An appraisal is completed for a home loan modification to verify the property's current value. Most often the appraisal will be the starting point to any changes to a loan agreement and terms between the lender and the borrower. Once the home's value has been fully established, both parties can move forward with negotiating the terms.
Why Modify a Loan?
Because the real estate market is a fluctuating, dynamic market, often a borrower finds it financially helpful to negotiate a loan modification for a lower interest rate. This will save him money long term. Also, if the borrower is having trouble making his mortgage payments, he may also want to extend the life of the loan for smaller monthly payments over a longer period. Other situations also often occur such as adding a guarantor, taking a forbearance or any other changes to the existing agreement.
How Does the Appraisal Affect the Modification?
The result of the appraisal will affect whether any loan modifications will be granted as well as terms of the modifications. This serves as the starting point for a lender to review the request and determine its viability. If the value has decreased, the lender gets more risk and less benefit from modifying the loan. In this case, the lender may request the principal to be updated. In the reverse situation in which the home's value has increased, the lender can usually be assured that its investment is safe and is more likely to approve any loan modifications. However, appraisal requirements can vary by lender.
Even in the case of a value decrease, many lenders will work with a borrower to modify a loan in order to avoid foreclosure. Because both the borrower and the lender have a strong financial interest in the property, foreclosure creates the biggest financial loss to both parties. Restructuring a loan to lower the monthly payments, extend the life of the loan, or go on a forbearance help both parties long term.
Creating a Paper Trail
Filing an appraisal for any loan modifications also creates a strong paper trail for the lender and the borrower's decisions to change the terms of a loan. This is especially helpful for the lender in case of a regulatory audit. In addition, the appraisal also helps maintain a paper trail for the lender's overall investment portfolio. Both for internal and external use, appraisals clearly show how much each individual home mortgage investment is worth.
- Modern Real Estate Practice: Galaty, et. al.
- Bankrate: Pros and cons of Refinance Appraisal
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