SC buys house for about $200,000. Pays an okay amount, probably 10% down, and a few years later the 1st mortgage is sitting at $177,000. In the meanwhile, has run up $40,000 worth of credit card debt... that SC is fine with, because they were just doing that temporarily until they had everything finished, because they just know their house is now worth at LEAST $225,000.
...
...
*sigh*
Now, SC is looking to borrow that $40,000 against the house on a home equity... the variable rate line of credit with interest only payments, of course, not the fixed rate/term loan. And the long term plan is to THEN refinance the 1st mortgage a year or two down the road to roll both the 1st mortgage and the home equity line of credit into one mortgage.
There is... a LOT... of risk in this idea. Never, never, never, NEVER get into a variable rate loan where your big plan for getting out of it is to refinance your house. Talk about a foreclosure waiting to happen.
But I'm not even dealing with the nightmare down the road.
Current loan request gets approved,despite the 96% loan-to-value (at SC's stated value of the home), probably because the underwriters didn't talk to the SC and hear the big plan for how to eventually pay it off. I get the loan for processing, groan a little, (actually a lot) and put in for the appraisal with fingers crossed. After all, sometimes the market value DOES increase that much. sometimes the customer really did find that good deal or put in the right type of work to actually have an impact on the value of the house.
Appraisal comes in... $203,000.
Oh the hissy fit! That's practically what they paid for the house. They spent all this money on the house. See that $40,000 in credit card debt. That went into the house! (Well, mostly.... umm...)
Yes, and the appraisal found 8 similar houses that sold with an average price of $215,000, and every. single. one. of the houses that sold over $205k was marked as in notable (5-10k worth) better condition than your house with at least a half-finished basement and other superior qualities that made the comparison value of your house... well, $203,000. It actually was one of the clearer appraisal reports I've seen. They didn't have to stretch out to older sales or distant neighborhoods, and most of the sold houses were cookie-cutter similar.
I could practically read the appraiser covering their own ass as I read the report as well. Poor appraisers. They have to go see the SCs in their own homes.
Anyway. Appraisal. Let's have a little lesson on market appraisals:
1) Your market appraised value does not equal price you paid for house + cost of work put into the house
2)Your market appraised value doesn't even equal price you paid for house + the value of the work put into the house.
Market appraisal = how does your house, in rather general terms, compare to similar houses that have sold in the past 3-9 months. And it's a whole more like a stock price for your neighborhood than a consideration of what your home is "worth"
So, no, you don't get to roll that $40,000 of credit card debt into the house. You don't get to have an interest only payment to help to get your budget back in the red. (yeah, I heard about those extra monthly expenses that don't show in the loan debt to income numbers and make you in a lot worse shape than the credit report reveals).
And I'd feel sympathy if you weren't patronizingly asking me to try to explain how we could go with such an inaccurate appraisal company. And when you burst into tears, I'd feel really sympathetic if your explanation of why you need this loan didn't involve a whole lot of talk that indicated you ran up those credit cards on purpose because the plan was to do this and now you have to be able to do this because YOU got yourself into this mess.
I go through the appeal process of an appraisal as well as the option of getting a new appraisal (cost paid upfront, non-refundable, and NO we will not allow you to choose that appraiser you know of who tends to estimate high)
And then SC demands to know if they are just wasting their time trying to fight this with us or if they should just go elsewhere. (Love the threat to go elsewhere when I'm the one telling them that I can't do the loan.
)
I let SC know that they might as well do the appeal because it doesn't cost anything, but it probably will not change the value and a new appraisal probably will not change the value by more than the 5k fluctuations or so that comes from appraisals having an opinion element to them, and they are welcome to try elsewhere, but frankly, I can't think of any lenders nearby who are likely to even DO 96% loan-to-value on a home equity line of credit, because most just don't go that high. A fixed loan, maybe, but not an interest only payment.
I did NOT tell the SC that I didn't think WE should have approved the home equity, but word is that our loss figures are too low, (which is a bad thing for a bank... losses happen in loans and if losses are too low it means the bank is turning away people too much... which is bad for customers too as not all riskier loans really are. gotta believe in people on occasion.) so we're approving things we used to take more care on.
Never, never, never get into any type of loan/debt dependent on a refinance to pay for it. You should always make certain you can afford the loan you have, not the one you want.
...
...
*sigh*

