Lenders require an appraiser to evaluate a home before funding a mortgage. This professional evaluation ensures the lender that the buyer's desired home exists, that the area supports the loan amount, and that the home has the features included in the listing agreement. Refinancing appraisals ensure that the features of the property being refinanced match the original sale, and also document any new improvements. The new appraisal lets the lender know the home has a value at least equal to the new mortgage should the lender need to foreclose on the property in the future.
Features and Condition
Appraisers use a checklist -- a standardized form in the case of loans made through the USDA Rural Development and Fannie Mae -- to evaluate the worth of your home for your lender. The basic checklist requires the appraisers to note the features of your house, such as number of bedrooms and baths, square footage, lot size, garage configuration, and the type of plumbing and electric systems. The checklist also provides the lender a report of the condition of the property, including overall wear, the age of the important systems such as the furnace, and the age and condition of the roof. Some appraisers use a simple calculation with a flat rate for the overall type of house, such as premium building materials and features, and multiply this by the square footage of the home. Any additional home features, such as a swimming pool or spa, increase the value above the standard rate. Other appraisers add the total value of your individual features to arrive at an overall value for your home. This calculation also reduces the worth of the features by the age of the features.
Residential appraisers understand the flexibility of residential values, and how overall market conditions impact the price of your home. Mortgage lenders look to hire appraisers working in the geographic area of your home. Appraisers with personal experience evaluating homes in your neighborhood or surrounding neighborhoods understand the worth of your particular neighborhood better than an appraiser from outside the area. Market conditions include the time homes spend on the real estate market before selling, and any repossessions, rental units or leased homes in your area. Large numbers of rentals, leases and repossessed homes negatively impact residential neighborhood values.
Even when market conditions mean higher overall home prices, the appraiser must document the value of your home by submitting comparable home sales in your immediate neighborhood. Neighborhoods without any recent sales, typically within the last six months, require the appraiser to look to nearby neighborhoods with homes similar to your house -- matching features, property size and condition. The appraiser looks for three comparable sales to document your property value. Failing to find these properties, the appraiser uses older sales, commonly as old as a year, to document your home's value.
Appraisers completing an inventory for loan refinancing look at tax records to discover any new building additions permitted by the city or county since the original loan. The appraiser then looks to ensure that any remodeling included proper permits and that inspections met local building codes. The appraiser notes this information on the formal report. Additions can increase the value of the home when completed to meet local regulations.
- EFannieMae.com: Uniform Residential Appraisal Report (Uniform 1004)
- USDA Rural Development: Decoding the Uniform Residential Appraisal Report -- For Use with the Guaranteed Loan
- National Association of Real Estate Appraisers: Uniform Residential Appraisal Report
- Realtor.com: Using the Latest Comparable Sales in Buying a Home
- Realtor.com: What's Underwriting and How Does It Work?
- Realtor.com: Underwriting
- Economic Policy Program Housing Commission: A Comparative Context for U.S. Housing Policy -- Housing Markets and the Financial Crisis in Europe, Asia, and Beyond
- Smart Money: New Battle Affects Home Values -- No-Rental Rules
- New York Times: Scrutiny for Home Appraisers as the Market Struggles
- Appraisal Institute: Making Sense of the Nonsense -- Providing Credible Appraisals in a Declining Market
- Federal Deposit Insurance Corporation. "The Home Mortgage Appraisal: How Consumers Can Benefit." Accessed May 27, 2020.
- The Appraisal Foundation. "A Guide to Understanding a Residential Appraisal." Page 4. Accessed May 28, 2020.
Lee Grayson has worked as a freelance writer since 2000. Her articles have appeared in publications for Oxford and Harvard University presses and research publishers, including Facts On File and ABC-CLIO. Grayson holds certificates from the University of California campuses at Irvine and San Diego.