The appraisal inspection is an important part of the mortgage process. Not to be confused with a home inspection that assesses the safety and quality of a home, the appraisal inspection is a review of the property to determine its fair market value, based upon recent sales of similar properties in the area. The valuation provided by the appraiser is used to determine the maximum loan amount the lender will lend on the property. The maximum percentage of the property value the lender will lend is commonly referred to as the maximum Loan to Value, or max LTV.
Who orders the appraisal?
The lender always orders the appraisal. One of the most misunderstood aspects of an appraisal in the mortgage process is that it is performed at the request of the lender, not the buyer or homeowner. While the borrower typically pays for the appraisal, the lender is the client of the appraiser and the intended user of the appraisal report.
Can I pick the appraiser?
Since the appraisal is used by the lender to determine how much to lend, the lender does not allow the borrower to choose who performs the appraisal. Even the lender does not have the final say and must place the apprasial order through a third party to ensure there is no conflict of interest.
How much does an appraisal cost?
The cost of an appraisal varies based on property type and location and must be reasonable and customary for the area. The fee for a single family, primary residence in a typical suburban subdivision will be less than the fee for a 4-unit multi-family investment property with rental income, or a very large property with several outbuildings on acreage. Since the appraisal is provided by a third-party for which the borrower is not allowed to shop, the appraisal fee is considered a “zero tolerance” fee that cannot change after an official Loan Estimate (LE) is issued. For this reason, and since the exact and final amount of the fee can change throughout the process, many lenders overestimate the amount of the appraisal fee on the initial Loan Estimate. Under no circumstance can the lender collect more than the actual invoiced fee at closing.
Have appraisal fees gotten more expensive in recent years?
Prior to the financial crisis in the early 2000’s, lenders had the ability to place an appraisal order directly with any licensed appraiser. The Dodd-Frank Act of 2008 instituted Appraisal Independence Requirements (AIRs) and created a larger degree of separation between lenders and appraisers. The AIRs were designed to prevent undue influence and conflicts of interest, or underhandedly inflate appraisal values. AIRs also instituted a requirement for “reasonable and customary” fees and made it possible for violators to be prosecuted and fined. Since lenders were not regulating fees being charged by appraisers, they faced the risk of violating the new regulations and facing prosecution. As a result, lenders turned to third parties called Appraisal Management Companies who collect and process appraisal orders, assign the orders to larger panel of appraisers and regulate the fees they charge. While the AIRs were intended to protect the consumer, their implementation introduced another hand in the cookie jar and added cost to the appraisal process. These added costs were ultimately passed on to the consumer and have resulted in increased appraisal costs.
What happens if the appraisal comes in lower than the sales price?
The lender will lend a percentage of the sales price or the appraised value, whichever is less. If the value comes in below the sales price, the buyer can bring additional funds to closing to cover the difference, attempt to renegotiate, or in certain cases, cancel the contract.
What is the role of the appraisal in the mortgage contingency?
A mortgage contingency clause in a sales contract stipulates that the buyer’s offer to purchase the property is contingent upon a mortgage approval. If the buyer is ultimately unable to obtain the mortgage approval and the lender denies the loan application, the buyer has the right to terminate the contract without penalty and recover their initial deposit.
What do the terms “as-is” and “subject to repairs” mean in an appraisal report?
An appraisal made “as-is” is based upon the current condition of the property and requires no repairs to be made. An appraisal made “subject to repairs” provides a value on the assumption the specified repairs will be completed. Lenders typically require any assumed repairs to be completed prior to closing.
How long is an appraisal good for?
An appraisal is typically valid for 120 days. As the expiration date approaches, the lender can order a Recertification of Value to ensure the property value is still reflective of current market conditions.
Author: Chris DeMatteis, NMLS ID 214872
