After downsizing in May, fintech lender Tomo continues to pursue its goal of being “the best at purchase mortgages” by rolling out its second new service for homebuyers this summer — an appraisal coverage guarantee that can get buyers to the closing table even if their appraisal comes in lower than expected.
While higher mortgage rates have been a drag on home sales and sellers are reducing their asking prices in some markets, inventory shortages mean many buyers are still feeling the effects of double-digit home price appreciation during the pandemic.
Tomo cofounder and CEO Greg Schwartz said approximately 14 percent of transactions are impacted by low appraisals, which can force homebuyers to bring more cash to the closing table, pay higher costs on their loan, or be forced to walk away from a deal altogether.
Tomo says that when its Appraisal Coverage guarantee launches next month, eligible borrowers will be able to close on a winning bid with the same cash to close, monthly payment, and interest rate that they’d planned on when making their offer.
Schwartz told Inman the decision to offer the free service was driven by consumer research that shows low appraisals, which often come only a few days before closing, create “tremendous complexity for the Realtor and the homebuyer.”
Greg Schwartz
Consumers, he said, “want these emotional last-minute surprises to be reduced.” But there’s often a price to be paid.
“So many folks are passing on their financing contingency to win a deal,” Schwartz said, which puts them at risk of forfeiting their deposit if their lender backs out.
The mechanics of how Tomo plans to fund loans when homes appraise for less than the sales price — and particularly how it will sell those loans to investors — are a bit mysterious.
Schwartz said the Appraisal Coverage guarantee is only available to homebuyers who are making a 10 percent down payment to buy a home with a conforming loan that’s eligible for purchase by Fannie Mae and Freddie Mac. Buyers must be represented by an agent who’s been certified by Tomo, he said.
According to terms and conditions of the offer published on Tomo’s website, homebuyers must also have received a fully underwritten mortgage pre-approval from Tomo before making an offer, and submit the property address and offer price to Tomo before they make an offer to the seller or listing agent.
Schwartz said Tomo doesn’t keep any of the loans it makes as portfolio investments, and that “each of these loans will find a buyer” because they will comply with Fannie and Freddie’s requirements. In cases where appraisals come in lower than expected, he said Tomo is willing to taken a “haircut” and sell a loan to investors at a discount.
“We can absorb that,” Schwartz said. “A financial institution is much better suited to match the last minute surprises of the lower appraisal than an individual homebuyer is, who is rubbing every last dollar together to get a close done.”
Tomo declined to say exactly how its loans will pass muster with Fannie and Freddie when appraisals come in lower than expected, citing the proprietary nature of the processes it’s developed.
But because eligible buyers must be ready to bring a 10 percent down payment to the closing table, in some cases a low appraisal might merely increase the homebuyer’s loan-to-value ratio, causing Fannie and Freddie to charge higher fees that would usually be passed on to the borrower.
And while the mortgage giants won’t buy or guarantee loans that exceed a home’s value, in some circumstances Fannie and Freddie will allow lenders to apply for an appraisal waiver before ordering an appraisal.
Whatever the mechanics of the process, Tomo’s Appraisal Coverage guarantee is the second product the company has rolled out this summer to address changing market conditions.
In June, Tomo introduced a “Lock and Shop” service that allows homebuyers to lock in a mortgage rate for up to 120 days, before they even know the address of the property they want to buy. Homebuyers can recoup the service’s $750 fee if they work with Tomo Brokerage partner agents and close their loan with Tomo Mortgage.
Schwartz, who launched Tomo last year with fellow Zillow veteran Carey Armstrong, said the uncertainty created by rising rates earlier this year has stabilized. After laying off one-third of Tomo’s workforce in May, “we now have a line of sight to our operating model,” he said.
Tomo is currently operating in nine states — Colorado, Florida, Georgia, Michigan, North Carolina, Ohio, Texas, Washington and Connecticut — with plans to expand into 10 more, Schwartz said.
“When you’re looking over the precipice. it’s sometimes hard to figure out if you’re jumping a foot or a mile,” Schwartz said. “For a moment, in the early days of these great moves [in mortgage rates], it was unclear what we were staring into. And it’s clear now [the U.S. real estate industry] will sell some 5 million plus homes a year. There’s plenty of opportunity for us.”
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