There are several reasons to refinance your home mortgage, and all of them are equally valid. Maybe you’re looking to consolidate debt. Or maybe you want to convert your home equity to cash for a sizable expense for renovations or to invest in a new business.
No matter your reason for refinancing, it’s crucial to understand what goes on behind the scenes. One of the steps you’ll need to take when refinancing is having your home’s value appraised.
As a homeowner, you may be familiar with the process of getting a home appraisal. However, there are some notable differences between a purchase appraisal and a refinance appraisal. We’ll be breaking down the process of getting a home appraisal for refinancing.
Read on to discover what to expect during a refinance appraisal and what to do if your appraisal value is too low.
Before Requesting to Refinance Your Home Mortgage
Before you even file that request, ask yourself: Do you need to refinance your home mortgage? Or perhaps there’s another avenue you can take. Have you also thought about home equity loans? When it comes to equity loans, does a home equity loan require an appraisal to get approval? The point is, before making a decision, ask, research, and explore all the home financing options.
What Does Appraisal Have to Do with Refinancing?
Because a home mortgage is essentially a loan, the lender (in most cases, the bank) has an interest in the value of your home. When you purchased your house, you likely had it appraised so that the bank had a clear idea of the home’s value. Essentially, banks want to know that they’re not loaning you more money than your home is worth.
In the time that has passed since you first bought your home, your property value has most likely appreciated or depreciated. As such, the lender wants to know this new value, too, since it can affect the amount of equity you hold in your home. A house appraisal for refinancing purposes makes this information available to the bank—and to you.
In most cases, you’ll need an appraisal to refinance your home, though there are exceptions. For example, if you have a VA loan, you may be eligible for the Interest Rate Reduction Refinance Loan (IRRRL), which allows you to refinance without an appraisal.
With that said, without an appraisal, you can only refinance your loan’s term, interest rate, or structure. If you want to modify your mortgage type, you’ll need an appraisal.
What Happens During a Home Appraisal for Refinancing?
When you schedule a refinance appraisal with the bank, a certified professional will visit your home to determine its value. The lender will often engage an appraisal management company (AMC) to perform an assessment. Neither the bank nor the homeowner can directly select the home appraiser, so the idea behind using a third-party AMC is to avoid any bias.
Home appraisals for refinancing typically last between 30 and 60 minutes. During that time, the appraiser will perform a walkthrough, making sure to:
- Note the dimensions of the home
- Examine the amenities
- Gauge the overall condition
- Take photos of every room, as well as the exterior
After completing this home appraisal checklist, the appraiser will look at recent home sales in your neighborhood to come to a conclusion about your home’s value and report it to the bank.
Once again, this process will feel familiar if you already had your home appraised when you bought it (and you probably did). However, there is one major difference: you may join the appraiser during the visit because you are the homeowner. If you’re present, you can show them any renovations you’ve made and answer any questions, which can lead to a higher home value overall.
Do Appraisers Know the Refinance Amount?
No, appraisers don’t know the refinance amount. Because appraisers must be unbiased, their knowledge about your home and its value is based solely on what they can see and infer from other homes in the area.
In fact, there are federal rules in place to inform the way appraisers and lenders can interact during the appraisal refinance process. After the 2007-2008 housing crisis, the government intervened to create more strict policies around lending and appraiser relationships.
In 2010, Congress passed the Dodd-Frank Act. One section of the act aims to increase appraiser independence, eliminating outside influence and making transactions more transparent.
All of this is to say that your appraiser should not have any insider information about your mortgage or refinancing amount. Licensed and certified home appraisers should always follow the Uniform Standards of Professional Appraisal Practice (USPAP) set out by The Appraisal Foundation. If you have concerns about inappropriate conduct, you can file a complaint with the Appraisal Complaint National Hotline.
(Note that the hotline is only for allegations of non-compliance with USPAP and not for reporting low appraisals).
What Happens If a House Is Not Approved for Refinance?
While refinancing your home is relatively straightforward, it’s not always a sure shot. There is a chance that, even after your home is appraised, your request to refinance your mortgage may be denied.
