Other Real Estate & Mortgage Resources

This guide includes information about home appraisals required for mortgages, dealing with bankruptcy issues when applying for a home loan, downpayment on your home to reduce the mortgage amount and the interest rate and home insurance.

Appraisal Needed To Obtain a Home Loan

Usually, individuals applying for a loan are only interested in obtaining the loan and unfortunately are not worried about the prudence of buying the property at the agreed price. In fact, many purchasers will try to encourage appraisers to increase the appraised value so that they can purchase the home regardless of its value.

The majority of real estate appraisals are requested by mortgage companies to validate the property’s purchase price for loan purposes. Except for periods of very low interest rates when everyone is refinancing, most loans are for the purchase of real estate and ordered after a sale price is negotiated. Purchasers mistakenly assume that mortgage companies are looking after their interests in the purchase transaction.

The law states that if the mortgage company orders the appraisal, the appraiser is responsible only to the mortgage company. We expect mortgage companies to be prudent and they should be, but being prudent is protecting their interest, not necessarily the purchaser’s. The mortgage company’s position is:

It has two sources of repayment: the purchaser’s income and the property.
The responsibility to repay the loan is not based upon the property’s value, so the purchaser is obligated to pay the note even if the property value declines to zero.
The loan may be insured or guaranteed by a government agency.
The government does not promise to pay the purchaser’s debt if the property value is wrong.
If the loan is greater than 80% of the value, a portion of the loan may be insured by a private mortgage insurer.
There is no decrease in risk for the purchaser regardless of the loan to value ratio. The investment by the purchaser is the same, a mixture of personal cash and a loan that must be repaid.

Appraisal to Establish House Market

In the real world, very few individuals order appraisal reports to establish an offering price or to substantiate a purchase price. At the point that an offer to purchase (in a typical residential transaction) is made, the price has been set by other parties, not the purchaser. The price has been determined by the seller, who wishes to obtain the highest price possible, or the agent, who receives a percentage of the price as compensation and often represents the seller in the transaction.

The real estate agent will typically perform a comparative market analysis (CMA). The appraisal laws in most states allow real estate agents to perform CMAs without an appraiser’s license or certification. A CMA is a necessary part of the agent’s preparation for a listing and consists of examining sales of properties in the area to arrive at a listing price. The reliability of the CMA depends upon the agent’s experience and the characteristics of the property. The agent will suggest a selling price to the seller based upon the analysis. However, neither the seller nor the agent is bound by the results of the analysis, and the agent is not required to follow any formal procedure in completing the CMA. If a seller wishes to list the property at a price higher than the price suggested by the agent, then the agent may be forced to accept the listing at that price or risk losing a commission.

Purchasers believe that they are getting a good deal if they make an offer lower than the listed price, but how far above the market value was the property listed? 10%, 15%, maybe even 20% above the fair market value? A negotiated price of 10% less than the listed price on a property that was listed at 20% above its value is not a bargain. The agent cannot tell the purchaser that the offered price is higher than the value, or even higher than their own CMA. In most states, they must submit the offer to the seller.

The seller of a property may want to order an appraisal before listing the property. Of course, the cost of the appraisal is always a deterrent, especially if the seller knows that a buyer will pay for it when applying for a loan, but the appraisal is often justified. The seller could lose a sale if the property appraised for less than the sale price when appraised by the appraiser.

Other Reasons to Order an Appraisal

There are many reasons to obtain an appraisal. The most common reason is for a real estate or mortgage transaction, but we have compiled a list of other reasons you may need to order an appraisal.

To Settle an Estate
Taxing authorities such as the IRS often require appraisals to establish the value of an estate when a death occurs. Generally, the survivors want a conservative value estimate that limits their tax liability as much as possible. Most estate appraisals are ordered by attorneys, not by the survivors.

To Establish the Replacement Cost for Insurance
Appraisals obtained for establishing the loss risk in case of fire are often limited to providing an estimate of the replacement or reproduction cost of the improvements. The insurable value may not be representative of market value and usually does not include the value of the land. Insurance agents may order appraisals when their standard cost service manuals are not adaptable to a custom home or structure. Property owners may order appraisals to contest the annual appreciation increases mandated by some insurance companies, especially when the increase in the insurance coverage results in an unrealistic premium.

