Mortgage lenders usually require a home appraisal by a licensed professional to put a value on a property. Normally, appraisers evaluate the home’s location, overall size, condition, and any recent upgrades/amenities in order to get an accurate assessment of the market value of the property.
It’s important for lenders to conduct an appraisal because they want to ensure that the home purchase price is accurate. Lenders rely on appraisals to ensure that homeowners are not over-borrowing when refinancing a property or taking out a home equity loan. Appraisals are important for lenders since the home serves as collateral for a mortgage or loan and in the event of a loan default or foreclosure, the lender can recoup any losses.
A home appraisal is also equally important to anyone considering a home equity loan, second mortgage or are refinancing their mortgage, as the loan amount depends heavily on the loan-to-value (LTV) ratio. The LTV ratio compares the amount of a loan you’re hoping to borrow against the appraised value of the property. It is an important component in assessing loan viability because if the LTV is too high, the loan may not be approved.
Do I need an appraisal?
Most of the time, lenders will require an appraisal unless the loan to value is very low. There are lenders who will waive an appraisal, or use an alternate source of value, but buyer beware! To offset the risk of not getting a full appraisal, most of the time these lenders will charge a premium for the loan, up to 2-3% more! This would mean on a $100,000 loan, to save the cost of a $400 appraisal, it will end up costing the client an extra $3000.00 in interest.
Is the appraisal just used to tell you the property value?
There are many reasons that banks need an appraisal, and value is only a small part of it. This is why other forms of valuation are rarely accepted by lenders. The appraisal gives a lengthy list of information to potential lenders such as zoning, square footage, condition. It will also give information such as property tax, comparable sales, condition information, and much more. All of these are factors lenders consider when approving a mortgage. This is also why having an appraisal upfront is so important in getting a firm approval, just submitting with an estimated value, even if supported, is not enough to get firm approval numbers.
3 reasons to get a home appraisal?
- When purchasing a new home
When purchasing a new home, an appraisal will help the potential lender financing the property, and the buyer, confirm that a fair market value is being paid for the property. In some cases, if the appraisal is lower than the purchase price, the buyer may need to put a larger down payment to cover the difference in the value.
- Applying for a home equity loan
A home equity loan is taken out in order to use the equity that’s been built up in a home as collateral. Home equity loans are one of the most popular home borrowing options as it allows you to access a large sum of money at a lower interest rate. For anyone wanting to purchase an investment property, invest in education or consolidate debt, a home equity loan might make the most sense.
- Refinancing your home
Refinancing a mortgage is the process of replacing your existing loan with a revised one with a different lender and normally at a lower interest rate. Refinancing allows the borrower to access up to 85% of the home’s value to tackle a number of financial priorities. With newly acquired funds through refinancing, homeowners can decide how best to use the money to meet their financial goals.
Who can do home appraisals?
Home appraisals are performed by licensed professionals who are trained at determining accurate property value. Unlike a home inspector who looks for repairs and damage on the home, a home appraiser checks the general condition of the home. A home appraiser has the proper training and experience to provide unbiased assessments.
How to prepare for a home appraisal
Before a home appraiser evaluates your property, it is a good idea to prepare ahead of time to be sure of a good first impression. Below are a few tips:
- Make sure the home is neat and tidy – A home will appear to have more worth if it’s clean, so it pays to put in the time and effort to scrub the floors and make sure the counters shine and there are no scuffs on the walls.
- Make any necessary repairs or repaint – Making much-needed paint touch-ups or fixing faulty cabinets or squeaky doors will make a huge difference in the overall appearance. It’s important to make any repairs to the exterior as well.
- Clean up the yard and cut the grass – To make the best first impression, it’s vital to make sure that the grass has been cut and the yard cleaned up. Upgrading your landscaping can increase the home value by 10-12%. Even if it’s a small project, planting a few small shrubs and flowers can make a big difference. Also, be sure to remove children’s toys or any lawn accessories as that can make the home look cluttered and junky.
- Create a list of any recent upgrades or renovations – It’s important to list any recent projects done to the home in the past 1-2 years. This can include updated countertops, a basement or bathroom renovation, new additions, a roof replacement, or new flooring.
- Research home values in your neighbourhood – It’s helpful to get a sense of the value of homes in your area to ensure you’re getting an accurate home appraisal. Take into consideration the square footage, lot size, and general design of the home. Also, inform the appraiser about nearby amenities such as schools and parks.
By following these simple tips, you can ensure you will receive the highest market value for your home.
At what stage do I need to get an appraisal?
It is always a good idea to get the appraisal upfront. Not only will this give you a more accurate idea of what you will get approved for based on property information and loan to values, but it will also provide other benefits as well. These include giving our team a better idea of the best possible lender fit based on ALL the property information, quicker turnaround times from the lenders due to having a complete package, and file priority. Also, for purchases, it will prevent surprises from coming up down the road, such as conditional issues or zoning surprises.
At Burke Financial, we want to make sure you get the most out of the equity in your home. If you are interested in applying for a loan and need a home appraisal but aren’t sure how to get started, contact us today.