Hey, homeowners, ever feel like all this appraisal stuff is over-complicated and kind of secretive? Download this guide for a general timeline of the mortgage appraisal process. PLUS, keep reading for a deep-dive into the ins and outs of the appraisal process. Download Now: Mortgage Appraisal Timeline PDF Save this worksheet to help demystify the appraisal process and share with others. [image]
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Keep in mind that mortgage appraisals may vary, but these steps offer a pretty standard snapshot of the process, from agreeing on a price to closing the deal.
What Is a Mortgage Appraisal?
A mortgage appraisal (sometimes referred to as a home, property, or bank appraisal) is a type of property appraisal that is done when someone wants to take a mortgage out on a home or refinance. The lender requires this appraisal, and it’s done by a licensed or certified appraiser before the home sale closes.
Appraisal Methods
When it comes to property appraisal, there is always a method (or several) to the madness. Appraisers follow the Universal Standards of Professional Appraisal Practice (USPAP), which set the standards for determining property value. These standards ensure consistency for mortgage transactions, including those backed by federal agencies like Fannie Mae, Freddie Mac, the Department of Veterans Affairs, and others.
Market Approach
This is the method you might envision: an appraiser goes to a home and compares its age, condition, and features to similar properties in the area. They will look for sales data from similar properties, consider differences, and then come up with a reasonable figure for the “market value.” But the market approach is just one piece of the pie.
Cost Approach
The cost approach considers the cost of materials, labor, and appreciating and depreciating value of those components. This approach is especially useful when dealing with unique properties, old properties that were built with dated supplies, and for insurance and land valuation purposes. Key considerations include:
Construction costs
Cost of materials, labor, and land value
Functional and external obsolescence
Income Capitalization Approach
If the property being sold is used for income-generating purposes, like if it’s a historical tourism site, or used as a rental property, the income capitalization approach can be useful. Unlike the others, this method focuses heavily on a property’s earning potential. Key considerations include:
Local rents and vacancies
Net operating expenses (NOI)
Capitalization (cap) rates
Discounted Cash Flow (DCF)
How Appraisers Choose Their Methods
Before starting an appraisal, appraisers determine the Scope of Work, which helps them decide the best method to use. This involves evaluating factors like:
Location and local markets
Size, land value, and zoning regulations
Age and building systems
Condition and construction materials used
Features both standard and unique
Each method requires consideration of different factors. For example, the cost approach relies heavily on the property’s age, building systems, and rehabilitation history. By analyzing these details, appraisers ensure their valuation is accurate and tailored to the property.
What Kind of Property Research an Appraiser Does
Appraisers are the masters of the research report. The data that they are able to source on each property goes directly into their research, which is all used to help inform their opinion of value. Appraisal research commonly includes both on-site and off-site methods (though the desktop appraisal is becoming more popular).
On-Site Appraisal Research Methods
The physical property can tell many secrets. Whether an appraiser does a drive-by appraisal or explores the inside of the home, there are many elements they look for. Here are a few they look for when conducting research on-site:
Size
Characteristics
Conditions
Features
Upgrades or repairs
Curb appeal
Surrounding area
They also take photographs of the property for documentation. From there, they can research and verify property descriptions using public records, and compare those to what they saw in person.
Off-Site Appraisal Research Methods
Analyzing “comparables” (i.e., comparable properties recently sold nearby) is a huge part of the off-site research an appraiser will conduct. This research includes consulting sale trends in the local real estate market and surrounding neighborhoods, comparing neighborhoods and communities, local amenities, and more.
What to Do with That Appraisal Report: Exploring Outcomes
When the appraisal is complete, one of three things can happen:
The appraisal value comes back lower than the agreed-upon price.
The appraisal value comes back higher than the agreed-upon price.
The appraisal value matches the agreed-upon price exactly.
Here’s what each outcome means and what you can do next.
The Appraisal Comes Back Low
So, the appraisal came back lower than the agreed-upon price. This can happen for a few reasons: if the market shifts after the seller sets their price, if the seller overlooked property flaws, or if the appraiser missed something during their review. What now? Put simply: the mortgage loan amount will not be approved. This could cause the deal to fall through, depending on the agreements made in the contract. If there is wiggle room, there are a few things a buyer can do if the appraisal comes back low:
You can pay the difference.
You can renegotiate with the seller.
You can appeal the appraisal.*
*If you decide to move forward with an appraisal appeal, you’ll have a better chance of getting a new value if the appraiser missed something big and obvious in their report, like a whole bedroom.
The Appraisal Comes Back High
Winner, winner! If your appraisal comes back higher than the agreed-upon price, congrats, you may have just scored yourself a sweet deal. A value higher than purchase price could mean great things in terms of your equity. But why does this happen? Generally:
The market changed favorably after the price was set.
The seller wants to move the property fast.
The property has features that weren’t listed.
The Appraised Value Matches the Purchase Price
This is the ideal outcome; you have done it! When the appraiser confirms the purchase price to be fair, the lender can move forward with confirming your mortgage amount and your sale can proceed.
Looking for More Homebuyer Resources?
Buying and selling a home is serious business, but that doesn’t mean you can’t have some fun along the way. Here are some more handy resources to help you prepare for your homebuying or selling journey:
