Lenders pay careful attention to the value of a property as they’re reviewing a home loan application. Loan amounts are set based upon the type of program which establishes a maximum “loan to value” or LTV. Most loans require some amount of down payment ranging anywhere from 3.0% to 5%, although some programs don’t require a down payment at all, such as the VA and USDA programs. Still, the loan amount is capped even in the instance of a zero-down loan. To arrive at a value the lender will use, an appraisal is ordered from a licensed appraiser.
A value is determined by reviewing recent sales of similar homes in the neighborhood of the subject property. While no single-family homes will be exactly alike, they’ll be very similar. Homes are built subject to local building codes. Lot sizes are similar as is square footage. The appraiser will research the neighborhood looking for recorded sales of homes that have recently sold, say between three and six months. When a loan application is submitted for an automated approval through an automated underwriting system, or AUS, the type of appraisal required will be listed on the results, or “findings.”
A full appraisal means the appraiser does the basic research to find recent home sales, or “comparable sales,” before making a physical visit to the property. The appraiser will measure the lot size as well as viewing the exterior of the home as well as the interior. The exterior of the home is the “curb appeal” of the property. Photos are taken of the subject property as well as photos of the comparable sales being used in the report. The appraiser determines the overall exterior condition of the home. Next, the appraiser inspects the interior. This is where various “adjustments” can be made based upon different features within the property.
For example, two homes of similar size on a same sized lot might appear very close to one another which would not affect the value of the property but the inside could mean a few adjustments are needed. One house might have a superior kitchen with granite countertops, custom cabinetry and high end appliances while the other does not. The appraiser would then make adjustments to the value based upon the first home’s upgrades. With a purchase transaction, the appraiser begins with the sales price listed on the sales contract and gets to work supporting the value listed on the contract.
The second choice for an appraisal is referred to as a “drive by” appraisal. Literally, the appraiser first does the research and then drives by the property for a visual inspection. No interior inspection is required, just “exterior only.” The findings will then ask for an exterior only appraisal. Most of the research done to arrive at a value is done at the appraiser’s office with the drive-by used to support the value. A drive-by is often associated with a transaction where there is considerable equity in the property.
For example, someone is refinancing an existing mortgage with a loan amount of $300,000. At the same time, the homeowners provide information that the subject property is worth $600,000. The appraiser does the initial research to support the $600,000 value. With a drive-by, there will be no interior inspection. The appraiser will also take exterior photos for the drive-by appraisal. It should be noted that a lender has the authority to override the drive-by request and ask for a full appraisal. On the other hand, a lender will not perform the reverse by requesting a drive-by if the approval asks for a full appraisal.
Finally, a drive-by will cost the borrower a little less compared to a full appraisal. Costs can vary by region and loan amount but a full appraisal might approach $500 but a drive-by much less than that. In your personal situation, I can provide you with the type of appraisal required along with the associated cost once you’ve submitted an application. For details, let’s talk over the phone or send over an email to get started.