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Mortgage approval: Does your home pass the test?

Before your mortgage application can be approved, your mortgage lenders will require that a professional appraisal be done on the property proving that it is worth as much or more than you are attempting to borrow.

The appraisal not only establishes the value of the collateral or security for the home loan but also protects you, the buyer, from unwittingly paying too much. Occasionally, issues with property--everything from the size of the lot to the condition of the septic system--can trip up your mortgage approval. FHA borrowers may have even more to worry about.

What is involved in the appraisal?

Your mortgage lender engages the services of an appraiser to get an estimate of the home's value. The appraiser is a professional with no vested interest in the transaction. To estimate the property value, he or she considers many factors, including:

  • prices of recently sold properties in the neighborhood, as well as average time on the market
  • the supply of homes for sale in your area
  • price trends in the immediate neighborhood and beyond
  • the home's condition
  • the home's features and improvements, both positive and negative
  • the size of the home and its lot
  • zoning, including flood zoning
  • hazards, such as radon, holes in the roof, hazardous waste on the property, etc.

Property issues that may affect mortgage approval

Appraisers report the physical conditions that are readily observable. Some property features will make it more difficult for you to obtain financing.

Lot size. The size of your lot can be an issue for mortgage lenders. If your neighbors all have one-acre lots and yours is 20 acres, mortgage lenders may be leery. They want to finance houses, not ranches. That goes double if your land has several outbuildings on it.

Private roads. These require road maintenance agreements and often liability insurance too. If your home is in a development with a homeowner's association, the association usually covers this.

In other cases, appraisers may note repairs needed to establish and/or maintain the marketability of the property (to protect the lender's collateral), safeguard the health and safety of the homeowners and protect the security of the property.

Conditions such as the following could mean the home has failed the test and will probably need to be addressed before your loan can close:

Lack of utilities. Mortgage lenders generally require that properties be connected to public power, water and sewer whenever possible. In addition:

  • Existing wells must be tested for lead, nitrate (as nitrogen), nitrite (as nitrogen), total coliforms, fecal coliforms or E. coli. In addition, the appraiser or inspector may do a pump test. Existing wells must pump three to five gallons per minute and new wells must pump five gallons per minute.
  • Septic tanks must be 50 feet from wells, 100 feet from the drain field and 10 feet from the property line. A septic certification may be required, which would require a pump-out and inspection. If the system cannot be inspected--for example, if it is beneath 10 feet of snow--the buyer must acknowledge that in writing and indemnify the mortgage lender.

Illegal improvements. Illegal improvements, such as outbuildings and home add-ons that were constructed without permits, generally are allowed, but the appraiser is required to note their illegality and adjust the property value accordingly.

If you run into these or similar issues with the property you are considering, usually your purchase agreement will specify how much the seller can be forced to pay for needed repairs. If your mortgage lender requires more, you and the seller can renegotiate--or cancel the deal.

FHA mortgages even tougher

FHA loans come with strict property guidelines and require more detailed appraisals.

For example, the Federal Housing Administration requires that if the property was built before 1978, the seller must disclose known information on lead-based paint and lead-based paint hazards when selling the house. The FHA will not approve a mortgage in such a case until defective paint surfaces are treated. In addition, the FHA does not allow earth-to-wood contact, nor will it insure home loans on manufactured homes built before June 15, 1976.

The FHA also requires the sales contract to specify that the buyer can cancel the contract without penalty if the property does not appraise for at least the purchase price.

What about home inspections?

Mortgage lenders don't mandate home inspections unless the purchase contract contains such a requirement. However, if you are interested in protecting your own interests, you will want to get a home inspection. After all, you, not your lender, will be responsible if you choose not to have your property inspected and it turns out to have serious issues.

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  • Preparing to Buy: Saving for Mortgage Expenses

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  • Will these documents satisfy my lender's ‘gift’ requirements?

    You'll likely need to get an OK from the mortgage lender that the documents are acceptable.

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