How can I challenge or confirm a shady home appraisal?

Question

I just built a new home and am finishing up the loan process. In the initial paperwork, the purchase price of the home was supposed to be 270k, but due to additions I wanted it ended up being around 280k. The bank sent an appraiser to the home with the initial paperwork. He quoted the home being worth almost exactly 270k. Since that was 10k shy of what the purchase price would be, that would cause problems. The loan officer talked with the appraiser to see if he could change it. The appraiser then appraised the home at being worth almost exactly 280k.

A second appraiser sent by the county appraised the home to be over 300k. A 20k difference in the value of the home?

So my understanding of private mortgage insurance (PMI) is that I need to pay insurance until 20% of the value of the home is no longer owned by the bank. Or in other words, the bank owns 80% or less of the value of the home. Since the bank appraiser appraised the home at almost exactly the purchase price, that seems like it maximizes the amount I'll have to pay in PMI. However, if the bank were to go by the county appraisal, there is a 20k difference in the value of the home and the loan amount. Does this appraiser have an incentive to value the home as low as possible?

And the property tax goes by the county appraisal, which means the higher the appraisal the more property tax I pay. So does this appraiser has an incentive to value the home higher?

I may be way off base in all this, so please correct me where wrong. Is this legal? Is there anything I can do, like get a different appraisal that the mortgage insurance company would adhere to? Or am I just being paranoid and I should put away my tin hat?

Answer 1

mhoran got right to the heart of it. There really is no relationship between the government appraisal and the one obtained for your mortgage at the bank.

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On the government question...

I own some rental property in Utah County near BYU (I see your profile says you're in Utah), and so I went to the Utah County tax assessor's website to see what they might say.

As far as your situation with the government appraisal, you should be able to appeal it based on a lower appraisal. You might even bring in the lowest one that you've got, and see what they come back with. Usually the county appraisal division sets a formula by neighborhood based on some very broad characteristics, and then only revisits it every couple years.

Sometimes they aim a little bit higher if they think property values are going to appreciate... which Utah is likely going to see over the next few years. If there's anywhere to keep your tin hat on and save yourself some money, it's here. :)

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As far as the bank appraisal is concerned, frankly, the appraiser was probably thinking that they were doing you and the bank a bit of a favor. It has more to do with how the bank makes its lending decisions than anything regarding sneaky profit maximization.

It's practically impossible for you to get a mortgage on a property that appraises for less than the mortgage amount. It is complicated, and requires extra money out of your pocket up front in the transaction, for you to get a mortgage outside of a certain loan-to-value ratio. So on the one hand, even though it feels like the bank is somehow ratcheting up their profits through collecting extra PMI, they aren't. Here is why.

The fact that you are mentioning PMI means that you are probably putting up a down payment of less than 20% of the value of the purchase price. No big deal, it's probably your primary residence and you're very excited for your new house. You should be!

So, let's say you're putting down 7% as a down payment and doing an FHA loan. If your sales price with the extra additions was $270K, then you needed to bring $18,900 as a down payment. You would get a mortgage for the rest ($251,100) and have a 93% loan-to-value ratio (251,100 / 270,000). The bank would be fine with that on an FHA loan. They will take the higher risk because their butts are covered under the PMI insurance umbrellla... that's why you are paying mortgage insurance.

But now, with the extra additions/whatever, your purchase price is $280000. You probably aren't bringing any extra money to the table, and so you needed a mortgage for the remainder. You would have a new mortgage of 261,100 = (280,000 - 18,900) which is a loan-to-value ratio of 96% (261,100 / 270,000). The bank would not be able to make this loan for you, because the maximum LTV on an FHA loan is 95%.

There are two options... they can either ask you for more money--and risk pissing you off and you going to a different bank. Or they can just talk to the appraiser and get him to revisit the appraisal. I'm sure you can imagine how outraged you would be, and how strung out you would feel, if they hit you up for more money now!

At the end of the day, it's just them trying to get the deal done as far as the mortgage appraisal is concerned.

Answer 2

There is no relationship between the government appraisal and the mortgage appraisal.

In some parts of the United States that is general advice, in other parts of the US by definition they will never be equal.

In some jurisdictions the government appraises every year in other places every three years. In some jurisdictions the maximum increase or decrease in government appraisal is set by law. But then they reset after the house is sold.

Some jurisdictions use an automated process, others do a more detailed/individual process.

Since the government also sets the rate, the actual amount of the tax appraisal is not important, what is important is the relative rate to the rest of the homes in the jurisdiction.

With new construction it can be vary hard to get an accurate appraisal, especially if all the houses are new. It is likely that an appraisal will match the purchase price because that is the only evidence of the value.

Unless a review of the documents shows something was missed, the appraiser will not even consider the government appraisal.

Answer 3

Appraising is not an exact science. Two different appraisers could give different values on the same day; generally, an appraisal will give a range of values based on recent sales, comparable homes in the area, etc and making allowances for the unique properties of your home in particular. However, they will almost never come out to exactly the same value.

Since even with an appraisal of $300,000 your loan would still be 93% of the value of the home, you would still need PMI.

I would wait between three and five years. This will give time for a) paying down some principal, and b) the house to appreciate. At that point, you could look at eliminating the need for mortgage insurance.