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How Do Mortgage Appraisals Work

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Home Appraisal Tips For Refinancers

How Does the Appraisal Process work for a Mortgage

When youre refinancing, you want to get the highest appraisal value possible. A low appraisal value could keep you from refinancing, but a high appraisal value means more equity for you which could mean more cash out or better loan terms. Here are some ways to up your chances of a high appraisal value.

How A Home Appraisal Works

For the most part, a real estate appraisal is fairly straightforward. After you apply for a mortgage, agree on a home purchase price, and the home is under contract, an appraiser will review the property to determine whether its worth as much as the agreed-upon price.

Most states require appraisers to have specific training and credentials. In addition to visiting the home and walking through it, an appraiser usually looks at recent real estate transactions to determine what nearby homes with similar features have sold for.

Two Key Things Go Into An Appraisers Assessment

A client of ours recently went through a refinance for her 1912 character home. As a result of the house being such an old timer, the lender wanted to ensure there was value and asked to see an appraisal.

This is pretty typical for a unique home with such a wide range of possible states it may have been in. As we mentioned in our article about property assessments and refinancing, an appraiser takes into account land value and property size, but also considers the interior of the home as well as the current local real estate market.

So, what is an appraiser looking for? Two key things go into their assessment.

First, they tour the inside of the home and make notes on the things they see. With permission, they take interior photos. For example, custom maple cabinetry will have more value than MDF cabinetry.

They look at the number and size of bedrooms with closets, appliances, and mechanical , and in the case of our clients 1912 character home, they wanted to know more about when the plumbing and electrical was upgraded and brought up to modern standard. The client was fortunate that she knew when all of the upgrades took place in some cases, a guess or a search of permits may be required.

According the the Appraisal Institute of Canada, upgraded kitchens and bathrooms, flooring, windows, doors, and even paint are all good options to consider as renovations and improvements that increase the market value of a home. Check out their consumer guide here.

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Appraisers Dont Consider Moveable Features Or Decor

Although real estate agents appreciate a neutral decor to help buyers to imagine their belongings in a home, a homes general aesthetic is not high on an appraisers list for assessing value.

Appraisers take the entire property into account when valuing a property, explains Spurgeon. This wouldnt include personal property like furniture and home décor.

According to Huston, all-new ceiling fans, Bahamian shutters none of that stuff adds value. A general rule of thumb is, if its nailed down and you cant take it out, then its considered part of the house.

An upgraded microwave doesnt add value, for instance, because its moveable. Neither does a utility shed or a hot tub.

That said, people dont move hot tubs, Huston notes. While such an item might not add market value on an appraisal report, a real estate agent would say it adds marketability.

If you have personal property youre selling with the house, such as a boat for use with an attached dock, thats something the appraiser should know.

What To Do If You Arent Happy With Your Home Appraisal

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  • The first step is to talk to the appraiser during the appraisal. If you have a brand new roof, think your attic qualifies as living space, etc., most appraisers will be okay with mentioning those things as long as you do it respectfully.
  • Get a copy of the appraisal.
  • See if you spot mistakes.
  • Look at the comps. Do you strongly disagree that theyre comparable? Be prepared to explain why.
  • See if permits are an issue.
  • Make unofficial changes to the appraisal.
  • Send a petition to the appraiser to reconsider based on your notes
  • If this goes nowhere, request an appraisal from someone else. Youll probably have to pay more for it.
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    Home Appraisal Vs Home Inspection

    Home appraisals are different from home inspections because they are conducted to determine the value of a home for the benefit of the lender. Home inspections are focused on the buyers interests and the home repairs needed before completing the purchase.

    During the closing process, the buyer will find and hire a home inspector, who will conduct a thorough review of each part of the home, develop a detailed report covering the interior and exterior and make recommendations about what might need to be fixed or updated.

    After the home inspection, it is up to the buyer and the buyers real estate agent to bring up any concerns found during the home inspection. Repairs could be made or paid for by the seller, or the two sides could negotiate compensation for the buyer to fix any issues after move-in. The home inspection does not involve lenders at all, unless the buyer decides to cancel the sales contract because of the results of the inspection.

    Does A Messy House Affect An Appraisal

    Appraisers try to look past all that. But sometimes, a messy home indicates a home that isnt being well taken care of. And clutter may actually hide rot, waste, and water damage. So while appraisers may not consider it in home value, it may add time to the appraisal or raise additional questions.

    While appraisals are supposed to be unbiased, you generally dont want to do anything that makes the appraisers work harder or longer. That could cause subconscious bias the appraiser isnt even aware of.

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    Low Appraisal Value For New Construction

    Home appraisals for renovation loans or new construction loans work a little differently. The appraiser will need to measure the market value of a home that doesnt yet exist.

