When refinancing a home, one of the most important factors that can affect every aspect of the loan is the appraisal. It is very important to understand how the appraisal affects the loan and to know what to do to prepare for the appraisal.
What is the Appraisal?
The appraisal is what establishes the current market value of the property for loan purposes. An appraiser who holds an occupational license to conduct residential appraisals, comes and does an interior and exterior inspection of the property, takes pictures and then compares the property to other properties that are as close as possible in size and features that have sold recently in close proximity. The normal standard is for the appraiser to find three comparable sales to help establish the current market value. The appraiser looks at the final sales price of these other properties and then makes adjustments to compensate for minor differences in the size or features of the subject property to these comparable sales. The appraiser also factors in average days on the market for homes to sell in that city or county and indicates if the appraisal is for refinance purposes or for a sale transaction. The final appraisal will include color pictures of the subject property and at least three comparable properties.
Why is the Appraisal Important?
When working on a refinance, the more the property appraises for, the more that can be borrowed, or, the lower the loan to value can be. Loan to value, (LTV) is simply the final loan amount as a percentage of the total appraised value. For example, if the property appraises for $100,000, and the loan amount is $80,000, the LTV is 80%. There are two specific reasons why the amount of the appraisal and the resulting LTV is so important. First, the more the property appraises for, the larger the loan amount can be. Second, the higher the appraised value, the lower the LTV can be. The lower the LTV is, the lower the interest rate will be, and the approval criteria will be more lenient. Also, if the LTV is under 80%, then the borrower will not have to pay private mortgage insurance, (PMI), which insures the lender against default by the borrower.
Getting Ready for the Appraisal
Since the obvious goal is to get the property to appraise for as much as possible, the next step is to prepare every aspect of the property to be appealing to potential buyers. Appraisers pay attention to the overall condition of the property and pay particular attention to how updated or out of date the features of the home are. Curb appeal is a very real and important detail to pay attention to. Curb appeal is the very first impression that a potential buyer gets when they first see the house. The front lawns, sidewalks, landscaping and the front of the house should all be clean and updated. Depending on how much time a property owner has to prepare for the appraisal and the time of year, it is always a good idea to fertilize and water the lawns to make them as green and manicured as possible. Also, if the property does not have a lawn and flower bed sprinkler system already, this is a good way to increase the appraised value. Sprinkler systems are a highly desirable feature and will increase the appraised value. The inside of the house should be freshly painted, and completely clean with any carpets freshly steam-cleaned and all repairs made. If possible, all kitchen and bathroom floors and counters should be updated to tile and stone and all plumbing and lighting fixtures updated to a consistent contemporary style should always be kept completely clean and free of clutter and any large indoor pets should be kept outside or kenneled when the house is being shown to potential buyers. The home should be as free of clutter as possible. This gives the appraiser a better overall impression of the interior and allows him to see all the details and features better and to be able to take much more appealing interior photos. If there are indoor pets, these should be kept outside or kenneled when the appraiser is there.
Q: Does the appraisal cost anything?
A: Yes. On a refinance, the loan officer will typically collect a check or money order prior to the appraisal being ordered. The check or money order is held by the loan officer, and usually given back to the borrower when the loan closes because most people choose to include the cost of the appraisal into the loan amount with the other closing costs. If the loan does not close, the appraiser is paid from the funds the loan officer has collected up front for the appraisal. The typical current cost for a residential appraisal is $400, although this will vary by location. If the loan is a VA product, the appraisal will usually cost a bit more, and will require the appraiser to inspect additional specific features of the home, including the hot water heater.
Q: How long does an appraisal take?
A: The property inspection itself only takes about an hour. The majority of the work an appraiser does is the research necessary to find at least three comparable sales and the construction of the appraisal in the software used for appraisals. In general, an appraisal usually takes about 5 business days from start to finish.
Q: Does the appraiser have to get inside the house?
A: Yes, in almost every case, an appraiser will have to inspect the interior of the home, verify the overall interior condition and take photos of the interior. The inside inspection is almost always a quick walk-through by the appraiser and a couple quick photos. On occasion, the appraiser only has to do an exterior inspection, also known as a drive by appraisal, but this is not typical, and usually only seen when a borrower is applying for a second mortgage line of credit.