Now, SC is looking to borrow that $40,000 against the house on a home equity... the variable rate line of credit with interest only payments, of course, not the fixed rate/term loan. And the long term plan is to THEN refinance the 1st mortgage a year or two down the road to roll both the 1st mortgage and the home equity line of credit into one mortgage.
There is... a LOT... of risk in this idea. Never, never, never, NEVER get into a variable rate loan where your big plan for getting out of it is to refinance your house. Talk about a foreclosure waiting to happen.
But I'm not even dealing with the nightmare down the road.
Current loan request gets approved,despite the 96% loan-to-value (at SC's stated value of the home), probably because the underwriters didn't talk to the SC and hear the big plan for how to eventually pay it off. I get the loan for processing, groan a little, (actually a lot) and put in for the appraisal with fingers crossed. After all, sometimes the market value DOES increase that much. sometimes the customer really did find that good deal or put in the right type of work to actually have an impact on the value of the house.
Appraisal comes in... $203,000.
Oh the hissy fit! That's practically what they paid for the house. They spent all this money on the house. See that $40,000 in credit card debt. That went into the house! (Well, mostly.... umm...)
Yes, and the appraisal found 8 similar houses that sold with an average price of $215,000, and every. single. one. of the houses that sold over $205k was marked as in notable (5-10k worth) better condition than your house with at least a half-finished basement and other superior qualities that made the comparison value of your house... well, $203,000. It actually was one of the clearer appraisal reports I've seen. They didn't have to stretch out to older sales or distant neighborhoods, and most of the sold houses were cookie-cutter similar.
I could practically read the appraiser covering their own ass as I read the report as well. Poor appraisers. They have to go see the SCs in their own homes.
Anyway. Appraisal. Let's have a little lesson on market appraisals:
1) Your market appraised value does not equal price you paid for house + cost of work put into the house
2)Your market appraised value doesn't even equal price you paid for house + the value of the work put into the house.
Market appraisal = how does your house, in rather general terms, compare to similar houses that have sold in the past 3-9 months. And it's a whole more like a stock price for your neighborhood than a consideration of what your home is "worth"
So, no, you don't get to roll that $40,000 of credit card debt into the house. You don't get to have an interest only payment to help to get your budget back in the red. (yeah, I heard about those extra monthly expenses that don't show in the loan debt to income numbers and make you in a lot worse shape than the credit report reveals).
And I'd feel sympathy if you weren't patronizingly asking me to try to explain how we could go with such an inaccurate appraisal company. And when you burst into tears, I'd feel really sympathetic if your explanation of why you need this loan didn't involve a whole lot of talk that indicated you ran up those credit cards on purpose because the plan was to do this and now you have to be able to do this because YOU got yourself into this mess.
I go through the appeal process of an appraisal as well as the option of getting a new appraisal (cost paid upfront, non-refundable, and NO we will not allow you to choose that appraiser you know of who tends to estimate high)
And then SC demands to know if they are just wasting their time trying to fight this with us or if they should just go elsewhere. (Love the threat to go elsewhere when I'm the one telling them that I can't do the loan.

I let SC know that they might as well do the appeal because it doesn't cost anything, but it probably will not change the value and a new appraisal probably will not change the value by more than the 5k fluctuations or so that comes from appraisals having an opinion element to them, and they are welcome to try elsewhere, but frankly, I can't think of any lenders nearby who are likely to even DO 96% loan-to-value on a home equity line of credit, because most just don't go that high. A fixed loan, maybe, but not an interest only payment.
I did NOT tell the SC that I didn't think WE should have approved the home equity, but word is that our loss figures are too low, (which is a bad thing for a bank... losses happen in loans and if losses are too low it means the bank is turning away people too much... which is bad for customers too as not all riskier loans really are. gotta believe in people on occasion.) so we're approving things we used to take more care on.
Never, never, never get into any type of loan/debt dependent on a refinance to pay for it. You should always make certain you can afford the loan you have, not the one you want.

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