Appraisals for Home Loans

For most all home loans an appraisal is required part of the approval and final underwriting process.  An appraisal is a document that gives an estimate of a property’s fair market value.  The appraisal is a compilation of data pertaining to the property on sales, physical condition, amenities and cost.  After a complete analysis of the data gathered an opinion of value is determined.  An appraisal is generally required by a mortgage lender before the mortgage loan approval to ensure that the mortgage loan amount relative to the property value is within the appropriate guidelines for the loan requested.  The appraisal is performed by an appraiser who is typically a state-licensed individual trained to render expert opinions concerning property values.  Although, the home loan borrower pays for the appraisal, the appraisal will be ordered and delivered to the mortgage lender.

An appraisal on a property for either a purchase or refinance is as important as the borrower’s credit history or debt ratio in obtaining the mortgage loan.  The appraisal will be an important factor in determining how much of a mortgage loan a bank or mortgage lender will approve.  At times when home prices are down it is common to find an appraised home value that does not support the mortgage loan amount and the home loan is subsequently never approved.

Though there is a significant amount of work to be done to perform the appraisal, the appraisal is still an opinion of value or the act or process of estimating the value.  The appraiser does not create value; the appraiser interprets the market to arrive at a value estimate of the home.  This opinion or estimate is derived by using three common approaches, all derived from available market data.

Appraisers use these three approaches when establishing the value of a given property:

1.  Cost Approach: The cost approach to determining value is to estimate what it would cost to replace or reproduce the improvements as of the date of the appraisal.  In this approach the following formula is used to arrive at the property value: Value of the land (vacant), added to the cost to reconstruct the appraised building as new on the date of value, less accrued depreciation the building suffers in comparison with a new building.

2.  Sales Comparison Approach: In the comparison approach to determining value the appraiser identifies comparable properties in the neighborhood of similar size, quality and location, which have recently been sold.  Ideally, the properties are close in vicinity (within a 1/2 mile radius of the subject property) and have sold within the last six months.  The appraiser then compares the sold properties to the subject property.  The factors used in the comparison include square footage, number of bedrooms and bathrooms, property age, lot size, view, and property condition.

3.  Income Approach: The income approach to determining value evaluates the potential net income of the property is capitalized to arrive at a property value.  This approach is of primary importance to income producing properties and is usually used in conjunction with other valuation methods.  For single-family residential mortgages it is given little weight.  The process of converting a future income stream into a present value is known as capitalization.

After thorough exercise of the three approaches, a final estimate or opinion of value is established.  When evaluating single-family, owner-occupied properties, an appraiser most heavily weights the sales comparison approach.  The final appraisal report is often very detailed.  Material in the final report will include: legal description, tax information and zoning requirements, a description of the lot dimensions and size, neighborhood improvements and amenities, a thorough home description with size, style, quality of condition, room types and features.

If the mortgage company orders the appraisal in conjunction with your home loan request, the appraiser is responsible only to the mortgage lender.  Through federal law you are entitled to a copy of your appraisal.  In order to get a copy, you have to request it.