When appraisals get in the way of refinancing

A year or so ago, Casey Jones and Samantha Klein Jones fell in love - with a three-bedroom, one-bath, ranch-style house in Kennett Township.

It sat on a modest 0.17 of an acre, but "it was the property of our dreams," she said. "The first day, we couldn't get inside but wanted to put in an offer, based on just the lot."

An inspection uncovered plenty of faults: The house needed a new roof; new windows; new paint; repairs to the bathroom, "which had chunks of wall falling into the tub, because it was just painted, no surround or water-resistant material," and more, said Klein Jones, 24, a chemistry doctoral student at Bryn Mawr College.

She and her husband, 35, plant manager of the Ice Butler in Wilmington, were willing to do what was needed. And when the work was finished, the home's appraisal value increased to $177,000.

But now that they want to refinance, that appraisal value is getting in the way - a problem homeowners commonly face these days.

The couple hope to refinance the $170,000 balance on their streamlined 203K Federal Housing Adminstration mortgage, designed to help buyers tap into cash for repairs. They want to bring their 5.625 percent interest rate closer to the current 5.05 percent.

The mere fact that the Joneses bought a house with flaws makes them rare among first-time buyers these days.

An online survey by Coldwell Banker Real Estate, the results of which were released Tuesday, showed that first-timers want places with a little less "room for improvement." The firm queried 300 people around the country who had purchased their first houses in the last year, and 87 percent replied that finding "a move-in-ready home" was important to them.

What helped the Joneses make the fixes their house needed before they moved in was the fact that their mortgage allowed them to finance up to an additional $35,000 to pay for property repairs or improvements, especially those identified by a home inspector or an FHA appraiser.

The FHA made getting a 203K mortgage sound like a snap, but as Klein Jones observed, "What a process!" involving "90 days of anxiety."

The couple worked with a contractor who knew how to do 203K jobs. "We got an estimate for necessary repairs, and we closed on June 14, 2010, at 7 p.m.

"[We] have been loving our home and homeownership ever since," she said, though the renovation costs ran higher than they anticipated and some items on the work order had to be removed as a result.

Under FHA rules, the couple are eligible to refinance because they have been paying their loan for at least six months. They have been given three refinancing scenarios:

An FHA fixed-rate loan at 4.75 percent, which would take $75 off their monthly payment. Because of changes in FHA's requirements, however, their mortgage-insurance payment would rise to $119 a month from $77.

An FHA 5/1 hybrid loan, in which the rate is set at 3.25 percent for the first five years, then rises 1 percentage point annually for up to 10 years. The monthly savings in the first five years would be $200.

A conventional fixed-rate mortgage, which removes the insurance and would save them $125 a month.

Scenario No. 3 would be perfect, Klein Jones said, calling it "my dream."

But the option is "too good to be true," she said: To qualify, the house must be appraised at $190,000 or higher.

The couple are wondering what they can do to the house to boost its appraisal value now that, Klein Jones said, "the condition is better than average - dare I say good."

They are considering extra square footage or adding a half-bath. They don't have money for an addition, but the house has six rooms, with kitchen and dining room counted as one. They are thinking about building a wall to separate the spaces, creating a seventh room.

Klein Jones said she understands that appraisals depend on comparable sales.

"There may not be much we can do in that case to add value," she said.

Is there a way to boost the appraisal value to get the refinancing deal they want?

The consensus among several local experts interviewed: Probably not.

Jerome Scarpello of Leo Mortgage, in Montgomery County, said the Joneses are stuck unless they add square footage or upgrade the kitchen and bath, as they are considering.

The home's original appraisal may have hinted at renovations that would raise the value now, Scarpello said - "condition of bath," for example.

"Short of some outrageous event, such as the original appraiser missing the upstairs or some clear mistake, they are going to probably have to wait until the market rises - and that will be some time," he said.

Daniel Drelich, president of the New Jersey chapter of the American Guild of Appraisers, said that "first and foremost," the appraised value should reflect the house's current market value.

"It's possible that the extra improvements the homeowners made did add value to the property and it could be $190,000," he said. But even if the necessary value to refinance was there, the Joneses "could fail in their attempt due to current lending factors beyond the control of the consumer and the appraiser."

Harry Pecci of Prosperity Mortgage, in Doylestown, said that given their current mortgage rate, 5.625 percent, depending on the loan amount, "it may be difficult to refinance and justify the total closing costs."

"During the first 12 months of owning a home, going to a conventional mortgage refinance, they will use the original sales price, not the appraised value, to determine the loan-to-value" ratio, Pecci said.

If it has been a year and the house has been totally renovated, "the only thing that could boost the appraisal numbers, in my opinion, would be adding an addition or some amount of tangible square footage," he said.

That, along with comparable sales higher than when the previous appraisal was done, Pecci said, "is really their only hope."