The appraisal is one of the most important factors in your refinance. It’s how the lenders determine how much they can lend you. Of course, you must be able to afford and/or qualify for the loan as well, but if the value of the home isn’t there, you won’t qualify for the loan.
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Below we look at how the
appraised value affects your ability to refinance.
The Loan-to-Value Ratio
The largest factor on your refinance aside from your credit score is the loan-to-value ratio. Each loan program has a maximum LTV. The value of the home will then determine the maximum amount a lender can give you.
The type of loan you take out will determine the LTV. For example, conventional rate/term refinance loans can have an LTV up to 95%. A cash-out conventional loan, on the other hand, can have a max LTV of 80%. FHA loans have different requirements; they allow a 97.5% LTV for
rate/term refinances and a 95% LTV for cash-out refinances.
The Interest Rate
The interest rate a lender charges you will also be determined by the appraised value of the home. Once the lender knows your loan-to-value ratio, they can determine which interest rate they may charge you. Interest rates help lenders make up for the risk of default. It’s a charge for borrowing the money, but it’s based on your ability to repay the loan. Any risky factors, such as a high LTV will increase your interest rate.
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There is a direct relationship between the interest rate and the LTV. The higher the LTV is, the higher the interest rate. Lenders view high LTVs as risky since you have less of your own money invested in the home. If you were unable to afford the payments, you have a higher likelihood of just walking away from the home than you would if you had your own money invested.
Getting Approved for the Loan
Overall, the appraisal can have an impact on whether or not you
get approved for the loan. If the value dropped significantly from when you bought it, the lender may ask more questions. Why did the value drop? Did all homes’ values drop in the area or is it just your home? The lender may want to know what made it drop and if there is anything they need to be concerned about.
If there is anything unusual about the appraisal or the home doesn’t pass the appraisal because the appraiser doesn’t think it’s in good condition, you may be left without the loan you wanted.
In order to make sure your appraisal doesn’t hinder your chances of loan approval, prepare your home. Make sure everything is in good working order, clean up the clutter, and make the home look presentable. If you have done any upgrades, make sure you point them out to the appraiser so that he can include them in the value.
The appraisal plays an important role in the loan process. Ignoring its importance could leave you without the loan you wanted. Not only should you prepare your own home, but you should do a little sleuthing to see what the average value is in the area just so you know what you are in for and to help you decide if now is the right time to refinance.
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