What is an appraisal and who completes it?
To determine the value of the property you are purchasing or refinancing, an appraisal will be required for a mortgage loan application. An appraisal report is a written description and estimate of the value of the property. National standards govern not only the format for the appraisal; they also specify the appraiser's qualifications and credentials. In addition, most states now have licensing requirements for appraisers evaluating properties located within their states. The appraiser will create a written report for us and you'll be given a copy at your loan closing. If you'd like to review it earlier, your Loan Originator would be happy to provide it to you. After the appraiser inspects the property, he or she will compare the qualities of your home with other homes that have sold recently in the same neighborhood. These homes are called "comparables" and play a significant role in the appraisal process. Using industry guidelines, the appraiser will weigh the major components of these properties (i.e., design, square footage, number of rooms, lot size, age, etc.) to the components of your home to come up with an estimated value of your home. The appraiser adjusts the price of each comparable sale (up or down) depending how it compares (better or worse) with your property. As an additional check on the value of the property, the appraiser also estimates the replacement cost for the property. Replacement cost is determined by valuing an empty lot and estimating the cost to build a house of similar size and construction. Finally, the appraiser reduces this cost by an age factor to compensate for depreciation and deterioration. Using these methods, an appraiser will frequently come up with slightly different values for the property. The appraiser uses judgment and experience to reconcile these differences and then assigns a final appraised value. The comparable sales approach is the most important valuation method in the appraisal, because a property is worth only what a buyer is willing to pay and a seller is willing to accept. It is not uncommon for the appraised value of a property to be exactly the same as the amount stated on your sales contract. This is not a coincidence, nor does it question the competence of the appraiser. Your purchase contract is the most valid sales transaction there is. It represents what a buyer is willing to offer for the property and what the seller is willing to accept. Only when the comparable sales differ greatly from your sales contract will the appraised value be significantly different.
Home equity loans frequently use the county tax assessment value for the value estimate. An automated valuation or appraisal may be required should the tax assessment value be insufficient for the amount of credit requested.
What types of things will an underwriter look for when they review the appraisal?
In addition to verifying your home's value supports your loan request, we'll also verify your home is as marketable as others in the area. We'll want to be confident if you decide to sell your home, it will be as easy to market as other homes in the area.
We certainly don't expect you'll default under the terms of your loan and a forced sale will be necessary, but as the lender, we'll need to make sure if a sale is necessary, it won't be difficult to find another buyer.
We'll review the features of your home and compare them to the features of other homes in the neighborhood. For example, if your home is on a 20-acre lot, or has a large accessory building, we'll want to make sure there are other homes in the area on similar size lots or with similar outbuildings. It is hard to place a value on such unique features if we can't see what other buyers are willing to pay for them. In some areas, additional acreage or outbuildings could actually be a detriment to a future sale. Finding comparable properties can be more challenging in rural areas where it is more difficult to find homes that have similar features.
We'll also make sure the value of your home is in the same range as other homes in the area. If the value of your home is substantially more than other homes in the neighborhood, it could affect the market acceptance of the home if you decide to sell.
We'll also review the market statistics about your neighborhood. We'll look at the time on the market for homes that have sold recently and verify values are steady or increasing.
Will I get a copy of the appraisal?
As a standard practice, we will provide a copy of your appraisal at or before closing.
Are there any special requirements for condominiums?
Since the value and marketability of condominium properties is dependent on items that don't apply to single family homes, there are some additional steps that must be taken to determine if condominiums meet our guidelines.
One of the most important factors is determining if the project the condominium is in is complete. In many cases, it will be necessary for the project, or at least the phase in which your unit is located, to be complete before we can provide financing. The main reason for this is, until the project is complete, we can't be certain the remaining units will be of the same quality as the existing units. This could affect the marketability of your home.
In addition, we'll consider the ratio of non-owner occupied units to owner-occupied units. This could also affect future marketability since many people would prefer to live in a project occupied by owners rather than renters.
We'll also carefully review the appraisal to ensure it includes comparable sales of properties within the project, as well as some from outside the project. Our experience has found that using comparable sales from both the same project as well as other projects gives us a better idea of the condominium project's marketability.
Depending on the percentage of the property's value you'd like to finance, other items may also need to be reviewed.
I'm purchasing a home, do I need a home inspection AND an appraisal?
Both a home inspection and an appraisal are designed to protect you against potential issues with your new home. Although they have totally different purposes, it makes the most sense to rely on each to help confirm you've found the perfect home.
The appraiser will make note of obvious construction problems, such as termite damage, dry rot or leaking roofs or basements. Other obvious interior or exterior damage that could affect the salability of the property will also be reported.
However, appraisers are not construction experts and won't find or report items that are not obvious. They won't turn on every light switch, run every faucet or inspect the attic or mechanicals. That's where the home inspector comes in. They generally perform a detailed inspection and can educate you about possible concerns or defects with the home.
Accompany the inspector during the home inspection. This is your opportunity to gain knowledge of major systems, appliances and fixtures, learn maintenance schedules and tips, and to ask questions about the condition of the home.
I've heard some lenders require flood insurance on properties. Will you?
Federal Law requires all lenders to investigate whether or not each home they finance is in a special flood hazard area as defined by FEMA, the Federal Emergency Management Agency. The law can't stop floods. Floods happen anytime, anywhere. But the Flood Disaster Protection Act of 1973 and the National Flood Insurance Reform Act of 1994 help ensure you will be protected from financial losses caused by flooding.
We use a third party company that specializes in reviewing of flood maps prepared by FEMA to determine if your home is located in a flood area. If it is, then flood insurance coverage will be required, since standard homeowners insurance doesn't protect you against damages from flooding.
How long does it take for the property appraisal to be completed?
Appraisals are performed by licensed appraisers who are familiar with home values in your area. We order the appraisal as soon as the application fee is paid. Generally, it takes 5-7 days before the written report is sent to us. We follow up with the appraiser to ensure it is completed as soon as possible. If you are refinancing, the appraiser should contact you to schedule a viewing appointment. If you are purchasing a home, the appraiser will contact the real estate agent, if you are using one, or the seller to schedule an appointment to view the home. Appraisal time can vary during high volume time.
