In most cases, when you buy a house with a mortgage, whether it’s through a bank, a credit union, or a private lender, the lender will require an appraisal to determine the true value of the home. This is to determine that the loan to value ratio is in line with the lender guidelines, in other words to make sure they think you can pay back the loan. The loan to value is the limit set by the lender on what they will lend on, based on the property value.
How does the bank determine the value of a home after I purchase it?
In a purchase scenario, you would provide the purchase agreement for the property whether it’s a new construction or resale. Then the mortgage lender would order an appraisal to determine that the current market value matches, or is greater than the purchase price. If the appraisal comes back lower than the purchase price, you have a number of options, but it’s definitely not the best situation to be in. The mortgage lender wants to make sure that you can pay back the loan and that the property is actually worth what they’re lending you for it.
How does the bank determine the value of my home if I’m refinancing?
In a refinance scenario, you would provide the estimated value of the home to your lender, then an appraisal would be ordered to confirm this value. To save time and money, many refinance lenders opt for automated appraisals (AVMs, which stands for Automated Valuation Model). To find out how much your home is worth today, sign up for Perch and we’ll use our database to give you an estimate within minutes.
In a mortgage switch/transfer the value of the home is typically not verified by way of appraisal.
How does an appraiser come up with the home value?
The appraisal process is either a drive-by, automated, or a full inspection. Home appraisals are done by licensed professional appraisers, who the lender trusts to provide an unbiased estimate of the home’s value.
Drive-by and automated appraisals
Drive-by and automated appraisals don’t involve an appraiser entering the home being evaluated, but instead rely heavily on comparable sales in the area. These kinds of appraisals might use machine learning, taking into account how certain renovations and features will affect the value of the home. For example, an automated appraisal service may look at other homes that have sold in the area, and then factor in that this particular property has an extra bathroom, heated floors in the kitchen, and a separate basement entrance and calculate the extra value these typically add to the home.
Full inspection appraisals
A full inspection involves not only the consideration of comparable sales in the area (this is called the ‘Sales Comparison Approach’) but also an interior and exterior walk-through done by the appraiser. Appraisals rely heavily on more recent comparable sales, rather than comparable sales that are over 6 months old, as this older data becomes less relevant in the current market.
In a full inspection, the appraiser will also consider any recent upgrades, proximity to schools, parks and shopping centers, and the quality and lifespan of features within the home in their evaluation. Overall, due to their experience and the ability to see and evaluate every detail of a home in person, a full inspection done by an appraiser is considered much more accurate. For this reason, some mortgage lenders will require an in person inspection to be done rather than an automated appraisal.
Is there a cost for the value determination?
An appraisal is typically sourced through a 3rd party company, and either the lender or the client will cover the cost. Both the type of appraisal and type of property will impact the cost. Things such as rural areas, executive homes, rental components, multi-unit dwellings and homes larger than 4,000 square feet typically have a higher premium added on. Multiple factors can determine the price of an appraisal, but they typically range from $300 to $900.
The end value is provided through a report which is sent to the lender and highlights the age and life expectancy of the property, location, architectural features, design and quality, and square footage. If the lender deems the appraisal report satisfactory and LTV is within the guidelines, this would complete the appraisal condition.