    To do this, the appraiser will study your building plans along with your local housing market to determine the homes eventual value.

    Many lenders call this a subject-to appraisal since it is subject to your planned projects completion.

    Once the builder finishes the job and the home receives its Certificate of Occupancy, youll need a new loan to pay off the construction loans balance. This new loan is called permanent or take-out financing.

    If, for some reason, your newly-built house did not appraise for a loan large enough to pay off construction costs, youd have some of the same options as any homebuyer:

    • Try a new lender
    • Get a new appraisal
    • Ask the builder to take less money

    If the low appraisal is the builders fault say, the quality of construction or materials were not as described in the loan application documents you may be able to sue your builder to recoup some of the losses.

    A lot of builder-owners get construction-to-permanent loans which combine the construction loan and the permanent mortgage into one loan. This option has both advantages and disadvantages. One advantage: Youd likely need only one appraisal instead of two.

    New construction that is not custom

    You have the same options if an appraisal comes in low back out, renegotiate, make a bigger down payment, etc.

    Be Aware Of The $500 Rule

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    Appraisers tend to value property in $500 increments like $300,000, $300,500, $301,000, etc. Because appraisals with $500 increments are common, its in your best interest to make small repairs if you are selling your home or refinancing. Even the smallest of changes can contribute to the overall condition of your property.

    Want a better understanding of home value? Read our guide on appraised value vs. market value vs. assessed value.

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    If A House Is Appraised Higher Than The Purchase Price

    What happens if the appraisal comes in above the purchase price of the home? Youre in a good situation if this happens. It simply means that youve agreed to pay the seller less than the homes market value. Your mortgage amount does not change because the selling price will not increase to meet the appraisal value.

    Who Performs Real Estate Appraisals In Massachusetts

    Appraisers in Massachusetts are licensed. Licensed appraisers are governed by statutes and regulations, and they must take approved courses and a test to obtain their license and continuing education to maintain their license. The role of the appraiser is to provide an objective, impartial and unbiased opinion about the value of the home he or she has appraised.

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    Heres What To Expect From A Home Appraisal So You Dont Blow It

    With a stellar offer in hand, youre relieved to have the bulk of your home sale behind you. But the deal isnt set in stone yet. There are several steps ahead that could impact your ability to close, including the home appraisal.

    A home appraisal is a professional opinion of your propertys value from a licensed appraiser. Its one persons opinion on one single day, explains Jolene Jacobs, who sells homes 57% quicker than the average Royal Oak, Michigan real estate agent.

    The buyers mortgage lender uses the appraisal to determine if the house is worth the amount of money that the buyer wants to borrow to buy it. The lender wont loan more than the property is worth, so if the appraisal comes in low, your buyer will need to make up the difference in cash or youll need to accept a lower purchase price. Otherwise, the buyer can exit the deal with their earnest money intact through their appraisal contingency.

    Unfortunately, appraisal issues arent so rare especially in a hot sellers market where bidding wars drive up sale prices. As of July 2021, appraisal issues accounted for 27% of delayed contracts and 14% of terminated contracts , according to the National Association of Realtors®.

    Sounds daunting? Dont worry weve partnered with three appraisal experts to help you understand the ins and outs of how home appraisals work.

    Heres what you can expect from a home appraisal:

    Property Size And Complexity

    Who Is The Mortgage Appraisal Meant For?  Birmingham ...

    Appraisals will generally cost more for unusual, complex or large properties, which sometimes require additional visits to the sites or extra research to determine value. A luxury waterfront house in a remote area will take more time to evaluate than a starter home in a tract subdivision, for example.

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    How Does The Fha Home Appraisal Process Work

    By Brandon Cornett | March 4, 2016 | © HBI,

    If you plan to use an FHA loan to buy a house, or if youre a seller entertaining an offer from such a buyer, youll eventually encounter the FHA home appraisal.

    During this process, a licensed and HUD-approved home appraiser will evaluate the property to make sure it meets HUDs minimum requirements, in terms of market value and overall condition.

    What Does An Appraisal Cost And Who Pays For It

    Usually, the home buyer pays for the appraisal . An appraisal cost varies depending on the location and type of property, but you should expect to pay between $400 and $1,000.

    Typical appraisal price ranges for appraisals are as follows:

    • Conventional loans usually cost somewhere between $500-$650

    • FHA almost always costs at the higher end of this spread at $650

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    Appraised Value Of A House Vs Sales Price

    Unlike the listing price, the house appraised value may not be what sellers are asking for their home. Lenders will only allow a loan amount based on how much the home is worth on the appraisal report. Unless buyers are willing to pay the difference between the listing price and home appraisal, the buyer and seller will have to renegotiate the offer.

