Usually, individuals applying for a loan are only interested in obtaining the loan and unfortunately are not worried about the prudence of buying the property at the agreed price. In fact, many purchasers will try to encourage appraisers to increase the appraised value so that they can purchase the home regardless of its value.
The majority of real estate appraisals are requested by mortgage companies to validate the property's purchase price for loan purposes. Except for periods of very low interest rates when everyone is refinancing, most loans are for the purchase of real estate and ordered after a sale price is negotiated. Purchasers mistakenly assume that mortgage companies are looking after their interests in the purchase transaction.
The law states that if the mortgage company orders the appraisal, the appraiser is responsible only to the mortgage company. We expect mortgage companies to be prudent and they should be, but being prudent is protecting their interest, not necessarily the purchaser's. The mortgage company's position is:
- It has two sources of repayment: the purchaser's income and the property.
- The responsibility to repay the loan is not based upon the property's value, so the purchaser is obligated to pay the note even if the property value declines to zero.
- The loan may be insured or guaranteed by a government agency.
- The government does not promise to pay the purchaser's debt if the property value is wrong.
- If the loan is greater than 80% of the value, a portion of the loan may be insured by a private mortgage insurer.
- There is no decrease in risk for the purchaser regardless of the loan to value ratio. The investment by the purchaser is the same; a mixture of personal cash and a loan that must be repaid.