How Does a Mortgage Company Appraise Your House?

An appraiser will consider home-selling trends as well as your house's condition.
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When you’re selling your home or trying to get a second mortgage or a home equity line of credit, your bank will probably order a current appraisal. The appraisal tells the bank what your house is worth based on its age, condition, the neighborhood, landscaping and recent sales trends, among many other factors. Since many banks sell home mortgages, the appraisal must meet certain industry standards. It’s natural to be anxious about the outcome of the appraisal, but knowing how the appraiser determines value gives you a chance to address issues that could affect your appraisal.

Appraiser Standards and Qualifications

Professional appraisers must not be associated with the mortgage company that orders the appraisal or with a real estate company that lists or sells the property, although many professional appraisers have real estate sales or mortgage finance experience. The Appraisal Standards Board sets minimum qualifications for appraisers, and individual states can adopt standards that are more stringent. Professional appraisers must undergo initial training and testing before receiving a license. Every two years, the appraiser must take additional courses to stay abreast of the latest rules.

Scheduling the Appointment

If you’re selling your house and you just signed a contract, the buyer’s bank has a certain amount of time in which to order the appraisal. This time varies depending upon the current availability of appraisers in your area and the type of loan the buyers are applying for, but typically the contract will stipulate that the bank must schedule the appraisal within a few days to a couple of weeks. By limiting the time, the buyers can’t drag their feet and tie up your property if the bank isn’t going to make the loan.

The Appraiser’s Checklist

The appraiser will measure the exterior of the house as well as the dimensions of all interior rooms. Every material aspect of your house will be noted, including the type and condition of the foundation, wall construction, condition and age of the roof, whether the roof has guttering, type of heating and air conditioning, utilities, interior and exterior finish, lot size and garage type. The appraiser will be looking for signs of damage and structural problems. In order to formulate an accurate value the appraiser records every detail that might affect your home’s value.

Analyzing House Value

Once the appraiser leaves your house, the real work begins. The appraiser searches real estate records to find homes similar to yours that sold within the past six months. These homes, called “comps,” provide a basis for determining the current market value of your home. If the appraiser is unable to locate comps that are close to your home in age and style, he will make his selections based on as many similarities as possible. In small communities with only a handful of recent sales, the appraiser might have to include homes that sold up to a year ago to find comps.

The appraiser fills out a grid with the sales prices of the comps, how long they were on the market, and the same details noted from the inspection of your house. The appraiser will adjust the value of each of the comps based on your home's features. For example, if your house has a new roof, but a comp had an old roof, the appraiser would add value to the comp to indicate what it might have sold for had its roof been in new condition. Other things the appraiser uses to assign value include the type of neighborhood, square footage, number of bedrooms and bathrooms, quality of interior and exterior finish, landscaping and lot size. As the appraiser goes through the list, he will adjust every comp value, either up or down, using your home’s condition and amenities as references. After completing the adjustments, the appraiser averages the totals to determine the value of your home.

Use of Appraisal

After the appraisal is complete, the mortgage company can agree to finance a buyer’s mortgage, up to a percentage of the appraisal value. In many cases, this is around 80 percent of the appraised value. Mortgage companies want buyers to put up the rest of the money to show that they’re serious about owning the home. If you’re applying for a second mortgage or a home equity line of credit, the lender will look at the amount of your first mortgage, your credit score and your ability to pay an additional note in deciding whether to lend more money. Your house is the collateral for the new loan as well as for the first mortgage.

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