Understanding the Appraisal Process
Whether you’re buying, selling, refinancing or pursuing a reverse mortgage, you can expect to encounter the home appraisal process along the way. It’s a critical, but often unfamiliar, experience with significant consequences for your goal.
Eliminating the mystery of the factors that determine an appraisal, why it’s required, and how it can impact your transaction will go a long way toward reducing the stress that they can add to your situation.
The Appraisal Process
In addition to thoroughly vetting the creditworthiness of their clients, mortgage lenders want the protection of knowing what a home is really worth. Similarly, buyers want to avoid overpaying for a property. The solution comes via a professional real estate appraiser.
These independent individuals use a uniform, comprehensive approach to develop an estimate without influence from the lender, buyer or homeowner. They review the property in question, the recent sales prices of similar homes, and use the data to calculate an appraised value.
Since their opinion can limit the lending amount available on a particular house, it’s critical to understand how they come to their decision. Even buyers with considerable down payments can be impacted by a low appraisal, as they may need to make up the difference, in addition to meeting the loan’s down payment threshold.
An appraisal begins with an assessment of the subject property. The appraiser will document the home’s size and condition. Of course, this includes information like the number of bedrooms and bathrooms. However, it will also take into account the functionality of the layout, the size of the lot, and improvements such as swimming pools or efficiency upgrades.
They will also consider the characteristics of the neighborhood. Its boundaries, number of other homes for sale, and amount of undeveloped or commercial land will all play a role in identifying the area as on the rise or in decline.
With a clear picture of the property being valued, the appraiser will search for similar homes that have sold recently, preferably in the last six months. Starting with the sales price for three or more of these properties, adjustments are then made based on the previous information gathered. Features that are an improvement over the comparable home result in an increase, while weaknesses will decrease the price.
For each of the similar properties, the appraiser will reach an adjusted value for the subject home. Finally, the multiple adjusted values will be used to form a final appraisal value, which will be the number your lender will rely on to make decisions about your borrowing options.
In some cases, the appraiser may also use a cost approach, relying on the land value and the current cost to rebuild the home to complete the estimate. Investment properties may also warrant an income approach to the valuation where the appraisal considers the rental income that a property would likely produce.
If you’re looking for a lender who can answer all your questions and minimize the stress of your next real estate transaction, trust Open Mortgage. Visit OpenMortgage.com or call for more information.