Planning to buy or refinance a home in 2014? With interest rates still low and home ownership on the rise, it's likely that many Americans will be in that position. The process, however, is about to get even more confusing starting this month, as new changes to the mortgage process go into effect. In order to protect yourself financially, here's what you should know. The Consumer Financial Protection Bureau will require lenders to provide borrowers with the results of every valuation tool used to determine the value of a home. As of now, lenders only provide borrowers with an appraisal report. Naturally, the value of a home may differ significantly depending on the tool used, which might be frustrating and confusing for borrowers. However, it's important to understand that not all valuation methods are created equal. Regardless of how many valuation tools were used, the most important document to study is the appraisal report. Federal law dictates that in loans of $250,000 or more, a lender must use an appraisal to determine the value of a home. That's because appraisals offer the most objective and professional analysis of value. Moreover, appraisals help consumers make informed financial decisions -- and in some cases, protect a buyer from overpaying for a home. Banks and other lending institutions are obligated to rely on appraisals because they offer the most comprehensive analysis of value. A licensed appraiser is trained to follow the Uniform Standards of Professional Appraisal Practices (USPAP), a set of Congressionally-authorized standards created and updated by The Appraisal Foundation to ensure objectivity in the profession. Although banks may order additional valuation tools, these methods are less reliable than an appraisal because they are usually not performed by a licensed or certified appraiser. In most cases, they rely on people who are not trained to asses a wide range of factors that affect a home's value, including its size, location, condition, age, quality, and more. In contrast, an appraiser analyzes such characteristics in relation to recent sales of comparable properties to arrive at an opinion of value. In addition to an appraisal report, one of the more common valuation methods you may receive in 2014 is a Broker Price Opinion (BPO). Unlike an appraiser, a broker is not required to comply with USPAP and is not subject to the same independence requirements that protect against influence from a lender. Similarly, a Comparative Market Analysis (CMA), which is based on comparable sales in the geographic area, is also typically completed by a real estate agent, and therefore not subject to USPAP. Another popular valuation technique is an Automated Valuation Model (AVM), a computer-generated estimation of a property's value. The accuracy of these models depends largely on the quantity and quality of the data input. While they can help support the findings of an appraisal, when used alone they are often not nearly as credible. Understanding the differences between these valuation tools will save you time, money, and frustration. Knowing the right questions to ask your lender will protect you in the process. For example, given that a lender is required to use an appraisal in transactions of $250,000 or more, it might be unclear why multiple valuation tools were used. Here are the questions you should be asking your lender:
- If you are required to rely on an appraisal to determine the value of my home, why did you order other valuation tools?
- How did you use the information from these other valuations?
- How much did I pay for these alternative valuation tools?
- How much time did it take during the process to order and review these other products?
- Could I have closed on my loan earlier if you hadn't ordered these products?
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