The Basics of the Residential Home Mortgage Appraisal Process
By Thomas Hardwick
Determine if a property valuation is necessary.
Most people know that if you are buying a new home or refinancing an existing home, a real estate appraisal will most likely be performed as a part of the loan approval process. But valuations for estate planning, tax appeal, divorce, foreclosure, insurance damage purposes (due to fire, water, weather, etc) are some other reasons for getting an opinion of value from a professional real estate appraiser. Simply put, once it is determined you need to answer the question: ‘What is my property worth?’ then the next step is to hire a professional real estate appraiser.
Engagement of the Appraiser by the lender/client
In residential mortgage financing transactions, the lender must be the one to hire the appraiser, either directly or through an Appraisal Management Company. An Appraisal Management Company (AMC) is a third party vendor contracted by a lender to oversee part of, or all of, the appraisal process. It can be as simple as the AMC ordering and forwarding the completed appraisal report to the lender. Full service AMCs can also approve appraisers for the lender panel and review completed reports for compliance with lender specific and general industry guidelines.
A homeowner (in a refinance) or a buyer (in a sale) cannot hire the appraiser directly and is not considered a client of the appraiser, regardless of who pays for the appraisal. In the Uniform Standards of Professional Appraisal Practice (USPAP), the client is defined as “the party or parties who engage, by employment or contract, an appraiser in a specific assignment” (USPAP 2014-2015 Edition Page U2 Line 49). Consistent with USPAP rules, since the lender engages the appraiser, the lender is the client. Furthermore, Fannie Mae & Freddie Mac form reports, used by conventional lenders, FHA & VA, specifically state the intended user is the lender/client and that it is not permitted to modify, add, or delete an intended user. The appraiser-client relationship is not established based on the person or persons paying for the appraisal service.
The appraiser has confidentiality obligations under USPAP and “must not disclose: (1) confidential information or (2) assignment results to anyone other than: the client; persons specifically authorized by the client; state appraiser regulatory agencies; third parties as may be authorized by due process of law; or a duly authorized professional peer review committee except when such disclosure to a committee would violate applicable law or regulation.” (USPAP 2014-2015 Edition Page U9 Lines 297-304). Therefore, the appraiser may not be able to discuss with the homeowner, borrower or even the real estate agent(s), certain aspects of the appraisal or report that could be considered confidential or any information that is specifically identified as confidential by the client.
Determine the type (and definition) of value needed.
Aside from hiring a qualified professional appraiser, determining the type and definition of value is an essential step in the appraisal process. What is value? According to the Merriam Webster Dictionary, value is: “the amount of money that something is worth; the price or cost of something”. In appraising, there are many different types of value; therefore, it is imperative to know what type of valuation solution is needed. In the lending universe, market value is, by far, the most requested value type. Other types of value can include: insurable value, replacement value, investment value, liquidation value, going concern value, business value, retrospective value and prospective value. One example of a prospective valuation is for a new construction home that is to be built but at the time of the appraisal does not currently exist on the property site. During the engagement process between the appraiser and the client, the scope of work is established including the type of value that is to be used.
An Appraisal is not a Home Inspection
The terms inspection and inspector have been used in the appraising world with various meanings and interpretations. An appraisal inspection is different than a home inspection.
For lending purposes, an appraisal is for the lender/client; home inspections are for the buyer or home owner. The appraiser is tasked with providing a professional opinion of value, most often a market value, for a property. An appraisal and its report do not guarantee that the property is free of defects or environmental problems. In a home inspection, a qualified inspector takes an in-depth look at the home to evaluate the physical improvements (structure, construction, mechanical/electrical/plumbing systems); identifies components that need to be repaired or replaced; and estimates the remaining useful life of the major systems, equipment, structure and finishes.
Preparing for the Appraiser’s site visit
If you are selling your home, the real estate professional marketing your property should have discussed the benefits of giving your home the best possible presentation. On the exterior, this is typically called “curb appeal”. On the interior, it is generally referred to as “staging”.
Particularly, if the loan is being guaranteed by FHA, VA or most other government backed/guaranteed loans, when possible, any known safety repairs should be completed prior to the appraisers visit. Check out FHA & VA Repairs and Other Related Issues- A Checklist that can be easily completed.
