Home appraisals often mystify homebuying newbies, and some appraisals occasionally mystify seasoned real estate agents. An appraisal evaluates the house, condo or co-op to let the buyer, seller and the lender know the value of the property. The buyer normally asks for and pays for the appraisal as part of the real estate purchase agreement.
"Underwriting" is a term used to describe the process required by the lender to determine the acceptable risk for the loan. Underwriting happens in first and second mortgage applications, and when you apply to refinance your current loan. The first part of underwriting qualifies you as a credit risk and the second part looks at your home choice to see if it meets with the lender's approval. You may love the house, but your underwriter might not view it as a good risk. Don't be discouraged if your house doesn't qualify with your lender's underwriter. If you qualify as a good credit risk, you can shop your loan to other potential lenders.
As part of the appraisal, your new home's price will be compared to the price paid for other houses in the neighborhood with comparable features. The potential lender looks for homes most closely matching the features of your new house, including number of bedrooms, bathrooms and lot size. If you make a huge down payment, the paper appraisal assures the bank of a good investment. The bank's primary concern is getting the loan amount out should you foreclose on the property. If the paper appraisal shows you got a steal compared with the value of the other homes in the neighborhood, or your down payment makes it a deal to the bank if you fail to make your mortgage payments, then the bank underwriting might be less thorough.
Physical appraisals involve varying degrees of inspections. The simplest is a drive-by where the appraiser looks at your new home out a car window. The most detailed involves getting dirty crawling through the attic and under the home's foundation to look for any suspected problems. Most appraisers look at the home to make sure the real estate agreement matches with the property to avoid any fraud. Appraisers using the Uniform Residential Appraisal Report typically take photos, measure the rooms and exterior of the house and also match the title report information to the physical lot and features. The buck stops on the appraiser to evaluate the worth of the home for borrower and the bank or private lender.
Appraiser qualifications vary by state and by lender, but new requirements in most states require a license and set down a minimum competence of training and experience. Professional real estate agents usually help prepare the "comps," listing the comparable sales in the neighborhood. Some sales agents meet with the appraiser to answer any questions about the property or the comps.
- Appraisal Institute: Education -- Starting Your Career
- California Office of Real Estate Appraisers: Statutes of 2011, Chapter 716
- California Office of Real Estate Appraisers: Statutes of 2011, Chapter 712
- Realtor.com: Underwriting
- Realtor.com: What's Underwriting and How Does It Work?
- Realtor.com: Using the Latest Comparable Sales in Buying a Home
- Realtor.com: Set Your List Price
- MSN Real Estate: Doing Your Own Comps? Maximize These 6 Sources
- Minnesota Title and Abstract Co.: Closing Costs -- Who Pays and How Much?
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.