To Establish Just Compensation for Condemnation
The appraiser may represent either the landowner or the condemning authority. Usually, the government entity that needs the land for public use orders an appraisal and offers to purchase the land for the value indicated by the appraisal. If the landowner feels that the amount offered by the condemning authority is not enough, then the landowner may also order an appraisal. If the parties cannot agree on a price, then the matter will be settled in court with each appraiser testifying on behalf of their respective value estimates. The appraisers are not advocates for their client; they are expert witnesses trying to
support their value estimates. Often landowners do not consider ordering another appraisal from an appraiser of their choice. Usually, they try to settle with the authority by negotiation rather than incur the expense of an appraisal. It is obvious that the landowner’s negotiating position would be enhanced if a supporting professional appraisal report were available.

To Contest High Property Taxes
If property owners feel that their property is assessed too high, then they may order an appraisal from a qualified appraiser to contest the assessment. In certain parts of the country this practice is common, but many property owners are not aware that this avenue for reducing their tax burden is available. The return on investment is easy to perceive when the cost of an appraisal is compared to several years of lower taxes. Sometimes these assignments include an appearance in front of the equalization board to argue the landowner’s case. The appraiser, however, must be careful not to base the appraisal fee on the dollar amount of the appraised value, which could be a violation of the USPAP.

Low Down Payments and Mortgage Insurance

Mortgage companies usually require insurance on low down payment loans for protection in the event that the homeowner fails to make his or her payments. When a homeowner fails to make the mortgage payments, a default occurs and the home goes into foreclosure. Both the homeowner and the mortgage insurer lose in a foreclosure. The homeowner loses the house and all of the money put into it. The mortgage insurer will then have to pay the mortgage company’s claim on the defaulted loan.

For this reason, it is crucial that the family buying the home can really afford it, not only at the time it is purchased, but throughout the time period of the loan.

Although the cost of the mortgage insurance is paid by the home buyer, or borrower, the mortgage insurer works directly with the mortgage company. Mortgage insurance is available to commercial banks, savings & loans and mortgage bankers, all of whom offer mortgage loans to home buyers.

Remember that mortgage insurance is not the same as credit life insurance, also called mortgage life insurance. This type of policy repays an outstanding mortgage balance upon the death of the person who took out the insurance policy.

Down Payment Loans and Gifts

Loans and gifts can help with your down payment but you can not use this strategy for all loan programs. The most popular program for this tactic is the Federal Housing Administration or FHA. FHA allows 100% gift funds for your down payment. The gift can be from any relative or can be collected through new innovative programs, like the Bridal Registry where couples receive money into an account that can be used for the down payment.

Another popular tactic, which can be used in a wider range of programs, is to borrow from your 401K program. If you have a 401K program with your employer, you can withdraw without a penalty for your down payment and pay it back over a specified period. There are some drawbacks, the payment will be used in qualifying and your 401K account will not continue to grow as fast. Even with these drawbacks, it is often a smart move if this is your only option.

Qualifying for a Low Down Payment Loan

To be considered for a low down payment loan, you generally need to have:

Sufficient income to support the monthly mortgage payment
Enough cash to cover the down payment
Sufficient cash to cover normal closing costs and related expenses (explained below)
A good credit background that indicates your payment history or “willingness to pay”
Sufficient appraisal value, which shows the house is at least equal to the purchase price
In some instances, a cash reserve equivalent to two monthly mortgage payments

Closing costs, or settlement costs, are paid when the home buyer and the seller meet to exchange the necessary papers for the house to be legally transferred. On the average, closing costs run approximately 2% to 3% of the house price. This percentage may vary, depending on where you live.

Closing costs include the loan origination fee (if not already paid), points, prepaid homeowner’s insurance, appraisal fee, lawyer’s fee, recording fee, title search and insurance, tax adjustments, agent commissions, mortgage insurance (if you are putting less than 20% down) and other expenses. Your mortgage professional will give you a more exact estimate of your closing costs.

Points are finance charges that are calculated at closing. Each point equals 1% of the loan amount. For example, 2 points on a $100,000 loan equals $2,000. Companies may charge 1, 2 or 3 points in upfront costs in addition to the down payment. The more points you pay, the lower your interest rate will be. In some cases, you may be able to finance the points.

So How Much of a Mortgage Can You Afford?
There are two basic formulas commonly used to determine how much of a mortgage you can reasonably afford. These formulas are called qualifying ratios because they estimate the amount of money you should spend on mortgage payments in relation to your income and other expenses.

It is important to remember that the following ratios may vary and each application is handled on an individual basis, so the guidelines are just that — guidelines. There are many affordability programs, both government and conventional, that have more lenient requirements for low and moderate income families.

