Now this loan file is underwriter approved. If this is a purchase transaction, we are now waiting for an offer to be made and accepted. Once this happens, we gather specific info about the property. If this is a refinance mortgage file, then we already know exactly which property will be used to secure the new mortgage loan, so we can get right to work on “property approval.”
So during the first steps of this mortgage process, we establish that the borrower has the ability and likelihood to make the mortgage payments on time, without going into default. But since the lenders can never be fully certain that any loan will avoid default, they further secure their position by attaching a lien to the subject property with a deed of trust. The Deed of Trust is the KEY document for a mortgage lender. This document gives them the ability to foreclose on the home in the event of a default of payment. Since the real estate is used to secure the mortgage, the lender needs a variety of data detailing the specific aspects of the property. We do this with a title report, and an appraisal report.
The title report confirms that we are in a position either to make a clean and legal transfer of ownership, or in a position to refinance existing debts attached to the property. The contents of the title report detail who is on the title currently (and therefore who has the legal right to transact upon the property). The title report also details any and all liens against the property. These liens or loans will have to be paid off and fully retired prior to the funding of the new mortgage loan. In a purchase example, this debt is generally the current loan of the seller, which will be paid in full out of the proceeds of the purchase funds. In a refinance, the title report describes the current loan that will be replaced with a new loan that has more favorable terms for the borrower.
The appraisal report confirms that the home is in working order, and (in a purchase) worth the price that has been agreed upon. An appraisal in a refinance mortgage establishes the market value of the real estate. This value affects many fundamental aspects of the available mortgage: It can affect available loan size, as well as available rate. Loans are extended based on a “loan to value” or LTV ratio. Different loan programs allow 80% of value, or 97.75% of value, or unlimited loan to value in the case of the new HARP 2.0 refinance program.
An appraisal in a purchase transaction is much more likely to achieve the agreed upon purchase price. This is because the contract reflects an actual market dynamic: there is a buyer and a seller and they have both agreed upon a price. In a refinance, the appraisal can be much more unpredictable. The appraiser has to base their price opinion on price per square foot of recent sales in the marketplace, which is very difficult, and in a declining or unstable marketplace the value they come up with is often frustratingly low.