insurance premium or 5) he could back out of the transaction. He chose to come up with the additional cash but not all prospective homebuyers are able to do that. Be prepared for this eventuality and discuss your options in advance with your mortgage and real estate professionals.

This column is written every Saturday by Peter Boutell, Certified Mortgage Planner and a principal at Santa Cruz Home Finance. You may reach him at (831) 425-1250 of email him at Peter@SantaCruzHomeFinance.com.