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Navigating the new lending rules

By now, most people have heard of the federal regulations implemented this year to standardize the property appraisal and mortgage loan disclosures process. These new regulations are called the Home Valuation Code of Conduct and the Housing and Economic Recovery Act.

The code of conduct went into effect in May to limit the contact between lenders and appraisers to avoid manipulation of the final valuation provided. While the intentions of this plan were admirable, the immediate result has been increased difficulty for those involved in contracting and closing the real estate transactions. With this new plan, all appraisals are ordered by the lender through a third-party servicing company. Many of these servicing companies are owned by or affiliated with national lenders, and they often use contract appraisers from the area. This has sometimes resulted in lower quality with generally lower appraised values and higher appraisal costs.

Once the appraisal is completed, it is sent via the servicing company to the lender and ultimately to the borrower. If a home’s value meets or exceeds the contracted price, then the transaction can proceed. If the value is lower, the process halts.

If the appraisal appears to be accurate based on comparable sales, the lender will use this value to determine the mortgage amount. If the value is lower than the asking price, the real estate agent and buyer can try to negotiate a lower price.

If the seller will not or cannot lower the price to the appraised value, the buyer is left with a few options: change the loan program or restructure to a lower down payment to make up the difference, bring more money to the closing table, which is often impossible, or walk away from the transaction and look for other homes.

There is an appeals process if the appraiser did not use the best comparables and provided an appraisal that was lower than similar property values. Unfortunately, it is not often that the original appraisal changes. In some cases, the buyers and sellers have agreed to split the cost of new appraisals with different lenders and have been successful in closing at the contract price.

The Housing and Economic Recovery Act was implemented July 30 of this year with the main purpose of strengthening the requirements regarding early and final disclosures to homebuyers and the timing of when certain fees can be charged. The most important feature is the provision regarding changes to the annual percentage rate. If there is an increase in fees or the interest rate, causing the APR to rise by .125 percent or more, then new disclosures must be sent out with an appropriate waiting period before the transaction can proceed. Although this program is also well intended, the end results have been delayed closings and sometimes higher interest rates because of expired interest rate locks.

The key to a successful closing is to allow for as much time as possible with 45-60 day contracts optimal. It also is imperative for the buyer to be fully approved with the interest rate and fees locked in as soon as possible. As always, consult your local real estate/mortgage professional with questions so you fully understand how the regulations will affect you.

Brian McMahon, a licensed mortgage broker, can be reached at (941) 720-2573 or brian@custom- mortgage.biz.

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