Many of these programs involve financial counseling for low and moderate income people interested in buying a home and in return, offer more lenient requirements.

Generally speaking, to qualify for conventional loans, housing expenses should not exceed 26% to 28% of your gross monthly income. For FHA loans, the ratio is 29% of gross monthly income. Monthly housing costs include the mortgage principal, interest, taxes and insurance, often abbreviated PITI. For example, if your annual income is $30,000, your gross monthly income is $2,500, times 28% = $700. So you would probably qualify for a conventional home loan that requires monthly payments of $700.

Any expenses that extend 11 months or more into the future are termed long term debt, such as a car loan. Total monthly costs, including PITI and all other long term debt, should equal no greater than 33% to 36% of your gross monthly income for conventional loans. Using the same example, $2,500 x 36% = $900. So the total of your monthly housing expenses plus any long term debts each month cannot exceed $900. For FHA the ratio is 41%.

Maximum Allowable Monthly Housing Expense
26% – 28% of gross monthly income – Conventional
29% of gross monthly income – FHA

Maximum Allowable Monthly Housing Expense and Long Term Debt
33% – 36% of gross monthly income – Conventional
41% of gross monthly income – FHA

One way to determine how much to spend for housing is to compare your monthly income with monthly long term obligations and expenses. Use the worksheet, “Evaluating Your Financial Resources,” to determine how much money you can spend on housing. Be sure to only include income you can definitely count on.

When budgeting to buy a home, it is important to allow enough money for additional expenses such as maintenance and insurance costs. If you are purchasing an existing home, gather information such as utility cost averages and maintenance costs from previous owners or tenants to help you better prepare for home ownership.

Homeowner’s insurance or property insurance is another cost you will have to consider. The lending institution holding the mortgage will require insurance in an amount sufficient to cover the loan. However, to protect the full value of your investment, you might want to consider purchasing insurance that provides the full replacement cost if the home is destroyed. Some insurance only provides a fixed dollar amount which may be insufficient to rebuild a badly damaged house.

Down Payment Assistance

Many local and state agencies run bond programs to generate funds to help individuals and families with a down payment. Contrary to public thinking, these bond issues are not a type of welfare. The government knows that it can be tough to buy that first home, especially on a limited income.

Most agencies are income sensitive, but you may be surprised by the high level of acceptable income. The income level is especially high if you have children or dependents. Most agencies also have purchase limits, but they are adjusted to the income qualifications level.

If you are able to obtain down payment assistance, you may receive a lower interest rate. The drawback is that it often takes quite a bit of work with extra paperwork and mandatory education classes. Our advice, find a realtor or mortgage professional who is familiar with both the local and state agencies and their policies.

Homeowners Insurance Information

When you insure your home, you should insure your home for the total amount it would cost to rebuild your home if it were destroyed. If you don’t have sufficient insurance, your insurance company may only pay a portion of the cost of replacing or repairing damaged items.

There are three ways to insure the structure of your home:

Replacement Cost: Insurance that pays the policyholder the cost of replacing the damaged property without deduction for depreciation, but limited to a maximum dollar amount.
Guaranteed Replacement Cost: Insurance that pays the full cost of replacing damaged property, without a deduction for depreciation and without a dollar limit. This coverage is not available in all states and some companies limit the coverage to 120 percent of the cost of rebuilding your home. This gives you protection against such things as a sudden increase in construction costs due to a shortage of building materials.
Actual Cash Value: Insurance under which the policyholder receives an amount equal to the replacement value of damaged property minus an allowance for depreciation. Unless a homeowners policy specifies that property is covered for its replacement value, the coverage is for actual cash value.

For a quick estimate of the amount to rebuild your home, multiply the local building costs per square foot by the total square footage of your house. To find out the building rates in your area, consult your local builders association or real estate appraiser.

Factors that will determine the cost to rebuild your home:

Local construction costs
The square footage of the structure
The type of exterior wall construction: frame, masonry (brick or stone) or veneer
The style of the house (ranch, colonial)
The number of bathrooms and other rooms
The type of roof
Attached garages, fireplaces, exterior trim and other special features like arched windows.

Also be sure to check the value of your insurance policy against rising local building costs each year. Ask your insurance agent or company representative about adding an “Inflation Guard Clause” to your policy. This automatically adjusts the dwelling limit when you renew your policy to reflect current construction costs in your area. Also, be sure to increase the limit of your policy if you make improvements or additions to your house.

