Here’s a hot take for all the folks in the mortgage industry: I think that Loan Officers should be collecting appraisal fees up front on the majority of loans. Keep reading or check out the video I made about this topic on Linkedin to find out why.
First, some context. The average appraisal is around four or five hundred dollars. This payment needs to be collected from the borrower and paid to the appraiser. Some lenders require payment up front every time before an appraisal order, some allow the Loan Officers to collect whenever they see fit, but most collect it at close.
Collecting the appraisal fee up front can provide lenders with a few main benefits.
1. Ensure commitment from the borrower
For many, the main reason to wait until after the appraisal has been completed to collect payment is due to the belief it will add friction for the borrower. The line of thinking is as follows: if you introduce the extra hurdle of paying for an appraisal early on in the home buying process, it will cause problems with the borrower, frustrate them, and generally add friction to their experience with you as the lender.
Now to me, that seems like avoiding the hard question. How committed to you, as an originator, is the borrower, if on a five, six, or seven figure transaction, they aren't willing to pay a four or five hundred dollar appraisal fee? If you aren't getting that commitment from them, that's potentially not a great sign. You’ve got to ask the (not so) hard question before you’re on the hook for a fee.
2. Decreased fallout risk
Not collecting appraisals payments up front could actually make borrowers more likely to fallout. If the borrower is going through the mortgage process, you order the appraisal, and they fall out, now you’ve got no choice but to pay that appraiser. Normally written off as a line item, borrower fallout can add up to a huge expense if you’re collecting at close.
Let's just do some quick math: if the average appraisal is say, $500, and your organization does 10,000 loans a year, if only 10% of borrowers fall out, then you’re eating half a million dollars per year in appraisal fees. If your fallout rate is higher, say 15%, it’s now up to $750,000 a year. That’s a lot of money just to write off, especially if you have high volume. This entire chunk of change could be completely avoided by collecting the appraisal fee up front.
3. Easier financial reconciliation
For every order you collect at close, your accounting team must float that money to the appraiser. The appraiser usually needs to be paid relatively quickly, so this can strain the accounting department, especially during high volume times. Reconciling each appraisal payment at close between the accounting system, the closers, the LOS system, and the appraisal vendor can get pretty painful, pretty quickly. Again, all avoidable work if LOs were to collect appraisal fees from the borrower up front.
Here at Reggora, we’ve built our software to handle all types of workflows and payment options. We’re connecting you to your appraisal vendors, automating appraisal allocation, and giving lenders complete control over their entire appraisal process. We plug into LOS and POS systems, process everything electronically, and actually collect payment from the borrower and pay out the appraisal vendor as well.
By working with so many different lenders, we’ve been able to pick out these three reasons: ensured borrower commitment, decreased fall out risk, and easier financial reconciliation, as strong arguments for collecting appraisal fees up front.
But that’s just my take! Connect with me on Linkedin to catch more of my hot, or not so hot, takes in the mortgage industry.
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