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Business & Merchant

By Roger Dolanch, Broker/Owner

When obtaining a mortgage to finance the purchase of real estate, the borrower typically pays a non-refundable loan application fee of approximately $500. This fee is used to cover the costs associated with two very big lender concerns: the credit report and appraisal.

The first lender concern is the creditworthiness of the buyer. You see, the lender’s investor is asked to loan money to people they will never meet! Consider the fact that the source of all mortgage money is some form of somebody’s savings. Instead of investing in bonds, the stock market or putting the money into CDs, the mortgagor invests in mortgages. The intent is to earn a profit, over time, in the form of monthly payments that may last as long as 30 years.

When deciding whether or not to grant a loan to a particular borrower there are many things taken into account. Does the buyer hold a steady job? How long have they been there? Is their monthly income sufficient to make payments, maintain the property and live? Do they have enough money to close the sale? How many other debts do they have? What are the loan balances and monthly payments? Do they make payments in a timely fashion? What is their credit score? Are there any judgments or bankruptcies in their recent past? Do they pay child support? Historically, does it appear that this buyer can manage finances? Are we able to verify what the buyer says is actually true? Ultimately, based on the information sources available to lenders today, does this buyer appear to be someone the lender can trust to repay the debt with interest plus handle all of the normal financial obligations associated with homeownership?

The second lender concern is the property value. You may have wondered about the need for an appraisal. If you are the buyer you know that the sellers and the real estate professionals obviously think that it is priced correctly. After all, if the property was listed for sale on the open market, didn’t the market establish the purchase price? The answer is “not necessarily”. The reality is that whatever type of property someone wants to mortgage, an appraisal will be ordered by the lender. This includes for refinancing or a home equity line of credit. Keep in mind that the lender is being asked to risk someone’s SAVINGS on a property they will never actually see. Therefore, they need assurance that in the unlikely event the buyer defaults, there is sufficient value remaining in the property that the sale proceeds will satisfy the debt.

The appraisal will be ordered by the lender through a third party company so that there is no possible communication or undue influence between the lender and the mortgage company. The appraiser inspects the property then compares it to other similar sold properties in the area. The appraisal gives a lender an unbiased professional opinion as to the property’s value. Another consideration is the fact that when you are the borrower, it is reassuring to know that you are not overpaying for the property.

An appraisal does not take the place of a general home inspection. Appraisals are used to determine the estimated value of a property based on numerous factors. A general inspection is a detailed examination of the physical condition of a property.

The secondary market, i.e. Fannie Mae, Freddie Mac, FHA, USDA and the VA create guidelines that lenders follow in an attempt to balance procedures to protect both parties’ interests. We all want buyers to be able to continue to buy and lenders to be able to continue to lend safely.

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