Overgrown bushes or other larger objects next to the house can make it difficult to accurately measure the structure. Therefore, you can help the appraiser by making sure there is easy access to the exterior walls of the house. Also make sure that the appraiser can easily access items like furnaces, water heaters, attic scuttles and crawl spaces.
(In winter months, make sure snow is removed from the driveway, sidewalks, patios, decks, etc. Remember these items affect value and should be observable by the appraiser for accuracy. If you have recent pictures of the exterior patio, in-ground pool, deck, etc. without snow cover, they can be handy references for the appraiser.)
Setting up a time for the Appraiser’s site visit
If you are selling your home, the appraiser generally will contact the real estate agent or their office to schedule the site visit. If you are refinancing your home, the appraiser should contact you directly to schedule the appointment time. Most all lenders have a defined timeframe for the delivery of the completed appraisal report, so it is not uncommon to get very short notice in the appointment request from the appraiser. Flexibility in providing access to the appraiser will help to ensure timely delivery of the appraisal report to the client.
On the day of the site visit
Another critical step in most valuation assignments is the home visit by the appraiser. During this process, the appraiser will come to your home and complete an interior walk-though, taking notes on individual aspects of the each room as well as the general condition and quality of the home, create a room layout drawing, and take numerous photos of your house for inclusion in the report. The appraiser will also measure the home as well as makes observations of the neighboring houses and the neighborhood in general.
Fannie Mae, Freddie Mac, FHA& VA require that appraisers take interior photographs of, at least, the kitchen, all bathrooms, the main living area, examples of physical deterioration and any recent updates. Often, individual lenders require interior photos of all rooms and the interiors of all outbuildings (pole barns, sheds, etc).
If you are home when the appraiser arrives, do not be afraid to request identification. Chances are you have never met the appraiser before and they will be entering your home, so request seeing their driver’s license, their pocket real estate appraiser license and a name-specific business card.
It is the appraiser’s job to report on the condition and other aspects of the property, so make sure all occupants are up (not sleeping in bedrooms) and not showering in bathrooms. Appraisers are at your home only a short period of time, and access to all rooms is imperative to a complete and accurate valuation process.
Whether you are home at the time the appraiser shows up or your real estate agent has requested you leave prior to the visit, several things you can do to prepare your home for the appraiser are:
· Open all window shades or drapery
· Turn on lights in all rooms
· Make sure any outbuildings (garages, sheds, pole barns, workshops, etc) are open and accessible
· General housekeeping (don’t have piles of dirty dishes from a week ago in the sink, vacuum the floors, clean up any dirty laundry, flush toilets, etc)
· Remove all offensive odors (garbage, clean the cat litter box, etc)
· Remove any pets (While your dog or cat may be your best friend, please remove them during the appraisers site visit. NEVER LEAVE A LOOSE DOG IN THE HOUSE, PARTICULARLY, IF YOU WILL NOT BE HOME WITH THE APPRAISER. Remember, to your dog, the appraiser is a stranger in the house)
· Don’t simply throw stuff in the closets to prep the house, as the appraiser should open every door! One never knows where a homeowner may have hidden a half bath or a mechanical system.
· If the home has a scuttle or drop stairs to the attic, make sure the attic area is accessible. If there is a scuttle, make sure it is not painted shut, is not covered by insulation and have an appropriately sized sturdy ladder available to the appraiser for a “head and shoulders” observation of the attic.
· If the home has a crawl space, make sure access is available to the appraiser, making sure an access panel is open and not obstructed.
· In winter months, make sure snow is removed from the driveway, sidewalks, patios, decks, etc.
You can help the appraiser to provide a more accurate appraisal in a less time, if you can provide the following, when possible:
· A survey of the house/property.
· A legal description of the property. If the property contains more than one parcel, make sure you provide the legal descriptions of the other parcels.
· The 2 most recent tax bills
· If any personal property is to be sold with the house, a list of the items.
· A list of any renovations or updating completed to the property (include approximate dates & costs). If known, provide dates on when kitchens and baths were updated or remodeled in the past 15 years.
· If the property has a private well or septic system, a drawing of the home and the approximate locations of the well head, the septic holding tank and drainfield.
