When you buy, sell, or even refinance a home, its market value will be very important to the transaction. A lender bases its approval on the true market value of the collateral, which is the home. Valuation is calculated using a number of factors, determined by a professional and licensed appraiser. In most instances, the market value is at parity or near the amount of the agreed selling price.
However, there are situations where there is no professional real estate evaluation, which is most common for homeowners applying to refinance. It is important to understand that refinancing is not a change in terms of your current mortgage, it is altogether a new loan. Because of this, the lender will need a professional valuation of the collateral.
Elements of a Home Appraisal
The home appraisal process can be a nerve-racking time for buyers and sellers, or, homeowners who are applying to refinance. Should the valuation come in at a different amount than the agreed selling price between the buyer and the home seller, the lender will not increase the buyer’s loan pre-approval. Instead, the lender will either deny the home loan, or in some instances, will allow the parties to renegotiate the selling price.
“Many appraisals are performed for lending purposes. Property owners should be aware that current federal lending regulations* require the lender to ‘initiate’ the appraisal. The lender must have the first contact with the appraiser and oversee the appraisal process. According to these regulations, the lender must be the client and the appraiser must be engaged by the lending institution. According to federal lending laws, any bank can use an appraisal prepared for another bank, as long as the initiating bank reviews the appraisal and finds it to be acceptable.” —Appraisal Institute
Of course, the former scenario is far more common than the latter. Lenders are adverse to risk, and, will take great caution in the loans they approve. Because of this potential, it is important that you understand the elements of a home appraisal:
- Location. It’s the old cliche of real estate, its value being all about location. What you might not know is that it’s not only the city, but also, the neighborhood. A home’s value, is in-part, based upon the surrounding neighborhood. Of course, the local real estate market conditions will also play a big role.
- Size. The size of the lot and livable square footage, will be two more factors which the appraiser will take into account. In addition to these, the number of bedrooms and bathrooms, their respective sizes, and overall layout of the home will also go into the calculation.
- Landscaping. Though this certainly isn’t the largest factor, it is nevertheless an important one. Appraisers will pay attention to the landscaping, particularly the curb appeal. Simply put, the more attractive it is, the better.
- Age and condition. This is not only about the actual age of the home, but how well — or poorly — it is aging. In addition, the appraiser will take into account any home improvements, particularly ones that won’t go with the seller post-transaction. These include flooring, updates, windows, doors, appliances, and the like.
- Comparables. Homes that are similar in size, have the same number of bedrooms and baths, and, are in the same condition which have recently sold are a big part of the appraised value.
Another factor that will have a lot to do with the final valuation is the various systems, such as the plumbing, electrical wiring, and so on. The structural condition and any defects, will also be included in the appraisal.