Tag Archives: lenders

Appraisals Explained

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Appraisals are a critical component of the lending process.  In any home sale/purchase transaction that requires financing, the lender will mandate an appraisal on the property.  So what exactly is an appraisal?

Often confused, a home appraisal is a separate analytical report from the home inspection.  An inspection identifies potential physical issues with the house to prevent costly repairs down the road.  An appraisal is a third party expert opinion on the current value of a piece of property.  Lenders rely on the appraisal report to ensure that they are not over-loaning on a property.  In the event a borrower defaults on the mortgage and the property goes into foreclosure, the lender recoups the money it lent by selling the home.  If the bank loaned above the value of the property, then the lender is unlikely to recoup their investment.

An appraiser is an independent and objective third party who does not have any financial stake in the transaction apart from his fee for performing the appraisal. Appraisers are state-licensed and work in regions and neighborhoods they are familiar with so they have an expert knowledge of any environmental or other concerns that may affect the value of a property.  Typically, the homebuyer pays for the property appraisal when applying for a home loan and the cost varies greatly depending on the size of the home and the experience of the appraiser.

There are two basic methods of appraisal used for residential properties. First, there is the sales comparison approach whereby the market value of the subject property is determined via “comparable” analysis.  The appraiser typically visits the home in question and obtains specific home information and statistics and then compares the data with “comps,” properties of similar kind in the same geographical area that have recently sold.  The second method is the cost approach, which evaluates value by determining how much money it would require to replace the property if it were to be destroyed.  This approach is more commonly used in evaluating new construction.

The appraiser gathers information for the appraisal report from a number of sources, but the process always begins with a physical inspection of the property inside and out.  Additionally, the appraiser may look at county courthouse records and recent sales reports from the multiple listing service. The appraisal report typically includes:

  • An explanation of how the appraiser determined the value of the property.
  • The size and condition of the house and other permanent fixtures, along with description of any improvements that have been made and the materials used.
  • Statements regarding serious structural problems, such as water damage and cracked foundations.
  • Notes about the surrounding area, i.e. proximity to schools, new or established development, lot size, relevant aspects affecting desirability and resale, and so on.
  • An evaluation of recent market trends of the area that may affect the value.
  • A comparative market analysis that supports the appraisal including maps, photographs and sketches.

Next week we will discuss how to prepare for an appraisal and what happens if the appraiser returns a value lower than your contract price.

The Pre-Buying Don’ts

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In our last blog installment, we discussed some pre-buying do’s.  Equally important to your home buying preparatory work are several pre-buying don’ts:

1)   Don’t Go Credit-Crazy

As previously mentioned in the “do’s” post, it’s smart to monitor your credit in the months leading up to a home purchase.  With every new line of credit opening, your credit score gets dinged.  So if a creditor solicits you for another amazing credit card with major perks, don’t bite during this crucial time.  Avoid any financial transactions that require inquiry into your credit health.

2)   Don’t Get Behind on Bills

Having a late payment hit your credit report before closing can impact your ability to get the loan you need.  Payment history comprise about a third of your credit health.  Many banks require 12 consecutive months of on-time payments to qualify for a loan in the first place.  A 30-day late blemish could cause lenders to rethink your loan application all together.

3)   Don’t Switch Jobs

Any change in employment is a significant risk from a lender’s perspective.  Lenders desire clients with stable, reliable income and generally will ask you to provide a picture of income stability during the underwriting process, as stability equates to the less likelihood of default in the their eyes.  During this crucial time of financial scrutiny, don’t switch jobs, don’t go entrepreneurial and become self-employed, and certainly don’t quit your job.

4)   Don’t Buy Anything Major

Don’t buy a car or truck or any other form of transportation that you have to finance.  Buying one increases your debt-to-income ratio and that’s something loan officers don’t want to see.  Additionally, don’t buy furniture or major appliances before buying your new house.  Like financing a car, charging big-ticket items negatively impacts your financial standing.  Keep yourself in good graces with your lending institution by minimizing your large expenditures.

The process of purchasing a home can be long and complicated.  From the moment you decide to become a homeowner until you close on your dream house, you want to provide a clean bill of credit so that your home gets financed favorably. Even if you have good credit at the beginning of the journey, there are ways to blemish your qualifications and make lenders think twice.  Being fiscally absentminded or slightly irresponsible with your credit health could cost you down the line.