Appraisal Overview
Even if you have an above average credit score, a fantastic debt-to-income ratio, and sizable collateral to boot, appraisals fortunately (and unfortunately) are still necessary in order for your lender to close your home loan. There are two major reasons for this: first, appraisals help determine whether your home’s contract price is fair –and secondly, appraisals ensure you are buying homes that are safe, structurally sound, and sanitary (the three S’s). Understanding how appraisals work alongside Minimum Property Requirements on the front end can save you a lot of frustration as a conventional, FHA or VA loan qualifying homebuyer. We’ll be discussing what appraisals are in the first place (as opposed to inspections), how long appraisals take, and the Minimum Property Requirements necessary to get a VA loan.
What Are Home Appraisals?
The first thing you should know is this: appraisals are not home inspections. An appraisal is a professional evaluation of your home that gathers vital information to ensure the asking price does not exceed the fair market value. Appraisals are carried out first by inspecting the home itself to see if it meets the MPR (more on that below) and is then compared to other properties of the same size, age, and location. It also takes into account the amenities of the home including the floor type, kitchen materials, square footage, etc. All this information is gathered into a report known as an appraisal, which deems the home is worth X amount of dollars.
What Happens During a Home Appraisal?
For the most part, this is a hands-off process for both the buyer and seller. The homeowner will have to give the appraiser access to the home, unless there’s a lock box on the front door. Aside from that, the buyer and seller do not really need to be involved in the appraisal process at all. It’s the bank or mortgage lender that orders it, because it protects their interests.
Here’s what happens leading up to, and during, the home appraisal process:
The buyer / borrower makes an offer to buy a house.
The seller accepts the offer, eventually, and the two parties sign a purchase agreement.
The signed purchase agreement will then go to the buyer’s mortgage lender.
The lender will order an appraisal. They are almost always required when a home loan is used.
The appraiser will visit the property and compare it to recently sold homes to determine its value.
The lender wants to know if the house is worth what the buyer has agreed to pay for it.
If the home appraises at or above the agreed-upon purchase price, the loan will likely move forward.
If the home appraises low, the seller may have to lower the asking price. Or the buyer can back out.
What the Home Appraiser Looks for During His Visit
The home appraiser will make note of the agreed-upon purchase price. He will then review recent comparable sales in the area, to determine if the property is worth the amount the buyer has agreed to pay. These are known as “comps” for short. These are the same comps real estate agents (on both sides of the transaction) use to determine the fair market value of a particular house.
After the mortgage lender requests the home appraisal, the appraiser will visit the property in question to conduct a thorough assessment. He will examine both the interior and exterior of the home. He may also visit some of the comp houses being used for comparison, to see how they stack up to the one being purchased. If the subject property has certain value-adding features that the comparable homes do not have, value should be adjusted.
The home appraisal process actually begins long before the appraiser shows up to look at the property. He will probably walk in the front door with a file in hand containing market data and pricing information, including the comparable sales mentioned above. This is similar to what a real estate agent does when trying to determine the asking price, or the reasonable offer amount, for a property.
He uses sales data to understand what the local real estate market is doing, and how much homes are selling for in the area. Then he applies that insight when visiting the subject property, adjusting the value up or down based on his findings.
Appraisers have their own way of doing things. So the process can vary. They typically look at the following:
Lot size, view, curb appeal, etc.
Value-adding features, upgrades or additions
Quality of construction and overall condition of the property
Structural integrity (but with less scrutiny that a home inspector)
Whether or not the property conforms to the neighborhood, for resale purposes
Anything else that might add or subtract value, or make the home different from the comps
Above all else, the appraiser wants to know what the house is worth in the current, local real estate market. He will look at any aspect of the property that helps in this assessment.
Reporting Back to the Lender
Next comes the appraisal report. This is usually a standard boilerplate document with fill-in-the-blank areas for property condition, lot size, comparable sales, and whatever else the appraiser uses during the appraisal process. And, of course, he will assign an actual value to the house.
This report goes back to the person who paid for it, which in a typical real estate scenario is the bank or mortgage company. It’s up to the lender whether or not they want to share a copy of the report with the buyer or seller. But they will tell both the buyer and seller what the house appraised for and whether or not that matches the agreed-upon purchase price.
If the house appraises for less than the purchase price, the buyer and seller will have to come to some kind of agreement with the seller about lowering the asking price, the buyer bringing the difference in cash to closing, both parties finding an agreeable amount to share the difference, or if no agreement can be reached, the parties can release from the contract.
This cost is usually paid by the buyer, since it is their lender that requires it. Sometimes the cost can be rolled into the buyer’s closing costs. Sometimes it has to be paid on the spot, upon completion of the home appraisal process.
How Long Does the Appraisal Process Take?
Report Is Created and Uploaded
· While appraisers have an important job, they don’t actually have the final say on your loan – they are simply the ones making the report. After the report has been made, it is uploaded onto the lender or VA’s web portal usually within fifteen days.
Report is Reviewed
· Following this upload, the report will be reviewed by either a VA approved appraiser, or a lender’s Staff Approved Reviewer (SAR). These official representatives of the Veterans Affair department have the authority to review the appraisal, and deem the estimated market value adds up, and if the home meets all MPR’s.
Notice of Value is Issued
· In the best case scenario, within five business days, your lender’s SAR should issue a Notice of Value (NOV), which informs your lender if you meet all the requirements to close the loan. If everything goes perfectly, then your home may be appraised and closed within 20 days.
