Overview: What Is An Appraisal?
A home appraisal determines the fair market value of your property. During this procedure, a home value expert called an appraiser visits your home and takes a tour around your property. The appraiser also does outside research on your neighborhood and property history, and issues an official estimate of what your home is worth.
Appraisals are important because they assure the lender that you aren’t borrowing more money than what the home is worth. In most situations, your lender will require that you get an appraisal before you refinance your loan. This helps protect the lender's financial interests.
For example, imagine that you work with a new lender and you refinance a $300,000 loan. If your appraiser finds that your home is only worth $200,000, your lender takes on the $100,000 discrepancy. If you don't pay your bills and your home goes into foreclosure, your lender will have a very hard time recouping that $100,000.
Most local governments also use appraisals to determine how much you must pay in property taxes. You may need to get another appraisal every few years to make sure that you're paying enough in property taxes.
It’s important to note that an appraisal is not the same as an inspection. A home inspection is a very in-depth process that assesses your entire property. An inspector will look for and document everything that needs to be repaired or replaced in your home. An inspector actively looks for problems with the home that the new homeowner may need to know about. You can expect an inspector to do things like test outlets, run the HVAC system and check out the condition of the roof.
An appraiser doesn’t set out looking for problems in your home. Instead, they only give you an overall estimate of what the home is worth. Your appraiser may take obvious defects into account (like a hole in a wall or a caved-in roof) but they do not document specific problems.
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How Does An Appraisal Work?
- The inspection: The appraiser takes a look at the physical condition of your property during an inspection. They may walk around your entire interior and exterior as well as any structures you have on the property. The appraiser only looks at the overall basic condition of your home and any upgrades you’ve made.
- Outside research: The appraiser finishes the home inspection and does some outside research on other homes in the area. He or she may look at property sales data and other local appraisals. This information also plays into the overall value of your home.
- The final report: Next, the appraiser will deliver a final report that includes an official estimation of how much your home is worth. Both you and your lender receive a copy of your appraisal results.
- The overall condition of your home: Your appraiser doesn’t consider the paint colors on the walls or whether your bathroom sink works when they “assign” your home value. However, they will consider basic elements of the home and the home’s condition. Your appraiser will look at things like the number of bedrooms, how many windows the home has and whether the home has any pressing safety issues, like lead paint. The appraiser also needs to know that someone could reasonably live in your home without issue. If they can’t, expect your home value to be lower.
- Permanent upgrades: Any permanent upgrades you make to your property can increase your appraiser’s estimate. However, only permanent features and fixtures play into your overall value. If you can take it with you when you move, it probably won’t increase your appraisal estimate.
- Local real estate data: Location is a major factor in determining a property’s value. Your appraiser also looks at how home sales data trend in your area when they assign a value to your property.
- Decrease the amount of your refinance. You can lower the amount of money you’re taking out in a cash-out refinance. On the other hand, if you’re doing a rate and term refinance, you may need to bring extra cash to closing to make up the difference.
- Cancel the refinance. A low home value might mean that a refinance isn’t right for you at this point in time. You may cancel the refinance, but your lender may still require that you pay the appraisal fee.
When An Appraisal May Not Be Necessary
- You must already have a VA loan that you want to refinance.
- You must already live in the home that you want to refinance.
- You only plan to refinance your interest rate or term – no cash-out refinances.
- You’ve made at least six consecutive on-time payments on your VA loan.
- It’s been at least 270 days since the closing date for your VA loan and your refinance application.
- You must already have a USDA loan.
- You must have made on-time payments on your loan for at least the last six consecutive months.
- You must have had your existing USDA loan for at least 12 months before you refinance.
- You must meet the USDA’s current debt-to-income (DTI) requirements.
- You must only refinance your rate or term (no cash-out refinances).
- You don’t have a USDA Direct loan.
- You aren’t removing buyers from your note.
- Your refinance will result in a $50 or greater reduction in your monthly mortgage payment.
An appraisal is a basic assessment of your home’s value. Your appraisal value is derived from a number of factors, ranging from local property values to your home’s overall physical condition. Most lenders require that you get an appraisal before you refinance a mortgage. An appraisal assures the lender that they aren’t loaning you too much money for your property.
You may not need an appraisal to refinance your loan if you have a VA loan or a USDA loan. You may qualify for a Streamline refinance if it cuts out the appraisal requirement. Each loan type has its own standards when it comes to who qualifies. Keep in mind that you can only refinance your interest rate or term with a Streamline. You cannot get a cash-out refinance without an appraisal.
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