What is Appraisal
The lender will require an independent appraisal prior to closing. The home must appraise at an amount determined by the lender to insure that the home is purchased at fair market value; and that in the event of non-payment that the bank can recoup their costs and the value of the loan. The work is done by a licensed appraiser and is often assigned through an appraisal management company. Appraisal management companies insure that the appraiser assigned is random and at arms length to all parties to the transaction including the bank, lender and realtors. The value is determined based on a sample of similar sales or comparable sale properties in the neighborhood. The comparables must typically be located within 1/2 to 1 mile of the subject property, of similar age, similar size, and similar characteristics. The closer to the subject and the more recent the sale, the more likely the property will be used by the appraiser as they are looking for the best comparables. A typical appraisal costs between $300 and $500.
Appraised Value is an objective value. It is not an exact science and they are all based on one person’s opinion. Appraised value is not a constant value and the value does change. FHA and VA appraisers tend to be more conservative in their estimates due to stricter guidelines in choosing comparables. An FHA appraisal will also attach to the property for 4 months. In other words, should the property appraise for one FHA buyer at $200,000 and that buyer’s transaction not close, then should another FHA buyer come along within 4 months the FHA would use the same appraisal.
VA and FHA Concerns
VA and FHA appraisers also look for more than just value. They inspect the property to make sure that the home meets minimum standards for public safety. The home must have running water and electricity. The home must be safe and marketable. Exposed wiring, rodent infestation, plumbing leaks, and non-secure homes and unfinished homes are not typically considered acceptable. Appraisers will flag items that make the home unsafe. The lender will require that these types of issues be resolved and repaired prior to closing. Just prior to closing, the lender will require proof of repair before final sign off of closing. The majority of the time the appraiser will have to re-inspect the item or items of issue at a nominal fee. The FHA and VA appraisal should not be considered an inspection. The buyer should still have a licensed inspector inspect the property during the inspection period to insure that there are no issues. The appraiser must comply with the Uniform Standards of Professional Appraisal Practice (USPAP) and appraisal regulations, but also follow any more requirements from the mortgage lender, Freddie Mac, Fannie Mae, FHA, USDA and VA.
Collateral Underwriting Process
Also, a new collateral underwriting process has been implemented to help the lenders assure that the property properly appraises. It requires appraisers to use specific software to guide them and verify that they are using the proper comparables. This new software requires appraisers to justify their decisions. Depending on the lender, the guidelines may force the appraiser to use a comparable that he or she may not have selected on their own or at least significantly justify why they are not using it.
Most lenders are looking for the closest homes that sold last to the subject. This may not always be a snapshot of the neighborhood. For example, a community may have three recent bank sales across the street from a totally renovated home. The totally renovated home was priced based on some similar sales in the same subdivision 3 months ago while the recent sales just closed. The appraisers will most likely be forced to use the bank sale homes and make adjustments. An appraiser will not give the same value as the cost of the renovations. Renovations typically have a set value towards adjustments. And, more than likely the home would not appraise for as much with the bank comparables.
Home Doesn’t Appraise – Now What
If an appraisal falls short of the loan amount, you might have to come up with a larger down payment or renegotiate the sale price before the lender will lend you the money at all. Say, for example, you intend to borrow $97,000 to buy a $100,000 house. But the appraiser says the house is worth $95,000. The lender isn’t going to give you a $97,000 loan for a house that’s worth $95,000. Either you will have to negotiate a lower price for the house, or you will have to pay the original price but come up with a bigger down payment and borrow less than $95,000.
What to expect with the appraisal:
1. Your lender will order the appraisal.
2. On the day of the appraisal, a good Realtor will generally attend the appraisal. The Realtor will provide the appraiser with an appraisal package. The package could include plats, surveys, deeds, covenants, HOA documents, floor plans, specifications, inspection reports, neighborhood details, recent similar-quality comparables, detailed list and dates of upgrades, remodels and costs, and energy- efficient green features. The agent will meet the appraiser at the property and answer any questions an appraiser might have about the property or neighborhood. Then agent will then allow the appraiser the necessary space and time to complete the inspection.
3. Regulations allow real estate agents, or other persons with an interest in the real estate transaction, to communicate with the appraiser and provide more property information, including a copy of the sales contract. An agent, or other persons with an interest in the real estate transaction, may not intimidate or bribe an appraiser and an appraiser may not disclose confidential information at any time.
4. The Government Sponsored Enterprises (GSEs) require that an appraiser analyze the sales contract and the appraiser must confirm analysis of the contract on the appraisal report.The appraiser looks at the terms of the sales contract and compares them with what is typical in the market. The sales contract has information such as the interest rate, the down payment amount, seller contributions or other personal property items that might be included in the sale. The appraiser must also verify if the property seller is the owner of public record.
5. The turnaround time for a full residential appraisal report varies depending on the complexity of the assignment.
6. Once an appraisal assignment is completed and sent to the appraiser’s client, typically the lender, an appraiser may not discuss the results of the report to anyone but the client who ordered the appraisal, or parties designated by the client. In order to ask an appraiser to correct errors in the appraisal report or consider more information, you must contact the appraiser’s client in writing.
7. The Equal Credit Opportunity Act (ECOA) requires creditors to automatically send a free copy of home appraisals and all other written valuations on the property after they are completed, regardless of whether credit is extended, denied, incomplete, or withdrawn.
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