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Posted on Monday, February 28, 2022 in Mortgage Lending

Home Appraisal Basics

A home appraisal is an important step toward financing the purchase of a home and may be required to obtain a home equity loan, home equity line of credit or refinance an existing home mortgage. It’s up to the lender and their underwriter’s discretion on whether an appraisal is required to obtain one of these types of loans.

An appraiser must hold a state license or certification. In Iowa, the rules governing real estate appraisers are administered by the Iowa Real Estate Appraiser Examining Board.

The appraiser must be an objective, third party without any interest in the outcome of the real estate transaction. This allows them to create an unbiased opinion on the value of your home. The appraiser’s job is to make sure all members of the real estate transaction - buyer, seller, and lender - are getting a fair deal.

Appraisals benefit home buyers and lenders

As a home buyer, the appraisal lets you and your lender know the true value of the home and ensures that you are not overpaying for it. It can also identify any problems with the property, such as a zoning issue or defect.

If the appraiser’s report concludes that the home is worth significantly less than what you’ve agreed to pay and plan to borrow, the loan may not be approved. 

An appraisal can also protect the buyer if they have an appraisal contingency in their purchase contract. The contingency may state that you can withdraw from the deal with your deposit or ask the seller to lower the price, if the appraisal comes back that the home is worth significantly less than a specified amount.

People buying a home with their own cash aren’t required to have an appraisal, although they can if they wish. At some point the buyer will want to resell their home, and if they’ve paid too much, they may not be able to recover their investment.

Quick overview of the home appraisal process

An appraisal takes place after the seller accepts your offer, but before closing. Your lender will schedule the appraisal. The type of appraisal you will get depends on whether you’re applying for a mortgage or refinancing, but lenders typically will order a full appraisal, which results in the preparation of a Uniform Residential Appraisal Report. 

It’s important to understand that appraisers are not home inspectors. Their role is not to uncover hidden problems with the property, such as vermin, source of water leaks, old wiring or outdated plumbing. Their report is, in part, a record of their observations, which may include notes regarding defects.  

The seller and their real estate agent may attend the appraiser’s inspection. The seller may be asked by the appraiser to provide additional information or respond to questions. However, the appraiser is not allowed to divulge anything to the seller or agent during the inspection.

What is the appraiser’s scope of work?

At a minimum, the appraiser must:

  1. Perform a complete visual inspection of the interior and exterior areas of the property.
  2. Inspect the neighborhood.
  3. Identify comparable sales from at least the street (it may be necessary to compare sales within a neighborhood, a small town, or even county, if there have been few comparable properties sold).
  4. Research, verify, and analyze data from reliable public and private sources.
  5. Report on their analysis, opinions, and conclusions in the appraisal report.

Contents of a Residential Appraisal Report

The purpose of the appraisal report is to provide the lender with an evaluation of the property that they can use in the loan decision process.   

An appraiser’s report will typically include:

  • Property description
  • Purchase contract price and date, and any financial assistance needed or being requested from the lender
  • Neighborhood characteristics and local market trends
  • Site data (zoning, hazard areas, utilities, easements, etc.)
  • Improvements and condition of the property
  • Sales comparison approach
  • Property value (market value is the probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale)
  • Additional comments
  • Cost approach
  • Income (monthly rent)

See an example of a Uniform Residential Appraisal Report used by FannieMae.

  1. home buying
  2. home equity line of credit
  3. home equity loan
  4. mortgage loan
  5. mortgage refinancing
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