When applying for a mortgage loan, one of the major considerations is the value of the home. After all, a lender will not want to lend more money on a home than it is worth. So to establish its value, a licensed appraiser will be normally required to perform an appraisal of the property.
Typically, an appraiser will visit and inspect the property, take measurements and photos and then do research on similar homes in the area. What the appraiser is looking for are fairly recent sales of similar properties within a close proximity to your home (known as the "subject" property.) These homes that are used for comparison (known as "comparables" or "comps") should be similar in design, function and size. Where there are discrepancies, the appraiser can determine the difference in value of such discrepancies.
When all the research is done, the appraiser should come to a conclusion as to the value of the property. Two things to keep in mind about this value:
- It is an opinion and appraisers have the flexibility to interpret the market place as they understand it. A good appraisal should be within a reasonable range of value with another reputable appraiser and to be very solid should have few adjustments in value between the subject and the comps. (The adjustments in value are to account for the discrepancies between the subject and the comps.)
- An appraisal is not to be considered a replacement for a qualified property inspection. While the appraiser does inspect the property, their inspection is limited and broad, typically seeking obvious defects that would affect overall value. Examples would be holes in the wall, missing fixtures, lack of flooring, etc. And inspector, however, will dig deeper into a property to uncover any defects they can find. They will find issues with wiring, HVAC, roof leaks (that are not so obvious), foundational and mechanical issues... and much more. And while they do inspect for issues, they can not assess value for the home.
Once an appraisal is completed, it is sent to the lender for review and approval. The lender will have many tools to validate the value of the appraisal. Some of these tools include a simple "desk" review in which someone looks over the appraisal report of red flags. A field review may be ordered in which someone would drive out to check out the home, but may not do a full review including measurements and inspection. And there are Automated Value Models (AVM's for short) that use data from the Internet to help determine a range of value. If the lender has used their tools and determines the value is ok, then the loan can move forward.
However, if the lender sees a problem, they can request a second appraisal or even "cut back" the value of the appraisal to what they feel is reasonable. While this is not a common practice, it can happen.
In most cases, especially in regards to a purchase, an appraisal is not that big a deal. They normally come in as expected with the value that is needed. On a refinance, it could be hit or miss depending on what the expected value is.
Either way, an appraisal will typically be done on 99% of all loans originated today. It not only protects the bank, but it can protect you as well from making a bad financial decision.
