When a lender evaluates a loan application, there really are two separate approvals going on. One is the lender evaluating the applicant. The applicant’s employment and income are reviewed making sure the new loan is affordable. A credit report and credit scores are ordered to make sure the applicant meets the minimum credit standards for the selected loan. Bank and investment statements are looked at to make sure there are sufficient funds to close, addressing a down payment, closing costs and cash reserves. The second approval involves the property.
The property being financed, whether it’s for a purchase or a refinance, must be approved and meet the standards for the loan selected. The home after all is indeed the lender’s collateral. The property must be in good condition with no deferred maintenance. The property must also be similar in nature to other homes in the area. If the subject property is a single-family, three bedroom home, then there should be other single family homes in the neighborhood. In fact, there needs to be at least three such properties that have recently sold along with the appraiser noting any current listings of such homes.
Different loan programs can have different “loan-to-value” or “LTV” requirements. This means the loan amount must be at or below the maximum LTV. If the maximum LTV is 90, that means the loan amount cannot exceed 90% of the current appraised value. If the property does not appraise at the needed value, the other option is to put more money down or even walk from the transaction and seek another home.
With a purchase transaction, the appraiser will review a copy of the sales contract and then seek to support the sales price using recently sold properties. This is fairly straightforward and most often the appraisal comes in at the sales price or even slightly higher in some instances. On the other hand, if the property does not appraise at the sales price and comes in lower than needed, most often more negotiation is involved or the buyers decide to look elsewhere. But in most stable markets, a home coming in at below the sales price is relatively rare.
A refinance is treated a bit differently as it relates to the appraiser. With a refinance, there is no sales price. The appraiser must use recent home sales data to arrive at a value. This again means researching the area and identifying recent sales of similar homes in the area. Sometimes the homeowners are refinancing into a particular type of loan that needs a specific LTV. Perhaps the existing loan carries private mortgage insurance, or PMI, and with a new, higher value, PMI can be removed. The appraiser will use recorded sales data without the benefit of a sales contract. But the homeowner can do a few things to boost the property value in the appraiser’s mind.
The first thing to consider is the “curb appeal.” This is the first impression the appraiser sees when driving up to the property. What’s involved with curb appeal? One of the main considerations is the landscaping. A well-trimmed lawn will help. So too will different types of flowers and shrubbery. Are the trees trimmed? Is the roof maintained? Is the property overall clean?
If an appraisal requires an interior inspection with pictures, here’s the opportunity to boost value. It’s a good idea to hire a cleaning service who will thoroughly clean and shine the interior of the home. Appliances are sparkling and floors are polished. If there is no need for an interior inspection, it’s up to the homeowner to let the appraiser know of any upgrades that may have been done. If the kitchen has custom-made cabinets and marble countertops, let the appraiser know. New appliances? Let the appraiser know that, too. In fact, any and all home improvements should be let known to the appraiser.
And finally, there may be recent “for sale by owner” transactions that might not be listed in the local multiple listing service. If a home has been recently sold in the area for a higher price, the appraiser should certainly be aware of that sale as well.
Just like a homeowner will do a makeover preparing for a sale, so too can a homeowner help the property appraise where it needs to be.