Appraisal – Maybe You Need One, Maybe You Don’t!
One of the primary factors in the conventional home financing process these days, whether it be a purchase or a refinance transaction, is the appraised value of the property. In this article we’ll get into how appraisals work and what you need to know about them.
[note color=”#F0F05D”]Worried About Your Appraised Value?
There are certain circumstances where your lender will not need an appraisal. See if you can skip the appraisal and qualify for HARP Financing, you can learn more about HARP HERE.
If you have had difficulty refinancing due to your appraised value, check with Poli Mortgage to see if you are eligible for a Poli Mortgage HARP Program.[/note]
Any time that you finance a property, your lender needs to know how much that property is worth before they lend money against it. This is to protect their interests. If you were to default on the mortgage, they need a realistic market value in the event they need to liquidate the property to recoup their investment. All transactions involve some type of risk for a lenders, but an appraisal helps minimize some of this risk.
Appraisals are ordered by the lender, and an entity called an AMC, or an appraisal management company, does the actual work. As opposed to how it was done several years ago where the lender had either their own appraisers. This prevents a conflict of interests with appraisers and keeps the lender and the appraiser separate from each other. This is to avoid any type of influence that the lender may have on the appraiser.
The AMC will schedule the appraisal with the home owner and the licensed appraiser will visit the home and take pictures including, street view, rear of the home, interior kitchen, bathrooms and bedrooms.
They will also take a few measurements in order to verify the size of the home. The appraiser will take note of things like quality of construction, fixtures, appliances and systems.
The Actual Appraisal
The appraisal process is made up of two parts. The first is the gathering of market data by the appraiser, the second is the actual inspection of the property to support what they find in the data gathering process.
To gather data, the appraiser will use sources such as the MLS, or Multiple Listing Service. This will tell them what similar homes in the area of the subject property have recently sold for. The properties that they use are called “comparables” or “comps”, as they’re sometimes referred to.
Ideally these comps will be within a very small radius, usually within one mile of the subject property, and will have sold within the past several months. These requirements tie back to the fact that lenders need area specific, and current data to be able to determine what a property is worth before lending money against it.
Because no two properties are identical, appraisers use what are called compensating factors to account for the differences. Factors that may be highly desirable in a specific areas, such as having a home on the water, or an oversized lot or more modern amenities for example, may require a significant adjustment. In areas where there are truly no comps, perhaps in a rural area where there are few homes to begin with, the appraiser may go outside of the typical range to find them.
Note that an appraisal is different than a home inspection, where the focus is put on the functional systems in the property making sure everything works properly. The appraisal looks more at what the home is worth among its comparable set of properties.
The appraisal is an important part of the home finance process. It gives the lender a good idea as to what the property is worth in relation to other similar properties in that same area. If you have more questions with regard to how appraisals work, please give us a call here at Poli Mortgage Group and we would be glad to help answer those questions.