What is an appraisal and who completes
it?
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To determine the value of the property you are purchasing or refinancing, an
appraisal will be required. An appraisal report is a written report of the
appraiser's conclusion 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.
At closing you can request a copy of your appraisal to be mailed or emailed to you.
Usually, the appraiser will inspect both the interior and exterior of the
home. Exterior-only inspections usually save time and money. Your loan advisor
will contact you to determine which inspection is required for your loan.
After the appraiser inspects the property, the appraiser 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 try to
compare the major components of these comparable 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.
If your home is for investment purposes, or is a multi-unit home, the
appraiser will also consider the rental income that will be generated by the
property to help determine the value.
Using these three different 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 very different.
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| What types of things will an underwriter
look for when they review the appraisal? |
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In addition to verifying that your home's value supports
your loan request, we'll also verify that your home is as marketable as others
in the area. We'll want to be confident that 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 that you'll default under the terms of your loan and that a forced sale
will be necessary, but as the lender, we'll need to make sure that 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 that 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 that 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 that values are steady or
increasing. |
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| I'm purchasing a home, do I need a home
inspection AND an appraisal? |
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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 that you've
found the home you want.
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 saleability 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.
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| Will I get a copy of the appraisal?
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| At closing you can request a copy of your appraisal to be
mailed or emailed to you. |
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| How long does it take for the property
appraisal to be completed? |
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| Licensed appraisers who are familiar with home values in
your area perform appraisals. We order the appraisal as soon as the application
fee is paid. Generally, it takes 10-14 days before the written report is sent to
us. We follow up with the appraiser to insure that it is completed as soon as
possible. If you are refinancing, and an interior inspection of the home is
necessary, the appraiser should contact you to schedule a viewing appointment.
If you don't hear from the appraiser within seven days of the order date, please
inform your Mortgage Loan Consultant. If you are purchasing a new 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. |
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| Are there any special requirements for
condominiums? |
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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 that the condominium is located in is complete. In many cases, it will
be necessary for the project, or at least the phase that your unit is located
in, to be complete before we can provide financing. The main reason for this is,
until the project is complete, we can't be certain that 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 that is
occupied by owners rather than renters.
We'll also carefully review the
appraisal to insure that 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. |
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| I've heard that some lenders require
flood insurance on properties. Will you? |
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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 to ensure that you will be protected from
financial losses caused by flooding.
We use a third party company who specializes in the 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 homeowner's
insurance doesn't protect you against damages from flooding.
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