New Homebuyer’s Guide To Appraisals

What New Homebuyers Need To Know About Appraisals

If you are a new homebuyer, welcome! Buying a home can be a confusing process, however, I hope that you have been able to surround yourself with knowledgable professionals who can help you navigate your first home purchase and make it an enjoyable experience. In this new homebuyer’s guide to appraisals, I’ll help you understand the process during your first home purchase.

I would like to do my part by informing and educating you on the appraisal part of the transaction. While most people will not require an appraisal very often it is good to know what an appraisal is and how the process works.

If you have any questions after reading this please leave a comment below or contact me as I am always available to answer any questions you may have.

What is a Mortgage Appraisal?

A mortgage appraisal is an appraisal that is done for mortgage lending purposes. Lenders, including banks and mortgage companies, require an appraisal to justify the loan they are making.

The appraisal must show that the home that is being purchased, and that will be the collateral for the loan, is worth the amount of money that is being loaned.

Banks never want to be upside down in a loan meaning that they do not want to loan out more than what the home is worth. This is true for the borrower as well.

If you owe more than the home is worth and must sell you will need to pay off the difference to the bank after you sell the house. It is much better financially for the home to be worth more than what is owed on it. This is called equity.

Who is the Appraisal for?

Most people believe that the mortgage appraisal is done for the benefit of the borrower, however, this is not true. The appraisal is done for the lender to help ensure that they do not overlend.

If they loan out more money than the home is worth, and they take the home back in foreclosure, they may lose money when they sell the house. Of course, this can also hurt you the borrower because the bank can then sue you for the difference.

Appraisal waivers have become popular recently as a way of saving the borrower money and speeding up the process. When a waiver is used the loan decision is primarily made based on the borrower’s good credit rating.

If the bank uses a waiver it is still a good idea for the borrower to obtain an appraisal of their own to make sure that they are not paying more than the home is worth. Banks are typically absolved from discrepancies between the amount they lend and the true market value of the home meaning that they will not be held responsible to the buyer.

You can read more about property inspection waivers in a past article I wrote.

Appraisal vs Home Inspection

As a new homeowner, you might be confused about the differences between an appraisal and a home inspection. Basically, an appraisal determines the value of a property, and the home inspection reports the home’s overall condition as well as that of the different systems.

Appraisers develop an opinion of value for the subject property for various reasons including mortgage underwriting. Some examples of this are buyers purchasing a home, owners refinancing a home, and clients who are building a home.

Other nontraditional uses for an appraisal include valuation for insurance companies, helping sellers arrive at a market value to list their home, estate planning, and tax appeals.

Real estate appraisers note any obvious condition items such as holes in walls or water stains on the ceiling, however, we are not required to probe the interior of the walls or other similar actions.

Home Inspectors develop a recap or snapshot of the condition of the property mainly for buyers purchasing a home, but it is not limited to just buyers. Other users might be sellers, mortgage underwriting, banks, and contractors.

Home inspectors dig deeper and test the operation of the plumbing, electrical, and structural systems of the house.

Home inspections are normally regulated by the state. The state of Alabama is regulated by the Building Commission which enforces the standards set by the American Home Inspector Society (ASHI).

As you can see, there are major differences between home appraisals and home inspections and both are very important.

There are numerous steps in the appraisal process and it’s important to know each step involved.

Steps in the Appraisal Process

1) Appraisal is ordered – After you complete your loan application the bank will complete the necessary steps they require before ordering the appraisal. When they do order it they will typically order it through the appraisal department of their company or through a third party Appraisal Management Company or AMC.

If it is ordered through the bank the actual order is sent directly to the appraiser, however, if it is sent to an AMC this may take a little longer because it is a third-party vendor. As in anything else, when more people are involved in the process the longer things take.

The AMC scenario was put into place several years ago to reduce direct contact between the loan officer and the appraiser, however as I said it can be a slower process.

2) Appointment is set – After receiving the order the appraisal inspection must be set. The appraiser is given the contact information, which is usually the real estate agents involved, to schedule the appointment and gain access to the property.

Any delays that the lender has in getting the order to the appraiser can extend the delivery date of the appraisal. This delay can grow even more if an AMC is used because one more party is involved.

