If you’re applying for a mortgage, you probably expect the lender to take a look at your income, debt, credit history, employment, and assets.
There’s another loan element the lender will consider that may be less familiar: an objective property valuation.
What Is a Property Valuation?
Sellers may use a property valuation to determine how much their house is worth and how much they can charge on the open market.
A mortgage lender’s property valuation is slightly different. It helps the lender determine the value of the property you’re hoping to buy based on factors like size, location, condition, and demand.
Why would lenders require this type of home appraisal? They want to know that the loans they offer are backed by a sufficiently valuable property so that if a borrower were to default on the loan, they can recoup their losses.
Consider this: Sellers can choose any listing price they want — whatever they think someone is willing to pay. But if the buyer needs financing, the selling price must be supported by market value (what comparable homes have recently sold for in the area) before a lender will pony up the cash for a loan.
If the home you want to buy is appraised for less than the sales price, the seller would need to lower the price to the appraised value, you would have to make up the difference, or you’d exit the deal.
Who Carries Out a Property Valuation?
A lender’s property valuation typically will be carried out by a professional appraiser assigned by a third party.
The lender, buyer, and seller are not to have any relationship with the appraiser so that the valuation is unbiased. Buyers can hire an independent appraiser, but the valuation would not be official.
The kind of valuation required by lenders depends on factors such as the type of home you’re looking to buy, the type of loan you’re applying for, your credit score, and whether you’re buying a single-family or multifamily home.
Home Appraisals, Explained
The most common kind of property valuation is an appraisal.
How Does a Home Appraisal Work?
An appraisal is an independent estimate of the home’s value by a licensed or certified real estate appraiser.
Appraisers weigh factors like location, the condition of the home, size and layout, the year it was built, and any renovations that have been done. They also consider “comps” — what similar homes in the neighborhood recently sold for — tax records, and zoning.
The appraisal will determine a market value that is either “as is” or “subject to” certain conditions, such as completion of repairs or upgrades.
Lenders rely on the appraiser’s market value to come up with the loan-to-value ratio of a property, which influences the amount they’re willing to lend and the terms of the loan.
When Does an Appraisal Happen and What Does It Cost?
The federal government no longer requires appraisals for homes that cost less than $400,000, allowing simpler evaluations to stand in their place. That said, most mortgage lenders probably will still require an appraisal.
The appraisal typically occurs once the seller has accepted an offer and is normally performed within the loan contingency date of the purchase contract, usually 21 days.
The buyer pays for the appraisal ordered through the lender. The cost depends on the type of property, city, size, and features, but for a single-family home it averages $348, according to a national survey from HomeAdvisor, an online platform for home services professionals.
A desktop appraisal may cost much less than that.
What If You Get a Low Appraisal?
If the appraised value is as much as the agreed-upon price or more, that encourages the lender to move forward with the home loan, assuming that the other aspects of the property and your application are in order.
If the appraisal comes in under the agreed-upon price, the lender may reduce the amount of the loan it’s willing to offer.
You or the sellers can dispute the appraisal with the lender or ask for a second appraisal. If the value is still too low, there are three routes:
• You can agree to contribute the difference in cash.
• You can try to get the seller to reduce the price.
• You and the seller may agree to split the difference.
Buyers can back out of the deal if the contract includes an appraisal contingency. A clean offer, one with as few contingencies as possible, caught on in the recent hot market, but buyers take risks in dropping contingencies.
Alternatives to a Full Home Appraisal
In certain situations or stages of the homebuying process, you may not need to go through a full formal home appraisal. Here are some alternative methods lenders use for home valuations.
Automated Valuation Model
Algorithms take into account the size of the home, the number of bedrooms and bathrooms, comps, and other factors to estimate property value.
Some lenders of conventional mortgages using Fannie Mae or Freddie Mac’s automated underwriting systems may receive a waiver for a full appraisal, thanks to robust sales in the neighborhood to support the purchase price, the amount of the down payment, strength of the borrower, or the type of transaction.
Some lenders also use automated valuation models when deciding whether to extend or adjust a home equity line of credit.
Drive-by or Exterior-Only Appraisal
A drive-by appraisal (also known as a summary appraisal) refers to an inspection that only looks at the exterior of a home. The appraiser will photograph the front and sides of the home, as well as the street in both directions.
The appraiser takes notes on the neighborhood and the condition of the home and looks at comps when coming up with an estimated value.
Never having to leave the desk, an appraiser uses property tax records, comps, and other public record data in lieu of a physical property inspection.
The Federal Housing Finance Agency made desktop appraisals, implemented in March 2020 amid lockdowns and social distancing, permanent for purchase loans starting in early 2022.
That means both Fannie Mae and Freddie Mac will allow appraisals to be conducted remotely.
Broker Price Opinion
A broker price opinion is an estimate of a property’s value determined by a real estate agent or broker, rather than a licensed appraiser. A client may request this estimate to underpin a home’s listing price.
A lender may request a broker price opinion when a borrower is behind on payments, and will use the unofficial assessment to see whether the home value is below the amount of the loan, potentially making the borrower eligible to negotiate a short sale.
Broker price opinions can also be used to buy and sell mortgages on the secondary market. Lenders prefer them in these cases because a full appraisal isn’t required, and because the valuations are fast and generally less costly.
An unbiased professional appraiser determines real estate valuation based on factors like home size, condition, location, and comparable sales. When big money is at stake, a lender needs to determine the true property valuation.
Before you get to the home valuation stage, the first steps to becoming a homeowner may be getting prequalified and preapproved for a mortgage loan.
SoFi offers home mortgages with as little as 5% down, competitive rates, and flexible terms.
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