| Usually,
individuals applying for a loan are only interested in obtaining the loan
and unfortunately are not worried about the prudence of buying the property
at the agreed price. In fact, many purchasers will try to encourage appraisers
to increase the appraised value so that they can purchase the home regardless
of its value.
The majority of real estate
appraisals are requested by mortgage companies to validate the property's
purchase price for loan purposes. Except for periods of very low interest
rates when everyone is refinancing, most loans are for the purchase of
real estate and ordered after a sale price is negotiated. Purchasers mistakenly
assume that mortgage companies are looking after their interests in the
purchase transaction.
The law states that if the
mortgage company orders the appraisal, the appraiser is responsible only
to the mortgage company. We expect mortgage companies to be prudent and
they should be, but being prudent is protecting their interest, not necessarily
the purchaser's. The mortgage company's position:
It has two sources of repayment:
the purchaser's income and the property.
The responsibility to repay
the loan is not based upon the property's value, so the purchaser is obligated
to pay the note even if the property value declines to zero.
The loan may be insured
or guaranteed by a government agency.
The government does not
promise to pay the purchaser's debt if the property value is wrong.
If the loan is greater than
80% of the value, a portion of the loan may be insured by a private mortgage
insurer.
There is no decrease in
risk for the purchaser regardless of the loan-to-value ratio. The investment
by the purchaser is the same, a mixture of personal cash and a loan that
must be repaid.
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