The appraisal inspection appointment will be set by the appraiser based on their current schedule. The appointment can be scheduled within one day to a couple of weeks depending on their current workload.

3) Appraisal appointment – This step occurs when the appraiser visits the property. The goal is to collect as much information about the property, such as how big it is, what condition it is in, and what features it has.

This step can take anywhere from 30 minutes to several hours depending on the property. Larger properties take longer to measure and walk through so keep that in mind.

The two main parts of the property inspection involve observing the inside and outside of the property. I prefer to start with the outside first because this allows me to sketch the house first and have that available when I go inside where I can then locate and label the various interior rooms and features.

The exterior of the home is measured to arrive at the gross living area, which will be used to arrive at one of the key metrics in appraising, the price per square foot. If the home has more than one level, such as a basement or second floor these areas may be measured from the inside.

After the home is measured the appraiser finishes the outside work by noting any other exterior improvements such as barns, pools, boathouses, etc. in addition to taking pictures.

The observation continues on the inside of the home with the appraiser walking throughout the house and noting the materials of construction, condition of the home, and the various features. Finally, pictures of all of the rooms and features are taken to include in the report.

4) Research and analysis – After the appraiser has all of the physical data about the subject property he/she can begin to collect and analyze the data on recent sales in the subject’s competitive market area. The physical data collected about the subject allows the appraiser to narrow down the recent sales to those properties that are the most similar.

The sales will be studied to determine the adjustments to be made in the report for the physical differences between the subject and comparables. Both closed sales and active listings will be included to arrive at the most accurate value indication.

During this stage of the appraisal, the appraiser will research and verify information about the sales to make sure the most accurate data is used. This often involves contacting a party to the sale such as the buyer, seller, or real estate agent who was involved in the sale.

The time required for this stage will vary depending on the amount of data readily available. In areas where sales are plentiful, the process will go more quickly than in rural areas where sales occur less frequently.

In areas where most of the sales are handled by agents, the information will be easier to find. In other locations such as with rural properties, there will be fewer sales, and/or the sales may be private so it may take longer to locate them and verify the information.

5) Appraisal is delivered – After analysis of all of the data, the appraiser then puts the report together to deliver to the client. This involves filling out the report and including all of the necessary exhibits such as the floor plan sketch, photographs, and maps.

Appraisal reports come in various formats, however, most people are familiar with Fannie Mae form 1004. This form is what is used by most lending institutions for residential properties. Some appraisers may write a narrative appraisal report for complex residential properties, however, for the most part, most are done on the 1004 form.

The appraisal report includes information about the subject property that was collected during the property inspection. Due to limited space on the form, many of the items noted may be abbreviated, however, if you do not understand how to read it you can check out this video I did explaining the form.

After the appraisal report is finished it is either delivered by email or through a lender or AMC appraisal portal.

After delivery, the lender will use the appraisal to finalize and close the mortgage loan. Even though the buyer pays for the appraisal the report is owned by the lender because they are the client of the appraiser and engaged them in the performance of the appraisal.

The bank is required by law to provide a copy of the appraisal report to the borrower. If they fail to do so it could be an oversite so you may ask them for your copy.

Because the bank or mortgage company is the client of the appraiser the appraiser is not able to discuss the contents of the report with anyone without the permission of the client. If you want to discuss specific assignment results you’ll need to ask the lender to give the appraiser permission to do so.

What If The Appraisal Is Less Than The Contract?

There is always the possibility that the appraisal value is less than the contract price. If this is the case most banks and mortgage companies have a formal reconsideration of value process.

You will need to find out the steps you need to take but they basically include providing information to the appraiser via the lender regarding data within the report that may be factually wrong or providing additional sales information that was not included in the report than may support a higher value. You can find out the 5 steps you can take when your appraisal comes in low in a previous post.

The appraiser will then use this information to possibly make changes to the value. An increase is not always guaranteed as the appraiser may have already considered any sales that are being provided to them and determined that they may not have been comparable.

If the appraisal value is not changed then it is possible that the deal can be renegotiated to match the appraisal value.

Conclusion

I hope this new homebuyer’s guide to appraisals has been helpful. I have included the key points and steps involved in the appraisal process for those purchasing a home for the first time.

Question

Do you have any further questions about what is involved when an appraisal is ordered during a home purchase? If so leave a comment below and as always thanks for reading.

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