While most residential real estate appraisers have access to a large amount of sales, through their local or regional Realtor® Multiple Listing Service (MLS), or through other private database organizations, some properties are sold as For Sale by Owner (FSBO). FSBOs are not usually entered into the local Realtor® MLS databases, therefore, if you or your real estate agent, are aware of any For Sale by Owner sales similar to your property, then you can, and should, provide this information to the appraiser for review. At a minimum, provide the full property address and the sale price, although, if possible, provide the tax assessor data information and a name of someone involved in the sale.
Often you may want to ask questions of the appraiser when they are conducting the site visit of your property. As was discussed above, the appraiser has certain confidentiality obligations to the lender client and may not be able to answer specific questions about the appraisal process, including whether the home will appraise for a certain dollar amount. In fact, in some lender engagement letters, appraisers are specifically informed to not discuss values or even when the report will be completed.
Awaiting the results of the process
The appraiser has left your home, now what happens? The home site visit is just the beginning of the appraisers work in providing an appraisal valuation. There are two components to the valuation process: developing the opinion of value and communicating the results. After gathering the information on the property and after the site visit, the appraiser is ready to get into the process of developing the opinion of value.
Basic steps to the appraisal process include:
· Gathering specific information on the property and general information on the area or neighborhood;
· Collecting and analyzing data, applying the most appropriate approach(es) to value. (Examples: Cost Approach, Income Approach and Sales Comparison Approach);
· Reconciling the data and developing a final opinion of value;
· Communicating the assignment results to the client. While results of the appraisal can be communicated orally, for mortgage transactions, this is typically done through a written appraisal form report;
· After submission to the client, a lender underwriter or other designated party reviews the appraisal report.
And the answer is...
So the appraiser has completed the appraisal process and the report is now with the lender. Finally, you learn the appraiser’s professional opinion of the (market) value of your home and whether your home did or did not appraise at or above the contracted sale price or the amount needed for a refinance. When the appraised value is less than is desired for a sale or refinance, some people believe or, in some cases, openly state that the appraiser is “killing the deal”. The appraiser is employed to provide an unbiased professional opinion of value, not to arrive at a predetermined value. Understand that, simply because the appraised value may be less than you need or believe your home should be valued at, this does not equate to a flawed, incompetent or inaccurate appraisal valuation.
The lender is required to provide you with a copy of the appraisal report. This is your opportunity to review the report for accuracy. Appraisers are human and appraisal reports are very technical documents, so minor errors do from time to time occur. If considering an appeal, what you need to look for and consider are factual inaccuracies that could affect the valuation analysis conducted. Omitting the pole barn, missing a half bath, indicating laminate countertops instead of granite, quartz or solid surface, and miscalculating the square footage of the home are examples of errors that could affect the valuation. Do you know of a very similar house one street away that recently sold and was not included in the appraisal? If you have concerns about the factual information in the report, contact your lender in writing and request any lender-specific process required for an appeal of the appraisal. Be prepared to provide detailed feedback on the errors you found in the appraisal report or additional information you feel is relevant for consideration. The lender should then forward your appeal request to the appraiser for comment or correction of the appraisal report or valuation.
Repairs for Government Loans (FHA, VA, etc)
Some people stress out thinking about dealing with a government guaranteed loan, such as FHA and VA. But this need not be the case. HUD/FHA states the home should be “Safe, Sound and Secure”, while VA varies slightly that the home should be “Safe, Sound and Sanitary”.
Both FHA and VA have written guidelines (HUD Handbooks 4910.1 & 4150.2 and VA Pamphlet 26-7) that provide specific requirements for most of the major components of a home and property. Often FHA and VA loan applicants are first time home buyers, and one of the rationales for both programs is to try to minimize the need for unexpected repairs soon after a home purchase. Both FHA and VA strongly recommend a buyer gets a home inspection from a qualified inspector.
If you are selling your home, your real estate professional should provide you with market data indicating whether FHA, VA or other government loans are common in homes similar to yours. If a majority of the homes similar to yours in market area are sold with FHA loans, then it stands to reason it is likely that you may receive a FHA loan offer. Before you even get to the point of looking over offers, you and your real estate professional should make an honest assessment of any potential repairs necessary and whether an issue appears to be cosmetic or is possibly a repair required to be completed for a government backed loan approval. Some repairs such as deteriorated roof shingles, an old furnace needing replacement or even a combination of multiple but small repairs can be costly.
For a reasonable fee, some FHA-approved appraisers will come to your home and provide an assessment on the repairs that would most likely be required.