If your home is not approved for refinancing, there are a few consequences. For one, you’ll be out the roughly $300-$500 you had to spend on a home appraiser. And, of course, you won’t be able to follow through on whatever plans you had after your refinancing went through.
Thankfully, if you’re still in the planning stages, there are steps you can take to increase the chances that the bank will approve your refinancing request.
Reasons You Wouldn’t Be Approved
To improve your odds of successfully refinancing your mortgage, do your best to avoid any of the following:
- A low credit score – Late payments and existing debt can drive a credit score downwards. Aim for a credit score at least in the mid-600s to have a better chance of refinancing. You can improve your credit score by eliminating debt.
- A high DTI – Your debt-to-income ratio (DTI) is calculated by taking your total monthly debt payments and dividing that by your gross monthly earnings. Banks use this figure to ensure you can pay your mortgage. Once again, you can improve your DTI by paying down existing debt.
- An “underwater” mortgage – If you owe more money than your home is worth, your mortgage is considered “underwater.” This can happen when the value of your home drops significantly, and it means your refinancing request will generally be denied. To avoid this scenario, make extra pre-payments on your mortgage when possible.
What To Do If The Appraisal Is Low
In some cases, your home appraisal for refinancing might be lower than what you expected. If your appraiser comes back with a low appraisal, you can take a few different routes.
1. Examine the Appraisal Report
A low appraisal could be the result of an honest mistake. Something as simple as a miscalculation of your home’s square footage can lead to a lower appraisal. You have the right to request a copy of the report, so be sure to confirm the appraiser didn’t miscount any bedrooms or bathrooms or forget about a valuable upgrade you made. This could result in you missing out on a new mortgage rate.
2. Ask for a Second Opinion
If you’ve triple-checked the appraisal report and find an error, it may be time to appeal the appraisal. The appeal process involves contacting the mortgage lender or the appraisal management company with evidence that the value is below the market rate.
Unfortunately, appeals are unlikely to succeed. Still, it can be worth trying, especially if you feel that the appraiser missed a crucial detail or compared your home to other incomparable properties. For example, if the report juxtaposed your house with one in a less desirable neighborhood, you may be able to argue that the evaluation is unfair. Another option is to compute your home’s fair market value (FMV) and then pick the appraiser that comes up with a similar figure.
3. Do a Cash-In Refinance
If your appeal is denied and you still want to refinance your home, you can choose to carry out a cash-in refinance. This process involves paying a large sum of money (usually several thousand dollars) to make up the difference between the amount of your loan and the appraised value of your home.
However, because cash-in refinancing is like making a second down payment on your home, this strategy is out of reach for many Americans. So, now what?
4. Choose a Sale-Leaseback: An Alternative Solution to Refinancing
Depending on your reasons for wanting to refinance, there may be other options for you. In fact, refinancing isn’t always the best option for homeowners. Some other options you can consider include home equity loan and home equity in line of credit (HELOC). However, a sale-leaseback program may provide a better alternative to a home equity loan or HELOC.
A sale-leaseback solution allows you to sell your home and lease it back, and convert your home’s equity to cash. If you’re looking to secure extra funds for a new business venture or home upgrades, consider a sale-leaseback program.
Solutions for Homeowners
Sale-leaseback programs offer a simple, less restrictive way to get you the cash you need. You can sell your house while you continue to live in it, so you can take advantage of liquidity without having to refinance.
There are several reasons to refinance your home mortgage, and they are all equally valid. You may be familiar with getting a home appraisal for refinancing, but there are some differences you want to be aware of. If you are still unsure of alternative options to refinance your home mortgage, after reading this article, consult a financial advisor to discuss your options.
- United States Census Bureau. Selected Housing Characteristics. https://data.census.gov/cedsci/table?d=ACS%201-Year%20Estimates%20Data%20Profiles&tid=ACSDP1Y2019.DP04&hidePreview=false
- CFTC. Dodd-Frank Act. https://www.cftc.gov/LawRegulation/DoddFrankAct/index.htm
- Smart Asset. What Is Fair Market Value and How Is It Calculated? https://smartasset.com/financial-advisor/fair-market-value