The Veridian Blog

Many clients of ours have recently discovered the harsh truth that their homes may not be valued as high as they once thought.  When borrowers are in the middle of a refinance transaction and they suddenly discover that their Loan-to-Value (LTV) ratio is above the standard 80% maximum allowable for loans, what options do they have?

This scenario is all too common these days as appraiser independence is as pure as ever due to the newly effective Home Valuation Code of Conduct (HVCC).  Appraisers have no incentive to keep lenders and borrowers happy and are instead ultra-conservative in hopes of avoiding underwriting scrutiny.  As a result, home values are now often surprisingly lower than what the borrower expects putting them in a position to make uncomfortable choices.  Here’s what they can opt to do:

1.      Pay down the balance

A tough pill to swallow in the current “cash-is-king” economy.  The amount of cash needed and the interest rate savings are the primary factors in selecting this choice.

2.      Dispute the appraised value 

Since inception of the HVCC, we’ve tried a handful of times but to no avail.  It requires more resources to find and submit supporting comps for a higher value and possibly a second appraisal report.  Even with reports laden with errors, we have yet to successfully change an initial value.  Appraisers apparently see no reason to budge.

3.      Find a “Refi Plus” program

The initial qualifying factor is that the borrower's existing loan must be owned by Fannie Mae.  If so, then they are definitely in luck because as long as the Loan-to-Value ratio is still less than 90%, then their rate will likely be the same as if were under 80%!  No time in the history of mortgage programs has this been possible!  Some conditions apply, but for garden-variety owner-occupied loans, this has been quite the savior program for many homeowners.

4.      Continue and pay PMI

Borrowers really need to have a compelling reason to continue with the loan and pay PMI.  The cost of the insurance is exorbitant and recurring.  Also note that PMI is not even allowed on high-balance conforming loans. 

5.      Wait

If none of the first four choices are likely, then borrowers must wait until they accumulate funds for the pay down, for favorable legislation to pass, or for home values to rise.  During this time, they will have to hope that rates stay low.

Most refinance candidates these days are choosing to pay down if they cannot qualify for Refi Plus.  The main reason is that mortgage rates are absolutely sizzling right now and it’s not easy for homeowners to pass on these great interest rates.