{"id":17197,"date":"2020-06-17T06:51:36","date_gmt":"2020-06-17T13:51:36","guid":{"rendered":"https:\/\/www.homelight.com\/blog\/?p=17197"},"modified":"2022-05-05T13:06:24","modified_gmt":"2022-05-05T20:06:24","slug":"seller-postponed-appraisal-rule-impacts","status":"publish","type":"post","link":"https:\/\/www.homelight.com\/blog\/seller-postponed-appraisal-rule-impacts\/","title":{"rendered":"What\u2019s the New Postponed Appraisal Rule, and Will Your Home Sale Be Affected?"},"content":{"rendered":"

If you\u2019ve heard rumblings about a new postponed appraisal rule<\/a> announced by the Federal Reserve in April 2020, you might be wondering what the implications are for you \u2014 either as a homeowner or someone thinking about selling their home in the near future. We talked with some veteran real estate agents and appraisal experts, and here\u2019s the gist of what we found.<\/p>\n

The postponed appraisal rule was created to accommodate the surge of refinancings driven by low mortgage interest rates. In the wake of COVID-19 and the overall rise in demand for appraisals, home appraisals have taken longer to complete and held up financing as a major bottleneck. Delaying the appraisal, in theory, helps to streamline some of those refis; however, there\u2019s a catch. The rule doesn\u2019t apply to government-backed loans, so it doesn\u2019t work for most mortgages.<\/p>\n

As a result, the impact of the new rule isn\u2019t as widespread as you might think. In addition, if you\u2019re selling a home to a buyer who is financing the purchase, you\u2019ll still need to go through the appraisal process. Read on to learn more about the ins and outs of the postponed appraisal rule, as well as how it will (and will not) affect your situation.<\/p>\n

\"There<\/a>
Source: (create jobs 51 \/ ShutterStock)<\/figcaption><\/figure>\n

Why is an appraisal necessary?<\/h2>\n

Unless you\u2019re working with an iBuyer, investor, or someone with cash on hand<\/a>, the buyer of your home will likely need a mortgage to finance the sale. In that case, the lender will require an appraisal to ensure that they\u2019re not loaning out more than the property\u2019s fair market value. This helps protect the lender from significant loss on the property if the buyer defaults on the loan, and it also enables them to sell off the loan on the secondary mortgage market<\/a>.<\/p>\n

If the appraisal comes in lower than the contract price, the deal could be in jeopardy. To save the sale, the buyer could pony up the extra cash, the seller might lower the home\u2019s price, or the two could work together to close the gap.<\/p>\n

How COVID-19 changed the home appraisal process<\/h2>\n

In a \u201cnormal\u201d housing market, the appraiser typically visits the home in-person and does a physical walkthrough, looking at all of its major systems and assessing its condition.<\/p>\n

But starting in mid-March, when the coronavirus pandemic led to stay-at-home and shelter-in-place orders, some real estate transactions used alternative appraisal methods<\/a>.<\/p>\n

These included desktop appraisals, where the appraiser bases the valuation solely on data, and hybrid appraisals, which included resources like property photos, information from previous property inspections, drive-by assessments, or video tours. These alternative appraisal rules applied to appraisals conducted through May 17.<\/p>\n

Kevin Kendrick<\/a>, a top real estate agent in Orlando, Florida, has seen lenders using only comps and other records to assess the value and waiving the actual in-person appraisal.<\/p>\n

“In certain circumstances, a financial institution can use an existing evaluation or appraisal instead of obtaining a new appraisal, as long as the institution can confirm that the evaluation or appraisal remains valid,\u201d notes Kenon Chen<\/a>, EVP of corporate strategy for Clear Capital.<\/p>\n

\"Understand<\/a>
Source: (mojo cp \/ ShutterStock)<\/figcaption><\/figure>\n

What is the postponed appraisal rule?<\/h2>\n

On April 14 of this year, the Federal Reserve<\/a> announced that in certain circumstances, appraisals and evaluations of residential or commercial properties can be deferred for up to 120 days after closing. This four-month postponement is in effect until December 31, 2020, unless the Fed opts to extend it.<\/p>\n

Why the new rule? According to the Fed, it was created in order to \u201cextend financing to creditworthy households and businesses quickly in the wake of the national emergency declared in connection with COVID-19.\u201d<\/p>\n

It\u2019s important to note that the postponement rule only applies to mortgage loans made by banks that they intend to keep in their own portfolios. Most lenders sell home loans on the secondary mortgage market<\/a> to one of the government-sponsored entities, which means the majority of loans won\u2019t be impacted by the rule.<\/p>\n

