Build Your Own House

Mortgage Appraisal

Summary: Mortgage appraisals are critical to home buyers, home sellers and mortgage lenders. A mortgage appraisal gives you and your mortgage lender the true market value of a home.

All mortgage loans including construction loans, home refinance loans, and home equity loans are called appraisal based loans because the maximum loan amount is based on the appraised value of the home as determined by a real estate appraiser.

Therefore, the mortgage lender will require a real estate appraisal, which when ordered by a bank, credit union, or other mortgage lender is called a mortgage appraisal, or appraisal for mortgage. Real estate appraisers are required to be licensed.

Besides your credit scores and borrowing power, the amount of money you can borrow on a mortgage loan is based on the fair market value of the home, which is determined by a mortgage appraisal.

Real estate appraising is the practice of developing an opinion of the value of real estate property, usually the Fair Market Value of that property.

Real estate appraisals are also done to other standards such as foreclosure value, distressed sale value, and investment value.

Real estate, specifically a home, is an asset. No two homes are alike therefore no two fair market values are alike.

While houses may be identical as to home design, home size and even identical as to the cost, they all differ in one important factor.

All homes have different locations!

An identical home located across the street, or even next door, has a different location, that is, it is on a different lot. It may even be in a different school zone. And yes, school zones are critical.

That is why there can’t be a basis for selling, buying, or more importantly financing, as there can be as with cars, boats, airplanes, stocks, etc.

A real estate appraisal is needed to determine the market value of a home.

This appraisal analyzes many factors to determine a home’s true market value.

Here are some of the important criteria used in the mortgage appraisal process to determine true market value:

  • Square footage of finished living area (habitable space).

  • Square footage of basements.

  • Square footage of garages, or the number of car spaces.

  • School district

  • Comparable sales in the same school district and/or zip code

  • Condition of the structure (s).

The most important factor that an appraiser analyzes is the recent sales price of comparable (similar) homes in the immediate area. This is called a comparative market analysis, or CMA.

It is assumed that the value of a home is what someone is willing to pay for it so the closer an appraiser can get to having the exact same home, the more accurate the appraisal.

The definition of value used in an appraisal or CMA and its’ report is a set of assumptions about the market in which the subject property may transact.

It becomes the basis for selecting comparable data for use in the analysis.

These assumptions will vary from definition to definition but generally fall into three categories called “Three approaches to Value”.

Although some real estate appraisals require no license or certification at all, a real estate appraisal is generally performed by a licensed or certified mortgage appraiser.

For mortgage loan valuations of improved residential property the appraisal is reported on a standardized form called the Uniform Residential Appraisal Report or URAR.

Here is a (PDF) copy of the Fannie Mae URAR

New Construction Real Estate Appraisal

Appraising the market value of a new home before it is built is called a “Subject to Completion” appraisal.

A  New Construction Real Estate Appraisal relies more heavily on the cost approach to value as a check or safeguard against irregularities in market value inflation of homes.

Unfortunately, the cost approach to value was disregarded by many lenders in the recent housing debacle.

Carl Heldmann