A mortgage requires an evaluation process that examines two critical components for a successful loan. The credit process evaluates the likelihood that the borrower will repay the loan. Lenders also investigate the value of the loan’s collateral. A mortgage appraisal provides lenders information about the home and its marketability in the event the borrower fails to repay the loan.
Since buyers and sellers naturally pull in opposite directions in price negotiations, a mortgage appraisal offers an independent approach to the home’s market valuation. Home appraisers are governed by the Uniform Standards of Professional Appraisal Practice, or USPAP, and must obtain state licensing. USPAP requires appraisers to arrive at an opinion of value after considering all the conditions common in a competitive market. An appraisal may not reflect unusual sales concessions or financing options that may contribute to the negotiated selling price. Since appraisers have no vested interest in the outcome, the appraisal process removes emotional attachment and financial incentive from the valuation.
Types of Mortgage Appraisals
An electronic appraisal assesses the value of a home from a database of public records, multiple listing service records, tax records and other documents. It does not include a visual inspection. An external-only report requires the appraiser to drive by the home to confirm that it exists. To complete the report, appraisers must rely on information about the home from public records. A full appraisal requires the appraiser to physically inspect the home and make note of its condition and quality of construction compared to similar homes that have recently sold.
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A full appraisal includes a report written by an independent appraiser that must conform to USPAP standards. The report describes the location of the home and its neighborhood. The appraiser chooses at least three recently sold homes to use as comparable properties. By assigning values for the home's features, such as the number of rooms or its functional use, appraisers compare the valuations to the features of the sales comps to estimate a current value. A detailed market evaluation spells out the current market conditions for the neighborhood and estimates the length of marketing time needed for the home to sell. Appraisers include comments about the property and point out problems and features that can influence the home’s market value
An appraiser’s opinion of value can play a key role in the completion of a mortgage transaction. Lending agents are compensated through the fees a loan generates, so they have a vested interest in the outcome. Buyers and sellers are motivated to complete the transaction, sometimes with emotional attachment. USPAP’s ethical guidelines and recent legislation, such as the Home Valuation Code of Conduct, or HVCC, have imposed stronger ethical standards and practices to ensure an appraiser's objectivity. HVCC attempts to prevent industry alliances that could contribute to mortgage fraud, one of the causes of the national foreclosure crisis according to The Washington Post. Since the implementation of HVCC in 2009, the law’s good intentions have received mixed reviews. USPAP, however, pledges to proactively respond to consumer’s concerns by continually monitoring and reviewing appraisal standards.
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