By Rae Oakley, Flyhomes Mortgage
Why do we need appraisals?
If you’ve ever financed a home purchase, you’re likely familiar with appraisals. Often a necessary step of closing on a mortgage, an appraisal is a third party assessment of the value of your home.
Fannie Mae, a government sponsored enterprise and the largest purchaser of conventional loans, explains,“the appraisal is used to judge the property’s acceptability for the mortgage loan requested in view of its value and marketability.”
Because your mortgage lender is on the hook for your home if you default, they want to make sure that it’s adequate collateral for your loan.
How do appraisals work?
When your mortgage company orders an appraisal through a third party appraisal company, the appraisal company sends a licensed appraiser to your future home.
The appraiser is required to do five things:
1: Perform a complete visual inspection of the interior and exterior areas of the property
2: Inspect the neighborhood
3: Inspect each of the comparable sales from the street (or a larger area)
4: Research, verify, and analyze data from reliable public and/or private sources
5: Report their analysis, opinions, and conclusions in an appraisal report
Note that there are three different methods for completing appraisals:
Used for single family residences, townhomes, condos for primary or secondary occupancy
Also known as Sales Comparison Approach, this method is based on a comparison with similar property sales in the area. Must include at least 3 sales closed in the past 12 months.
Used for investment properties
This approach allows investors to estimate the value of a property based on how much income it will bring in. Divide the net operating income of rent by the capitalization rate to estimate a value.
Typically used for new construction homes
As the value of the property is dependent on completion of the project, most construction lenders require this method. To calculate the value, take the cost of improvements less the amount of depreciation plus the estimated value of the site if vacant.
What are comparables and how are they selected?
Comparables, aka “comps,” are properties deemed similar enough to the subject property to use in estimating the subject property’s value. In the market approach, 3 comps are required, but most Form 1004 appraisal reports include 6 comps.
What comp choices are based on:
-Size. At the most basic level, similar size means similar square footage, and the same number of bedrooms and bathrooms.
-Location. Location means not only proximity, but also the neighborhood and school district.
-Style. Generally speaking, appraisals will try to find comps that are similar in style and layout. For example,appraisers will try to compare a rambler to other ramblers, and a split-level to other split-levels.
-Whether or not they have recently been sold. Depending on the market, “recently sold” can mean anywhere between 90 days and 6 months as the outer limit.
Because no two homes are 100% identical, appraisers often “bracket” the characteristics of the home to determine the value.
For example, if there is no comp that is the same size as your home, the appraiser may select one comp that is slightly larger and another that is slightly smaller in order to determine the value of your home that lies in the middle.
How much do appraisals cost?
The average appraisal across the United States costs between $300 and $400. In Seattle, appraisals can run you between $500 and $900 depending on the mortgage company and size of your loan.
For example, at Flyhomes Mortgage our prices are $720 for a conventional loan and $870 for a jumbo. When selecting your lender, we recommend considering the cost of an appraisal as well as all lender-specific costs.
How does appraisal value affect my loan?
The most important thing to know is that your mortgage lender can only provide a loan based off of the lower of the appraisal value or the purchase price.
So, if the appraisal value comes in lower than the price you offered on your contract, you might be in a situation where you have to make up the difference between the two prices.
For example, let’s say you offer to buy your future home for $500,000 and plan to put 5% down. In this scenario, you are planning to put $25,000 down and receive a loan of $475,000 from your lender.
Then, imagine that the appraisal value comes back at $480,000. Since most mortgage lenders can only lend up to 95% of the home’s value, that means your new loan amount is a maximum of $456,000.
Since your contract requires $500,000 for the house (assuming there are no contingencies), that means your new downpayment is $44,000 ($500,000 – $456,000).
The good news is that all buyers have a right to receive a copy of the appraisal and contest the appraisal should they find inaccurate information or better comparables to appeal the appraisal value.
So there you have it … a crash course in appraisals. We hope this helps arm you with the information you need to feel confident about making an offer on your dream home!
Want to learn more about appraisals?