On most mortgage transactions, lenders require an appraisal. Brian Faye and Brian Taylor go through some of the most asked questions to help you understand this process.
Appraisals and home inspections are not the same. They both generally take place within a week of signing a purchase agreement, but they are two separate processes.
A home inspection is focused on the condition of the house. A building or home inspector will complete a thorough observation of the entire house and property and make recommendations for what needs to be fixed. This includes the structural elements of the home: roof, basement, windows, exterior and interior walls, and doors. The inspector will also take a look at electrical, plumbing, heating/cooling systems, and appliance systems.
“Believe it or not,” says Brian Taylor, “the lender doesn't actually require anything from the home inspection. They are interested in the appraisal.”
An appraisal is about the current value of the home. Appraisals are an estimate of how much the home is worth.
If you are buying a house for $200,000, for example, the lender wants to be sure the house is worth at least $200,000.
Brian Faye explains, “If it comes in less than $200,000 you are going to have to renegotiate with the seller. The bank is never going to lend you more money than the house is worth.”
Appraisals protect both the lender and the buyer by making sure the house is worth the amount being paid. The appraisal will also help determine with the PMI, or private mortgage insurance, is. This will help calculate the amount of equity in the property.
An appraiser will visit the property and make an unbiased estimate based on comparables, or comps. This means appraiser will compare homes in the area similar to the one being sold. For example, if the home being sold is a colonial, appraisers will look up other colonials within a close distance that have been sold within three to six months.
From there, adjustments are made for year built, the condition of the home and property, amenities, and updates or repairs. All of the comparables and adjustments will help to make an estimate on the value of the home - the appraisal.
The biggest factors in an appraisal are:
Other factors that go into an appraisal are the location of the home, the structure of the home, updates made, and the current real estate market.
Do you have more questions about home appraisals? Contact us today!