Clarification, Repairs or Negotiations
· On the other hand, if the SAR has questions, or needs clarification on the appraisal, then this could take time. If your home does not meet all the requirements, then you (or your appraiser) will have a chance to negotiate with the seller to lower the price of the home so that it is below the appraised value. If it does not pass the MPR’s, then you (or your appraiser) can negotiate to fix the repairs to close on the deal.
Approval
· If all goes well, the appraisal will be finalized, and you will be well on your way to finalizing your home loan!
How is an Appraisal different from a Home Inspection?
In contrast, a home inspection is an in-depth, granular look at your home’s physical condition. Home inspectors create reports with much more nuance, detailing the condition of your home’s architecture, plumbing, electricity, possible mold or radon, and more. Home inspectors however do not tell you the valued price of your home (or at least they shouldn’t) — they will simply give you an unbiased detailed account of your home, highlighting any looming problems, both immediate and long term.
This detailed account gives you an idea if the perfect home is, in fact, too perfect to be true.
Home inspections are not required for loans, however, definitely recommend them in order to ensure you are making a good long-term investment
VA APPRAISAL
Interpreting Home Appraisal Results
An appraisal is mandated by the VA. You cannot get a VA loan without an appraisal because it ultimately ensures that the lender is not overlending. While the appraisal fee is technically your due to pay, your lender will order the appraisal for you once your home is under contract.
VA Appraisal Fees and Timeliness for the Roanoke Regional Loan Center Effective April 1, 2019
(Source: https://www.benefits.va.gov)
State/County: Virginia
Single Family: $525
Individual Condo: $525
Manufactured Homes: $525
2-4 Unit Multi Family: $700
Appraisal Turnaround Times (Business Days): 10
Meeting the Minimum Property Requirements for VA Loans
According to the VA, appraisals also determine whether your home meets the VA’s Minimum Property Requirements (MPR’s) necessary to close on the loan. These requirements ensure veterans and military families have a home that abides by the three S’s: safe, structurally sound, and sanitary. If the home you’re under contract for has a “ding” for any one of these categories, repairs will be necessary before you can close. Big-ticket items that need to meet these property requirements include the following:
Residential Properties Only. Because the VA loan was made to help those finance a primary home, this does not include commercial buildings.
Adequate Heating. Must be able to maintain a temperature higher than 50 degrees Fahrenheit. Homes that use a wood-burning stove must rely on conventional heating to provide adequate heating.
Water Availability. Safe water must be checked for safety. Disposable sewage must be able to safely be disposed of. Wells must abide by localized laws.
No Health/Safety Hazards. No nuclear waste, radon poisoning; existing rail guards for stairs.
Adequate Roofing. No major hail damage, holes, or caving roof.
Easy Access to Home. No major obstructions to enter or exit the home.
No Evidence of Termites. No Substantial wood-decay or termite infestation.
Crawl Spaces are not Moist. No moisture in the basement, or signs of leaking.
The MPR’s will inspect all obvious repairs that need to be made, but it is not a guarantee of defects. The purpose of the MPR’s is to protect you and your family as well as your home’s marketability. Generally speaking, all VA-loan homes need to be “move-in ready”, or else finalizing the VA loan is impossible.
VA Loan Appraisal Visit Checklist
A VA appraisal is a specified evaluation of properties financed with VA loans. The purpose of this appraisal is to determine the fair market value of the property. The VA appraisal is mandatory for every VA loan. Use this checklist to prepare yourself and your home for a VA qualified appraisal.
▢ Provide the Appraiser with a list of updates and repairs at least 24 hours before the appointment. This allows the Appraiser to select the best data and comparables for your appraisal report. Comparables must be physically photographed by the Appraiser.
▢ Leave bedroom and bathroom doors open. Lenders require all bathrooms and kitchens must be photographed. Be prepared for all rooms to be photographed.
▢ Leave curtains/blinds open. Natural light makes for better photos and allows the Appraiser to effectively move through a house without looking for light switches.
▢ Discuss any Pets that are on the property. It’s best to have your pet locked in a cage/kennel or away from the property for the inspection. This prevents accidents such as biting or escape.
▢ Remove clutter so finishes can be easily seen. Appraisers are not going to touch your personal property so it’s best that things are picked up so they can easily navigate the home and see all the finishes and updates.
▢ Have the gate to the backyard unlocked. The Appraiser must measure the exterior of the house. Being able to move around the house helps them get accurate measurements.
▢ Ensure smoke alarms are installed. This is becoming a popular lender requirement.
▢ Bars on the windows must have safety releases from the interior. If the bars do not have safety releases they should be removed.
▢ Windows cannot be painted shut. Any window that is designed to able to be opened must be operational.
▢ Utilities (gas, water, and electric) must be turned on and working. This includes all faucets, the furnace, A/C unit, and water heater.
▢ Outlets near sinks must be GFI. If there is an outlet near a water source like a sink or an exterior outlet it needs to be a GFI outlet.
▢ The attic must be viewed. Anything blocking the attic access should be removed and alert the Appraiser if you have taller than the standard 8’ ceilings so arrangements can be made.
▢ No peeling or damaged paint can be present. This includes the exterior and interior. Common places for damaged paint are the fascia and trim around doors and windows.
▢ No rotted/deteriorated exterior wood. This is commonplace around windows and doors.
This is by no means an exhaustive list. Properties may need to meet more localized requirements, too.
Source: Accurate Appraisal, USA Source: The Reichert Mortgage Team Source: homebuyinginstitute.com