What's an Appraisal?
As a bank mortgage sales representative or mortgage broker, understanding property appraisals and being able to communicate that knowledge to customers is critical. Appraisals play a vital role in the mortgage process and can have a significant impact on a loan approval. This short blog post outlines information you should know about property appraisals.
First, a property appraisal is an unbiased estimate of the true (sometimes called “fair market”) value of a home in an open and competitive market. An appraisal is conducted by a professional appraiser, who should be an objective third party having no financial or other connection to any person involved in the transaction.
Appraisals are important because they provide a professional opinion and estimate of the property's market value. Mortgage lenders require appraisals to ensure that they're not lending more money than their lending guidelines permit, which is typically a maximum percentage of the property’s worth. For example, a lender may only lend up to 80% of the property’s appraised value or purchase price, whichever is lower. Lenders do this because the lender needs to be able to sell the home and recoup their investment if a borrower defaults on their mortgage.
Property appraisers assess the condition of the property and compare it to similar homes in the same area that have sold recently. They'll consider factors like the home's condition, size, location, and amenities. They'll also consider recent improvements or renovations and what is happening in the neighbourhood.
The appraisal may come in lower than the sales price or expected value in the case of a refinance. This can present challenges in the mortgage process. The lender will typically only lend up to a specific percentage of the appraised value. If the appraisal is lower than the sales price, the buyer will need to come up with the difference or negotiate with the seller to lower the price. Alternatively, the buyer can dispute the appraisal or request a second one.
The appraisal may come in higher than the sales price, and this is good news for the homebuyer because it means they’re paying less for the home than it’s worth. However, it doesn't mean the lender will lend them more money. The mortgage is still based on the sales price or appraised value, whichever is lower.
Some people ask if the appraisal can affect the loan amount and terms. The answer is absolutely. It generally depends on the loan-to-value ratio (LTV), which is the amount of the loan compared to the appraised value of the property. If the LTV is higher because of a lower appraisal, the loan might become more expensive, or the lender might reduce the loan amount or even decline it.
When sharing this with your customers, make sure to explain in simple terms what an appraisal is and why it's important. Be honest about the potential implications of a low appraisal. Inform them that while it's a necessary step in the home-buying process, it doesn't guarantee the condition of the home; a separate home inspection is recommended for that purpose.
Reassure your customers that you're there to guide them through this process and answer any questions they might have. Being knowledgeable and prepared will alleviate their concerns and enhance the process for everyone.