Title Insurance

A policy of title insurance is a contract of indemnity between the insured and the insuring company relating to the title to the land described in the policy, protecting the insured against loss of damage by reason of defects, liens or encumbrances of the insured title existing at the date of the policy and not expressly excepted from its coverage.

The policy is issued after a complete search and examination of the public records and shows the condition of the record title, including any money obligations outstanding against the property, easements and other matters which may affect the rights of ownership, possession and use of the property.

Title insurance protects the “record” title, insuring it is good subject only to the exceptions expressly set out in the policy. lt also insures against certain matters which do not appear of record, such as forgery, identity of parties, incompetence of former owners, interest of missing heirs, and status of individuals not having the “right” to sell property.

There are different types of policies. Owners’ policies are issued to real estate owners. Purchasers’ policies are issued to purchasers of real estate under contract. Mortgage policies are issued to mortgage companies. In addition there are several other special forms of policies. There is a type of policy to meet the requirements of almost any form of real estate transaction.

Title Insurance FAQ

What Protection Does Title Insurance Give?
It insures that the “record” title, is good subject only to the exceptions expressly set out in the Policy. It also insures against certain matters which do not appear of record, such as forgery, identity of parties, incompetence of former owners, interest of missing heirs, and status of individuals not having the “right” to sell property.

What Risks Are Not Covered?
The standard owners policy and standard mortgage policy are based on public records of the recording district in which the land is located. It does not insure against matters which would only be disclosed by actual inspection or survey of the property. It does not insure against certain matters not shown by the public records such as unrecorded easements, liens or money obligations; unrecorded utility rights of way, public or private roads, community driveways and other types of encumbrances, or against the rights or claims of persons in possession of the property which are not shown by the public records.

Can Protection Be Obtained Against Matters Not of Record?
Upon application, the issuing company may specially cover matters which are disclosed by a physical inspection and/or a survey of the property, subject to any exceptions which the inspection will determine to be proper. An additional risk premium is charged for this type of coverage. Insurance of this kind is called “extended coverage.”

Are There Different Kinds of Policies?
Yes. Owners’ Policies are issued to real estate owners. Purchasers’ Policies are issued to purchasers of real estate under contract. Mortgage Policies are issued to mortgage companies. In addition there are several other special forms of policies. There is a type of policy to meet the requirements of almost any form of real estate transaction.

When Is the Policy Issued?
An owner’s policy protects only the owner while a Mortgage policy protects only the holder of the mortgage on the property. Separate policies are required to protect both interests. Special rates are available when both Owner’s and Mortgage policies are applied at the same time.

The Owners Policy of title insurance usually is issued after the deed to the buyer is ‘delivered’ and recorded. A Purchasers Policy is usually issued after the contract has been executed by both parties or after the signed contract has been recorded. The mortgage policy of title insurance is usually issued after the mortgage or deed of trust has been properly executed and recorded.

If I Was Insured When I Bought the Land, Why Should I Have It Re-Issued to My Purchaser When I Sell?
The coverage of your policy is against all matters that appeared of record up to the date of issuance of your policy. Since that time many documents may have been recorded, some of which may affect the title to your land. Taxes and assessments may have accrued and be unpaid. There may have been actions in court affecting your title. The purchaser is entitled to have full information and protection as to the condition of the title right up to the date of his purchase. In addition, there may be matters of record which would prevent either the seller or buyer from selling, buying, or mortgaging land until such matters have been cleared. These items include such things as federal tax liens, judgments, incompetence, divorce actions and other conditions which the title search may disclose.

How Are Premiums for Title Insurance Determined?
Title Insurance Premiums are determined by the amount and type of coverage provided. Unlike other insurance premiums, however, the title insurance premium is paid only once as the policy is effective for so long as title or “ownership” remains in the name of the insured, or his heirs or devises. Rates are filed with the insurance commissioner who regulates the activities of title insurers.

Flood Insurance

Flooding is not covered by a standard homeowners insurance policy. Usually Flood Insurance is a requirement to obtain a mortgage.

To determine if you need flood insurance, ask your insurance professional, mortgage company or neighbors about the flood history in your area. If there is a potential for flooding, you should consider purchasing a policy that covers the structure and your personal belongings.

Flood insurance can be purchased from an insurance agent or company under contract with the Federal Insurance Administration (FIA), part of the Federal Emergency Management Agency (FEMA). Flood insurance is only available where the local government has adopted adequate flood plain management regulations under the National Flood Insurance Program (NFIP).