Appraisal 101
What is an appraisal?
An appraisal, simply put, is a professional opinion of the value of your home. These evaluations are made by comparing similar homes in your area. It must be done by a company that is not directly affiliated with your mortgage company.
Appraisals are not needed for all mortgage transactions. For example, HARP and FHA Streamline are a few products that do not require an appraisal prior to closing the loan. However, in most purchase and refinance transactions, an appraisal is required. The price in these instances is usually going to be your only required out-of-pocket expense, and will generally range between $300-$500. The appraisal cost depends on the geographic location of the home, square footage, property type, and type of loan.
How does an appraisal work?
A licensed appraiser will schedule a specific time to come see your property. He or she will take pictures of each interior room as well as the exterior of your home and surrounding area. The appraiser is looking for the dimensions, condition, improvement(s) that have or have not been made, and the surrounding area.
The appraiser should not be in contact with your Loan Advisor at all during the loan process. After appraising your property, a market analysis will be performed where your home is compared to similar homes in the same geographic area. Typically, all of this information will be inserted into Fannie Mae’s Uniform Residential Appraisal Report. You will receive a copy of the appraisal report and your Loan Advisor will review it with you.
Why is an appraisal so important?
Having an appraisal done is important for both the lender and the borrower. The lender needs to ensure that the homeowner is not going to be over-borrowing on the property and that the home is serving as good collateral for the mortgage. The lender needs to protect itself by not lending more than the home can sell for in the event of a foreclosure.
It is extremely important that the homeowner doesn’t over-borrow—not only from a monthly payment aspect but from an equity standpoint. Consider if you get a dream job offer that requires a move. Those who over-borrow may owe money to a mortgage even after selling the home. Worst case scenario, if an asking price is too high due to the lack of equity left, a home may not sell at all.
Lastly…
Your appraisal is simply a checklist item when getting a loan and you shouldn’t lose sleep over it. Understanding how and why the appraisal is important can only benefit you during this exciting process.