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
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
- 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.