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As the lending industry has come under more scrutiny, new regulations have sprung up. Two areas that have added paperwork are the appraisal and income verification processes. So, don’t be surprised if you need to sign even more forms when financing a real estate purchase or refinancing.

Late 2008, several governing agencies as well as the Attorney General of NY’s office, banded together to create the Home Valuation Code of Conduct (HVCC). These changes went into effect on May 1^st and significantly altered the appraisal process. Most lenders require appraisals to verify the value of the property.

Under the old system, mortgage brokers ordered appraisals. Generally, a local appraiser, who knew the subtleties of the area was contracted to do this home valuation. Based on a home inspection and local real estate sales data, the appraiser was able to come up with a value for the property. It was up to the appraiser to chose which “comparables” best fit. However, under the HVCC, lenders are discouraged from using local, independent appraisers. Instead, they have a regulatory incentive to use an Appraisal Management Company. AMC often contract the work out based on price and turn-around time, not necessarily experience and knowledge of the area. Finding comparables has become automated too. Appraisal Management Companies are encouraged to use an Automated Valuation Models. In seconds, AVM’s provide detailed data regarding the subject property including an estimate of value.

What should you as the consumer know about this?

You will need to sign an additional disclosure, the HVCC Disclosure, when receiving the completed appraisal. This disclosure must be signed at least three days before your loan is due to close. Failure to sign this form could delay your closing.

Review your appraisal carefully. These appraisals are often done by someone who is not familiar with the particular nuisances of your neighborhood. If you have any questions or want to dispute part of the appraisal, you need to contact the lender. You cannot contact the appraiser directly. If you do, the appraisal can be considered non-compliant with HVCC and another appraisal will be required.

On September 1^st, Fannie Mae tightened the requirements regarding the use of IRS tax transcripts to verify borrower’s income. Fannie Mae now “highly recommends” that 4506-T transcripts be obtained from the IRS for the transaction prior to closing and is used to validate the income documentation provided by the borrower and used in the underwriting process. So, you the borrower will be asked to complete and sign Form 4506-T at both loan application and closing.

Helpful Tips

If you are refinancing, when the appraiser contacts you to set up an appointment, you should ask: how many appraisals have you done in my area in the last 3-6 months and where are you coming from? If either response is unacceptable have them call you and cancel that appraisal and reorder.