The Appraisal Process and Valuation
The Appraisal and Appraisal Process
There are actually quite a few requirements that must be followed when determing the value of the property to be used in a home loan transaction.
The Uniform Standards of Professional Appraisal Practice (USPAP) provides licensed and certified appraisers with the expected standards and methods used when valuing a property.
What is an Appraisal?
A written of market value completed by a qualified Appraiser, that states an opinion on the value of a property based on its characteristics and the selling prices of similar or comparable properties in the area.
Determinging Value
Typically in a home loan transaction the value is determined using the Sales Comparison Approach.
To determine the value an appraiser compares the subject property to other properties with similar characteristics, within the same neighborhood that have been sold recently.
Comparable homes used for the appraisal should be no less than 1 mile away and that have sold with in the the last 90 days but comparables could be as old as 1 year.
Bedroom & bathroom counts should be similar as well as gross living area. Construction should be similar. Appraisers often have to make adjustments because homes are rarely identical in nature.
There are times when an appraisal cannot support the sales price well. We see this in a rapidly increasing market. For instance, if the sales price of homes in the last three months have been rising you may ask for a higher sale price than the previously sold homes. The sales prices used in the coparison would be less making it hard for the appraiser to support a higher value.
If the last three homes sold for $285,000, $305,000 and $310,000 a seller may reasonably expect to sell their home for $315,000 or more in a rapidly appreciating market.
The appraiser however, would have to use the three comparable which often can weighted but still would not support a value of $315,000.
Usually the comparable homes are weighted closely but lets say an appraiser could put 85% weight on the last comp sold, 10% on the one before that and only 5% weight on the property that sold for $285,000 the appraised value would still only be $308,250.
A low appraisal can be problematic for those who do not have a lot of money for a down payment and canot afford to make up the difference betweent he sales price and appraised value at closing.
When determining the amount of the mortgage the mortgage company uses the lower of the purchase price or appraised value.
For example:
The original purchase price is $315,000 and the expected mortgage was going to be 95% or $299,250. So the borrower or home buyer would bring inn 5% down payment or $15,750.
With the value only coming in at $308,250 the bank now will only lend $292,837 (95% of $308,250). The home buyer now must come in with a higher down payment or $22,163, not $15,750) to make up the difference.
Appraisal Requirement
Appraiser Independence
RIGHT TO COPY OF APPRAISAL
The Equal Credit Opportunity Act and its implementing Regulation B having been amended by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank) requires mortgage lenders to provide applicants with free copies of all appraisals and other written valuations developed in connection with an applicant for their home loan, whether the mortgage is for an owner occupied property, second home etc.
These Dodd-Frank Rules became effective January 18, 2014 and requires mortgage lenders to provide applicants a copy of each appraisal or other written valuation promptly upon its completion or three business days before closing or before account opening for home equity lines of credit, whichever is earlier.
The regulation does permit applicants to waive the timing requirement for providing these copies. However, applicants who waive the timing requirement must be given a copy of all appraisals and other written valuations at or prior to loan closing or account opening.
If the mortgage does not close then the mortgage lender must provide a copy of all valuations no later than 30 days after the loan is declined or withdrawn.
It also prohibits mortgage lenders from charging for the copy of appraisals or other written valuations.
APPRAISER INDEPENDENCE
Appraiser independence safeguards are required by law for most mortgage transactions. Each mortgage company must have a policy describing its policies. The basic language would look something like this:
No employee, director, officer, agent of a mortgage company or any other third party acting as a joint venture partner, independent contractor, appraisal company, appraisal management company, or partner on behalf of a mortgage company shall influence or attempt to influence the development, reporting, result or review of an appraisal through coercion, extortion, collusion, compensation, inducement, intimidation, bribery, or any other manner including but not limited to:
a. Withholding or threatening to withhold future business, promotions or increased compensation for an appraiser
b. Withhold or threaten to withhold timely payment or partial payment for an appraisal report
c. Expressly or imply promising future business, promotions or increased compensation for an appraisal or certain appraiser.
d. Conditioning the order of an appraisal report or the payment of an appraisal fee, salary or bonus on the opinion, conclusion or valuation to be reached on a preliminary value estimate requested from an appraiser
e. Requesting that an appraiser provide an estimate, predetermined or desire valuation in an appraisal report prior to the completion of an appraisal report or requesting that an appraiser provide estimated values or comparable sales at anytime prior to the appraiser’s completion of an appraisal report
f. Providing an appraiser any anticipated, estimated, encouraged or desired value for a subject property, a proposed or target amount to be loaned to the borrower except that a copy of the sales contract for purchase transactions may be provided
g. Providing to an appraiser, appraisal company, appraisal management company or an entity or person related to the appraiser, appraisal company or appraisal management company stock or other financial or non‐financial benefits
h. Removing an appraiser from a list of qualified appraisers, or adding an appraiser to an exclusionary list of disapproved appraisers in connection with the influencing or attempting to influence an appraisal as described in paragraph 2 (above.) This does not preclude the management of appraisers lists for bona fide administrative or quality control reasons based on written policy.
i. Any other act or practice that impairs or attempts to impair an appraiser’s independence, objectivity, impartiality or violates the law or regulation, including but not limited to, the Truth in Lending Act (TILA), Regulation Z, or the Uniform Standards of Professional Appraisal Practice (USPAP.)
Acceptability of Subsequent Appraisals
Lenders should not order, obtain, use or pay for a second or subsequent appraisal in connection with a mortgage financing transaction unless;
1. There is a reasonable basis to believe that the initial appraisal was flawed or tainted an such basis is clearly and appropriately noted in the mortgage file and the original appraisal will not address the concerns raised by the underwriter.
2. Such appraisal is done pursuant to written, pre‐established bona fide underwriting guidelines.
3. A second appraisal is required by law.