A home appraisal is a critical step of the mortgage and refinancing process. Lenders depend on professional home appraisals to determine the fair market value of a home and approve a loan. As a buyer or refinancer, a home appraisal will affect the amount you can borrow. It is important for a seller too because it tells them what their home is worth.
Therefore, understanding the home appraisal process can help homebuyers at every step including buying, maintaining, and selling their home. Here is a guide to help you understand this process.
Why Lenders Need a Home Appraisal?
A home appraisal is performed by a certified or licensed appraiser hired by the lender. An appraiser assesses the home’s condition, square footage, location, and features to determine an accurate value of the property to ensure that homeowners are not over-borrowing, and also protect their investment.
The property serves as collateral for the loan. So, if the actual value of the property is less than the sales price and the borrower defaults on the loan lenders will not be able to recoup the loan amount.
How the Home Appraisal Process Works?
The home appraisal takes place when you apply for a home loan or refinance. The lender selects a qualified appraiser familiar with the area and who has no direct or indirect interest in the deal. The appraiser will check the public records to obtain information on similar homes in the neighborhood that have been recently sold to determine the current market trends. Then he will complete a visual inspection of the exterior and the interior of the home to check the amenities, the number of rooms, floor plan functionality, and major upgrades since the last property transaction. He will also check to make sure that there are no concerns that can adversely affect the market value of the property like safety issues.
What Will You See In The Final Report Of Value?
Generally, the appraisal report will resemble the Uniform Residential Appraisal report template from Fannie Mae and include:
- Maps, photographs, and sketches of the property that has been appraised.
- Details of the property with a side-by-side comparison of similar properties.
- Characteristics of the property including the size and condition of the house.
- Flagged descriptions about problems like a cracked foundation, wet basements, water penetration through the roof, and windows that need replacement.
- Information of permanent fixings like ceiling fans, lights, and faucets.
- Details of home renovations like bathroom, new flooring, and kitchen updates.
- Other relevant information that determines the property’s market value like market sales records, public land records, and public tax records.
- The contact information including licensing information of the appraiser.
An appraisal helps lenders to determine the loan-to-value ratio of the loan. If the appraiser puts the home equity at less than 20%, then homebuyers and refinancers will have to pay private mortgage insurance(PMI).
Tips on How Home Sellers And Refinancers Can Prepare For A Home Appraisal
If you intend to sell or refinance your home shortly you should be ready for the appraisal process. You have probably done some work to increase the value of your home like updating your kitchen or bathroom. Itemize and document these recent improvements or major changes you have made with the year and cost of each.
Some of the things that you could do to keep your home in top shape are:
- Ensuring that all-important mechanical devices connected with the home are in working order.
- Make sure that there are no more repairs to be done like faulty railings, steps, or water leaks.
- Fix anything that is broken.
- Clean up the roof and if needed replace it with a new one.
- Clean and unclutter your home and yard so that it looks good.
You should highlight any upgrades and positive features of your home to the appraiser.
For more tips check out our blog post “Home Improvement Projects You Should Tackle to Increase The Value Of Your Home”.
Appraisal Tips for Home Buyers
As a buyer, you do not have many options. However, you can prepare yourself before you apply for a mortgage.
- Know what features impact the home value: The appraiser calculates a home value by comparing properties in the neighbourhood that have similar characteristics like the square footage, age, location, utilities, and various upgrades and renovations. The listing agent or your real estate agent can provide you with comparable properties or comps which will help you to know how sellers arrived at an asking price.
- Check the condition of the home to evaluate any damages, wear or tear.
- Talk to your Real Estate Agent: Discuss how to handle a shortfall and how willing you should be to walk away from the deal if it is not right for you.
- Add an Appraisal Contingency when you put up good-will money: Your offer on the home should point this out so that if the appraisal price is low you can withdraw your offer without losing your money.
Though a home appraisal is intended to protect the mortgage lender it can be beneficial to buyers, sellers, and refinancers too. An accurate appraisal can confirm the home’s value and offer information that can guide you through the biggest monetary decision of your life.