You’re ready to refinance your existing mortgage loan to one with a lower interest rate. There’s just one problem: Your lender refuses because your home has been appraised at too low of a value. Are your hopes for a refinance dashed?
It's a last-ditch effort, but you can appeal the appraisal. Just don’t get your hopes too high. Most lenders require that you have at least 20 percent equity in your home before they’ll approve your refinance. If your appraisal comes in too low to give you this equity, you’ll face an uphill battle in getting a change, even if you appeal.
"You'll need to prove that there was some factual error with the appraisal," said Joe Parsons, managing partner with PFS Funding, a mortgage banker in Dublin, California. "If you can't show that, you won't have much luck winning an appeal."
A challenging task
If you think the appraisal of your home is too low, you can contest it with the appraiser. Matt Weaver, manager and vice president of sales at Finance of America Mortgage in Boca Raton, Florida, said that he's seen appraisals overturned maybe once out of every 30 times they are appealed, a low success rate.
"It is very rare," Weaver said. "The appraisers are armed with a lot of data. They know a lot about your house and your neighborhood before they even get to your property. Appeals are often not successful."
But there is one exception. Weaver said that homeowners boost their chances of a successful appeal when they can prove that appraisers compared their homes to the wrong properties when calculating a home's appraised value.
Appraisers rely heavily on what are known as comparables, or comps, when determining the value of homes. This means that they look at comparable homes in the same area that have sold recently. If a home similar to yours in the same neighborhood sold for $250,000 last week, appraisers will generally appraise your property at or near that price.
Sometimes, though, appraisers might miss a better comparable to your home, Weaver said. Maybe a home very similar to yours sold for $270,000 just two days before an appraiser appraised your property. If the appraiser didn't consider that sale, and you bring it to the appraisal company's attention, you might be able to successfully appeal the lower appraisal. If you do, the appraisal company will order a new appraisal that accounts for the new comparable.
"The most successful way to overcome a value that the owner doesn't feel is right, nine out of 10 times, is to find a comparable sale that has been missed," Weaver said. "The homeowner knows the community. The appraiser is only going off data. In many cases, the homeowner knows of a sale that just transpired but hasn't yet been recorded at the courthouse. That is the most common way in which an appraisal can be successfully appealed."
Why appraisals matter
Low appraisals can quickly scuttle a refinance. Say the appraiser values your home at $220,000, but you owe $195,000 on your existing mortgage loan. That gives you 11 percent equity in your home, far less than that magic 20 percent. To close the refinance with a lender requiring that 20 percent equity, you’d need to appeal the appraisal.
When your home is appraised before a refinance, you hope that the appraisal comes in high enough so that your 20 percent equity is preserved. For instance, if you owe that $195,000 on your loan and your appraiser values your property at a far higher $250,000, you’ll have 22 percent equity in your home, clearing that all-important 20 percent threshold.
You do have other options: You can seek a refinance, say, through the federal government’s Home Affordable Refinance Program, or HARP. This federal program allows homeowners to refinance without 20 percent equity in their properties. However, owners have to meet certain eligibility requirements to qualify.
Homeowners work with their lenders to appeal the appraisal. This involves submitting what is known as a request for reconsideration of value (ROV) report to the appraisal company. This document, which the appraisal company sends out, gives homeowners the chance to state the reasons they believe that the original appraisal is incorrect.
Your lender can provide the evidence, such as a missed comparable, when working with you to to fill out the form. The lender will then send the letter to the appraisal management company behind the appraisal.
Even with this request, though, there is no guarantee that the appraisal company will order a new appraisal. The company might reply that it stands behind the original appraisal, in which case your refinance might be scuttled. But if you do provide compelling evidence, your ROV might result in a new, higher appraised value for your property.
How to win an appeal
As Weaver said earlier, winning an appeal is no easy task. But there are steps you can take to increase your odds.
Eric Rosen, associate real estate broker with Halstead Property in New York City, said that appeals can be successful when homeowners stick to real facts. But a successful appeal takes significant research, mostly to find better comparables that appraisers could have used.
Rosen points to the Manhattan market in which he works. Here, homes can vary significantly in price from one block to the next. Homes in one neighborhood might sell for $50,000 more on average than homes in a neighborhood two blocks away, he said.
"What is really important is to take a look at what comparable properties were used and how they are different from the property that was appraised," Rosen said. "There is real work that will be required to appeal an appraisal. That said, if you do the work, it can be done."
First, make sure you can provide missed comparables. This, again, is the surest way to overturn an existing appraisal. Work with your lender, though, to find the right comparables. A home that sold for $400,000 might not be a good fit if it is located two neighborhoods away. Likewise, a home that boasts two more bedrooms and 700 more square feet of living space than yours is not a good comparable even if it is located next door.
Parsons gives a good example. He recently appealed an appraisal for one of his refinance clients. The home sat in the middle of a planned unit development in Florida in which many of the homes are near-clones of each other. The appraiser, though, did not include a recent sale of one of these near-clone properties when determining the property’s value. Parsons pointed this out in the ROV and successfully won a higher appraisal.
“The comparables really do make the difference,” Parsons said. “If you can find evidence that the appraiser ignored comparable sales or didn’t use the right ones, that is when you most often see appeals succeed.”
Next, look for errors in the original appraisal. If the appraiser stated that you have one bathroom when you really have two full baths, include that in your appeal. If the appraiser undercounted your square footage, do the same.
You can also hunt for what you believe to be incorrect comparables. Maybe one of the homes that the appraiser used for a comparable was sold through the foreclosure process. That home might have sold for thousands of dollars under its true market value because of this. Using this home as a comparable could unfairly bring the appraised value of your property down.