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What Mortgage Lenders Wish Borrowers Knew About Home Appraisals

An important part of any home buying transaction is the appraisal. Home appraisals help establish your home’s market value, the sales price it would likely bring in an open and competitive real estate market. If you plan to use your home or other real estate as security for a loan, mortgage lenders will require an appraisal to make sure the property will sell for at least the amount of the loan. While many real estate agents use a comparative market analysis (CMA) to help home sellers determine a realistic asking price, a real estate appraisal and CMA are two different things. A real estate appraisal is much more detailed than a CMA and the only valuation report a mortgage lender will consider when it comes to whether or not they’ll lend a prospective borrower money. If you plan to apply for a mortgage in the near future, equipping yourself with the following facts about real estate appraisals will make the appraisal process less intimidating.

USACE inspector reviewing newly delivered temporary housing unit in AlabamaIt’s important to understand that real estate appraisers have completed coursework and internship hours in order to be licensed by the state. Some mortgage lenders staff real estate appraisers but often contract with independent appraisers. When utilizing a real estate appraiser of your own choosing and someone the lender isn’t familiar with, the results will most likely be subject to review before the lender accepts them. The real estate appraiser should be someone who doesn’t have any financial or personal connection involved in the transaction. On paper, your home will be referred to as the “subject property.” Typically, though not always, you’ll pay for the appraisal when you apply for the mortgage.

Unlike a comparative market analysis, a real estate appraisal includes details about your home along with side-by-side comparisons of three similar properties. Additionally, the appraiser will make statements about issues the he or she believes are harmful to the property’s value like poor access to the property. You’ll see notes about any serious flaws like a crumbling foundation. Also included is an estimate of the average sales time for the property, an evaluation of the overall real estate market in the area and the type of area where the home is located (a stand-alone on lots of acreage or in a development like a subdivision).

Real estate appraisers use two common methods when it comes to appraising residential properties — the sales comparison approach and the cost approach. With the sales comparison approach the appraiser estimates your home’s market value by comparing it to similar homes that have sold in the area. These homes are called comparables, or comps. Because no two properties are exactly alike, the appraiser compares the comps to your home, making adjustments in order to make their features more in-line with your home’s features resulting in an estimated value that shows what each comp would have sold for if all three homes had the same components as your home. With the cost approach, most useful on new properties, the appraiser estimates how much it would cost to replace your home if it were destroyed.

So what happens if your home appraises for lower than the sales price? The loan might be declined. If your appraisal comes in low, remember that most problems can be corrected. Just keep your cool and work through the issues one step at a time. There are also other factors that could stall your purchase. One is if the estimated time to sell the property is longer than the area average. In rare cases when homes are located on a private, shared road, the lender will want to see a road maintenance agreement signed by all parties who use the road in order to verify the maintenance is shared by all the parties. This is why when it comes to selling your home it’s a good idea to look at your home through the lens of a buyer, addressing any of your home’s imperfections so it won’t hinder the lending process.