APPRAISAL
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 comparable properties 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 comparable properties. A typical appraisal costs between $300 and $500.
APPRAISED VALUE
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 comparable properties. 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 comparable properties. 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 comparable properties.
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.