Whether it is a first time home loan or a refinancing opportunity, all mortgages are issued as a secured loan that uses the property as collateral. Prior to loan approval, lenders require an appraisal of property as part of the process. Mortgage Marvel's FAQ section on property and appraisals has the inside scoop on what lenders are looking for regarding the property and appraisal.
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Frequently Asked Questions About Property and Appraisal

How do I figure out what I should look for in a home?

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If I am selling a home, how do I find a great real estate agent?

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I'm purchasing a home, do I need a home inspection AND an appraisal?

Both a home inspection and an appraisal are designed to protect you against potential issues with your new home. Although they have totally different purposes, it makes the most sense to rely on each to help confirm that you've found the perfect home.

The appraiser will make note of obvious construction problems such as termite damage, dry rot or leaking roofs or basements. Other obvious interior or exterior damage that could affect the salability of the property will also be reported.

However, appraisers are not construction experts and won't find or report items that are not obvious. They won't turn on every light switch, run every faucet or inspect the attic or mechanicals. That's where the home inspector comes in. They generally perform a detailed inspection and can educate you about possible concerns or defects with the home.

Accompany the inspector during the home inspection. This is your opportunity to gain knowledge of major systems, appliances and fixtures, learn maintenance schedules and tips, and to ask questions about the condition of the home.
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What is an appraisal and who completes it?

To determine the value of the property you are purchasing or refinancing, lenders generally require that a qualified individual prepare an appraisal report. An appraisal report is a written description and estimate of the value of the property. National standards govern not only the format for the appraisal, they also specify the appraiser's qualifications and credentials. In addition, most states now have licensing requirements for appraisers evaluating properties located within their state.

The appraiser will create a written report for the lender. Federal law requires that the lender also provide you with a copy of the appraisal if you request it.

Usually the appraiser will inspect both the interior and exterior of the home. However, in some cases, only an exterior inspection will be necessary based on the lender's requirements, your financial strength and the location of the home. Exterior-only inspections usually save time and money, but if you're purchasing a new home, you may be more comfortable with a full inspection.

After the appraiser inspects the property, they will compare the qualities of your home with other homes that have sold recently in the same neighborhood. These homes are called "comparables" and play a significant role in the appraisal process. Using industry guidelines, the appraiser will try to weigh the major components of these properties (i.e., design, square footage, number of rooms, lot size, age, etc.) with the components of your home to come up with an estimated value of your home. The appraiser adjusts the price of each comparable sale (up or down) depending on how it compares (better or worse) with your property.

As an additional check on the value of the property, the appraiser also estimates the replacement cost for the property. Replacement cost is determined by valuing an empty lot and estimating the cost to build a house of similar size and construction. Finally, the appraiser reduces this cost by an age factor to compensate for depreciation and deterioration.

If your home is for investment purposes or is a multi-unit home, the appraiser will also consider the rental income that will be generated by the property to help determine the value.

Using these three different methods, an appraiser will frequently come up with slightly different values for the property. The appraiser uses judgement and experience to reconcile these differences and then assigns a final appraised value. The comparable sales approach is the most important valuation method in the appraisal because a property is worth only what a buyer is willing to pay and a seller is willing to accept.

It is not uncommon for the appraised value of a property to be exactly the same as the amount stated on your sales contract. This is not a coincidence, nor does it question the competence of the appraiser. Your purchase contract is the most valid sales transaction there is. It represents what a buyer is willing to offer for the property and what the seller is willing to accept. Only when the comparable sales differ greatly from your sales contract will the appraised value be very different.
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What types of things will a lender look for when they review the appraisal?

In addition to verifying that your home's value supports your loan request, lenders also verify that your home is as marketable as others in the area.

They willl review the features of your home and compare them to the features of other homes in the neighborhood. For example, if your home is on a 20-acre lot or has a large accessory building, lenders will want to make sure that there are other homes in the area on similar size lots or with similar outbuildings. Finding comparable properties can be more challenging in rural areas where it is more difficult to find homes that have similar features.

Lenders will also make sure that the value of your home is in the same range as other homes in the area. If the value of your home is substantially more than other homes in the neighborhood, it could affect the market acceptance of the home if you decide to sell.

Finally they will review market statistics about your neighborhood, such as the typical length of time homes are offered for sale before selling and the trend in values for verification that values are steady or increasing.
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Will I get a copy of the appraisal?

Federal law requires that the lender provide you with a copy of the appraisal if you paid for it and request a copy. Many lenders provide borrower's with a copy for every transaction but it won't hurt to ask just to be sure.
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I've heard that some lenders require flood insurance on properties. Is that true?

Federal Law requires all lenders to investigate whether or not each home they finance is in a special flood hazard area as defined by FEMA, the Federal Emergency Management Agency. The law can't stop floods. Floods happen anytime, anywhere. But the Flood Disaster Protection Act of 1973 and the National Flood Insurance Reform Act of 1994 help to ensure that you will be protected from financial losses caused by flooding.

Generally lenders use a third party company who specializes in the reviewing of flood maps prepared by FEMA to determine if a home is located in a flood area. Flood insurance will be required if the home is located in a flood area, since standard homeowner's insurance doesn't protect you against damages from flooding. For more information about flood zones and flood insurance, visit www.fema.gov.
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