If you've put in a bid on a new home and are financing your mortgage through a conventional bank or lending organization, the lender will require an appraisal of the property you intend to buy. The appraisal of the home will let the lender know how much money to lend you, and you'll know if the offer you made to the seller is reasonable. Appraisals are completed when you refinance your home as well.
Function
A real estate appraiser interprets the market to estimate a property's value. Appraisers compile data about the site of the property and the stability of the neighborhood, amenities such as special kitchens or baths, and the physical condition of the property. Appraisers generally have real estate or lending experience and in most states are licensed.
Methods
While there are many ways of appraising a property, two methods are used routinely in real estate transactions. The cost approach determines what it would cost to replace or reproduce any improvements as of the date of the appraisal. Cost appraisals also factor in physical deterioration of the property and functional and economic obsolescence.
The comparison approach makes use of benchmark properties of similar size, location and quality that have been recently sold. Generally, these are in the same neighborhood as the house under appraisal.
Considerations
Banks grant mortgages with the understanding that the loan is repaid via the purchaser's income and the property itself, should it need to be sold because the purchaser defaulted. Generally, lending institutions will issue mortgages for 80 percent of the appraised value of the property. The purchaser will need to make a down payment equal to the difference between that and the purchase price. If the loan is greater than 80 percent of the value, the loan may need to be insured by a private mortgage insurer.
Protections
Appraisers are always third parties in the mortgage process and do not work directly for the lender or real estate company. Their goal is to supply a realistic judgment about a property's actual worth at the time of the appraisal. For homebuyers, appraisals are safeguards against paying too much for a home. They're also safeguards for the lender not to issue a loan for more than a property's value.
References
Writer Bio
Lisa Nielsen is a marketing consultant for small businesses and start-ups. As part of her consultancy, she writes advertising copy, newsletters, speeches, website content and marketing collateral for small and medium-sized businesses. She has been writing for more than 20 years. She is also a business strategist, trainer and executive coach. Nielsen holds a Master of Business Administration from the University of Miami.