The appraisal is an integral part of the mortgage approval process. Lenders use it to determine whether a home is sufficient collateral for a loan. The Federal Housing Administration must ensure that a home meets all of the Department of Housing and Urban Development's minimum property standards to insure a loan. The FHA backs mortgages made to borrowers with minimal down payments and modest means who might otherwise have difficulty getting conventional financing.
The appraisal is performed for the benefit of the lender, the FHA and HUD, which oversees the agency's insurance programs. In addition to determining market value, the appraisal reports any deficiencies in the property that might affect occupant health and safety or might hurt the home's future marketability. An appraisal is required on all purchase transactions and refinances, with the exception of certain streamline refinance transactions.
The streamline refinance is an expedited loan that improves the mortgage's affordability without the need for extensive qualifying. It is limited to transactions involving an existing FHA-insured loan and must result in a lower monthly principal and interest payment for the borrower, known as the net tangible benefit. The refinance is a no-cash-out loan, in which the borrower receives no more than $500 back for minor adjustments to closing costs. A streamline refinance may be completed with or without an appraisal.
The new loan amount for a streamline refinance without an appraisal is restricted to the outstanding principal balance on the existing FHA loan. The refinance cannot pay off secondary liens, such as second mortgages or home equity lines of credit. The borrower must pay off the second loan or it must be resubordinated, that is, remain second in priority to the FHA loan. The combined loan-to-value, or CLTV, is limited to 125 percent of the home's original appraised value. The LTV ratio compares the amount financed to the home's value. This means that a streamline refinance can result in the borrower owing more than 100 percent of his home's value when secondary financing is involved in a streamline refinance.
Borrowers may opt for a streamline refinance without an appraisal when they can demonstrate that their income and credit is sufficient for the new loan. This is known as a credit-qualifying streamline refinance. No income or credit documentation is required on a streamline refinance when an appraisal is used. With both an appraisal and credit qualifying, the borrower can include closing costs, prepaid items and the funds to establish escrow accounts in the new loan. Escrow accounts are used for the collection of taxes, homeowner's insurance and mortgage insurance. The appraisal must justify a loan value sufficient to cover costs while meeting the FHA's 96.5 percent LTV restriction.
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