    As you can imagine, its in the sellers best interest to try to get the home appraised for a value that matches the selling price. If an appraisal comes back low, a buyer can go back to the seller and negotiate a lower sale price. If the seller refuses, the buyer could end up walking away from the home completely. For the buyer and seller to both get what they want a home that sells the seller may seriously consider lowering the price.

    Though an appraiser isnt looking for things like paint on the walls or childrens toys in the yard, small things can still affect the appraisers overall assessment. Its important to note that while appraisers evaluate some of the obvious issues that may affect the value of a home, appraisals are different from a home inspection.

    A home inspection is a much more detailed walkthrough of a home and examines wear and tear, risks, damage and hazards. You still need to do an inspection even if you have an appraisal done on a home you plan to purchase.

    Here are a few things you can do to make sure you dont hurt your appraisal:

    What Is An Appraisal Contingency

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    The contingency clause in your purchase agreement means that you can walk away from a low appraisal on a home without losing money. Be sure that you can walk away from the get-go, so make sure your purchase agreement contains an appraisal contingency to be absolutely safe. If the home doesnt appraise for the amount youve agreed to pay, sometimes walking away is the smartest and safest thing you can do.

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    A Homes Appearance Matters

    A dirty or ugly home will usually affect your appraisal negatively, Graham says.

    How to avoid: Before you list your property, consider having it professionally cleaned both inside and out and staged not only for prospective buyers, but for appraisers as well, he says. Dont forget areas such as the attic, basement and garage, especially if they are unused. Clean up and mow the yard, touch up the paint and pack up your tchotchkes.

    Review Comparables Before You Put The Offer In

    The bank appraisers and your realtor are going to be looking at the same comparable sales, and your realtor should be providing you comparables PRIOR to writing an offer to make sure that what youre paying is justified. If you know the facts & have sales to support your offered price then youll know that youve made an informed decision and havent overpaid in the first place.

    Related Article: Asking Price VS Market Value Explained

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    Tips For A Successful Home Appraisal

    Now that you know what an appraiser looks for, you can prep your home to ensure a successful appraisal.

    First, tidy up, says Jacobs. Appraisers are trained to look past clutter and disarray, but youll still want to put your best foot forward. Jacobs tells clients to prepare their home like they would for a prospective buyer. Make it show just like when we had it listed, she advises.

    Here are additional steps you can take to prepare for your appraisal appointment:

    If youre going to sell a car, youre going to wash the car, vacuum it, probably Armor All the tires, because you only have one chance to make a first impression, Huston says. Lots of times, people dont do that.

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    A Look At The Appraisal Process

    Appraisal Process of Construction Financing

    The appraisal takes place as early as possible after the two parties agree on a price, to allow enough time to schedule a property visit and production of the report. A lender will select a home appraiser who will contact the seller to set a time and date for a home visit.

    A uniform residential appraisal reportwhich generally resembles this template from Fannie Mae, a government-sponsored company that backs many mortgagesusually relies on these factors:

    An appraisal inspection. Traditionally, appraisers review both the exterior and interior of a home to make sure it is in good structural shape, to confirm there are no safety issues, to make note of the number of rooms and to see if there have been major upgrades since the last real estate transaction. The appraiser usually takes photos of the various parts of the home during the walk-through. The appraiser handles the home visit individually, but homeowners might be present, especially if they are still living in the home. Buyers can request to be present, although its not common.

    Appraisal visits for government-backed loans can differ from those for conventional loans. For example, an appraiser who is compiling a report for an FHA-backed loan needs to test utilities and appliances to make sure they are in working order, per government rules. VA loans have a similar list of requirements for an appraisal.

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    Are Mortgage Appraisals Accurate

    • In general, they tend to be pretty accurate
    • For home purchases, theyre often close to the purchase price
    • And for refinances they tend to come in at value
    • But there will always be exceptions
    • And two different appraisers will likely come up with two different values

    A recent trend in the industry has been using appraisal management companies , which critics claim rely on real estate appraisers that arent familiar with the neighborhoods they work in.

    This is where arguments start because a lot of times the real estate agent and/or mortgage broker will disagree with the comps used in the appraisal, especially if the property doesnt appraise at value.

    Theyll claim that they should have used X property instead of the cheaper ones in the report.

    But the independent appraiser licensed to do the job is the one in charge, not the interested party trying to get a sale.

    The same type of thing may happen when a borrower is refinancing a mortgage and hoping to get a favorable value.

    If it falls short, the homeowner may argue the appraisers decision. Of course, it will likely fall on deaf ears.

    Ultimately, you will be at the mercy of the appraisers valuation analysis, which can certainly range depending on the comps they use.

    Whether thats accurate or not is debatable, but what is likely is that different property appraisers will come up with different values.

    The value of the property is one of the most important factors when it comes to securing financing.

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