\u201cBy requiring the banks to keep the loans in-house, the regulators have ensured that the banks will proceed with caution,\u201d notes Mason Spurgeon<\/a> with Spurgeon Appraisals. \u201cThis will minimize the risk of bad or fraudulent loans.\u201d<\/p>\n

What loans are exempt from the postponed appraisal rule?<\/h2>\n

The rule doesn\u2019t apply to any loans that are sold to or guaranteed by a government agency or government-sponsored enterprise, such as FHA, HUD, VA, or Fannie Mae\/Freddie Mac loans. \u201cThese loans will still need appraisals before closing because they have independent lending requirements,\u201d explains Louisiana real estate investor Travis Steinemann<\/a>. \u201cThey may update them to match this rule, but that is just speculation.\u201d<\/p>\n

The rule also excludes \u201c…transactions for acquisition, development, and construction of real estate,\u201d which means it only pertains to refinance loans, says Spurgeon. \u201cThe lending institutions will still be required to have certified appraisals before closing on purchases,\u201d he notes.<\/p>\n

\"\"<\/a>
Source: (Andrey_Popov \/ ShutterStock)<\/figcaption><\/figure>\n

How is value assessed with postponed appraisals?<\/h2>\n

Chen points out that even when appraisals and evaluations are deferred, \u201cthe agencies expect institutions to use best efforts and available information to develop a well-informed estimate of the collateral value of the subject property.” In other words, even in the absence of a traditional appraisal, the lender is still expected to do a thorough job of determining the home\u2019s value.<\/p>\n

According to the rule, lending institutions are to \u201cdevelop procedures for estimating the collateral\u2019s value for the purposes of extending or refinancing credit.\u201d Based on this guideline, it seems the lenders will be able to create their own valuation policies.<\/p>\n

\u201cMany banks already have policies in place to complete in-house collateral evaluations on real estate properties that have lower loan amounts, so they will likely just extend this same process to the larger loans,\u201d Spurgeon predicts.<\/p>\n

How might the postponed appraisal rule impact sellers?<\/h2>\n

As the postponed appraisal rule delays valuations for refinances, the process of selling a home could go quicker than usual, says Spurgeon. \u201cWith restrictions lifted on refinance appraisals, appraisers will be able to give priority to purchase appraisals, which still have to be completed before closing,\u201d he notes.<\/p>\n

Steinemann points out that the postponed appraisals can also be beneficial for those who are refinancing, because it can enable them to liquidate equity much quicker. \u201cIf a homeowner needs the money to stay afloat until this is over, this is one way to do it,\u201d he says.<\/p>\n

As consumers face unemployment fallout from the coronavirus and asset losses, tapping into home equity can provide much-needed economic relief.<\/p>\n

\u201cDepending on your current mortgage rate and how much the closing costs associated with the new loan are, even a small reduction in your rate could yield significant savings over the life of the loan,\u201d notes BBVA USA Head of Consumer Direct Mortgage Lending Bob Jones in a blog post<\/a>. \u201cOn the other hand, competitive rates alone may not be enough to justify refinancing if you don\u2019t plan to stay in your home long-term.\u201d<\/p>\n

\"Understand<\/a>
Source: (Indypendenz \/ ShutterStock)<\/figcaption><\/figure>\n

What happens if the appraisal comes in low after closing?<\/h2>\n

\u201cThe biggest concern with this rule is the property value falling in those 120 days \u2014 which is likely in an unstable economy like the one we face right now,\u201d says Steinemann.<\/p>\n

So, what happens if the loan amount for a refinanced property is higher than the appraised value after closing? Does the lender cancel the loan, change the terms, or require more money down from the homeowner for the refinanced loan?<\/p>\n

The rule isn\u2019t clear about that outcome, Spurgeon notes: \u201cIt only states that the banks should do their best to mitigate the risk and must keep the loan on their books. So, it appears that the banks will have the most to lose if the real estate was not properly valued.\u201d<\/p>\n

In a nutshell, says Steinemann, the postponed appraisal rule is the government\u2019s way of trying to prevent a real estate collapse and to keep the money flowing despite tighter lending standards. \u201cIt will be interesting to see how this works out over the next few months, and what does happen if property values fall between closing and appraisal,\u201d he says.<\/p>\n

If you\u2019re selling a home to a buyer who is financing the purchase, you\u2019ll still need to go through the appraisal process and the postponement rule won\u2019t apply. But if you\u2019re a homeowner who is considering refinancing during this uncertain time, you may find that the appraisal is shelved until after you\u2019ve closed on the new loan.<\/p>\n

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