The home buying process is a complex puzzle. As each piece falls into place you move closer to settlement. Every once in a while we have a tendency to check off a box before it is no longer an issue. Appraisals are a perfect example. Most of us assume that if the value comes in at or above the sales price, then all is well but that is only step one in the appraisal review process. There are a number of checks and reviews that are placed on that appraisal through a lengthy process.
Generally speaking, an appraisal is ordered through a third party company and is completed by an individual appraiser. The appraisal then goes through a review by a national firm before it is sent to the lender. That is step one and where most agents will typically make the mistake of checking the box that the appraisal is complete. It is important not to be hasty in removing the appraisal contingency until the next steps are complete.
Step two comes once the bank has the appraisal in house. At that time it is reviewed by the processor or loan officer to pick up any obvious issues. Next, and before the loan is submitted to underwriting, the loan is run through one of the Automated Underwriting Systems (AUS systems). This underwriting system then runs its own Automated Valuation Model (AVM) on the subject property. If the AVM identifies the sales price or estimated value is greater than 20% of its estimate, then a review appraisal is ordered at the lender’s expense. As long as it is within the 20% range then we move forward to the next step.
Step three comes when the appraisal is sent to underwriting. Underwriters have the right to challenge a value or request additional items. If the underwriter does not agree that the appraiser supported the value with sufficient comparable sales, then a request is made for additional items to better support the value. If the underwriter feels the appraisal is flawed he/she may request that a review appraisal is conducted. If the review comes back clean then we get to move forward. If it comes back with suggestions, then the original appraiser is contacted and expected to make the requested changes.
Confused yet? It gets more confusing if the appraiser disagrees with the underwriter or refuses to make the changes. At that time a second appraisal is ordered! If the second appraisal comes in lower than the first, then the lower of the two appraisals is used. Actually, the lower of the two appraisals is used no matter what – if they happen to come in for the exact same amount then I guess you could say both are used.
The long and the short of it is that you should always double check with your loan officer or originator to make sure underwriting has signed off on the appraisal before removing the appraisal contingency. If the lender comes back and discounts the appraisal after the continency is removed the buyer client does not have a rememdy. Even worse, they could still be on the hook and considered in default.