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.
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.
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.
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.
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.
- Are VA Appraisal Fees Expensive?
- FHA Septic System Rules
- How to Remove a Co-Borrower on an FHA Streamline Refinance
- Do Banks Ever Reassess the Value of a Home With Regard to the Home Equity Loan?
- Definition of Pre-Foreclosure Auction
- What Is an Appraisal Fee for Buying a House?
- Things to Know Before You Buy Real Estate
- Can You Request a Mortgage Commitment Letter Before an Appraisal of the House?