Reader question: “Do mortgage lenders always require an appraisal for home loans? I’m planning to sell my house soon, and I wanted to know if I should prepare for an appraiser to visit. I’m assuming most buyers in my area use mortgage loans (we’re not a high-income area), which means most of them will probably require an appraisal.”
Short answer: In a hurry? Here’s the “executive summary” version of everything that follows. Yes, a home appraisal is required for most purchase loans (i.e., home buying scenarios). The lender wants to protect the investment they are making, so they’ll have the property appraised to determine its true market value based on current real estate conditions. In this regard, the appraisal can determine whether or not the loan moves forward. That’s for purchases. On the refinancing side, there are certain scenarios where a home appraisal may not be needed. The FHA “streamline” refinance program is a good example.
Home Appraisals Almost Always Required for Purchases
Yes, a home appraisal is almost always required when using a mortgage loan to buy a house. This is true for “regular” conventional loans, as well as the government-insured FHA and VA home loans that are widely used today.
When you think about it from the lender’s perspective, it makes a lot of sense. Most home buyers make down payments of 20% or less. The lender covers the rest of the purchase price, which means they are exposed to more risk.
If the homeowner ends up defaulting on the mortgage, the lender will be stuck with the property — and they’ll have to sell it as quickly as possible. So they want to make sure the property is worth what the buyer is paying for it (at least). They also want to know the potential resale value and future “marketability” of the home.
So yes, an appraisal is typically required when a mortgage loan is being used for the purchase of a house.
The appraisal is usually ordered by the lender. As a seller, you won’t have much to do with the process at all. You may have to grant the appraiser access to the home, unless you have a lock box on the door. But that’s about it. You probably won’t even get a copy of the appraisal report. That’s between the home appraiser and the lender, and sometimes the buyer. Sellers are usually left out of the loop. But you should definitely prepare the house, just as you would for a potential buyer.
Make sure everything is in good repair. Clean and organize from top to bottom. This will make your home “show” better and may reflect the appraisal amount. In fact, most of the valuation forms used by appraisers have a space provided for the “overall condition” of the home. A neglected property will likely get a lower appraisal value than one that is well-maintained.
Not Needed in Certain Refinancing Scenarios
A full home appraisal is required for most purchase loan scenarios. We’ve covered that above. But there are certain refinancing scenarios where it may not be required. The Federal Housing Administration’s streamline refinance program is a good example. Through this program, homeowners who have an existing FHA-insured mortgage can refinance into a new one (ideally with a lower interest rate) without the lender having the home appraised.
That’s a rare exception, though. The Department of Housing and Urban Development (HUD) requires a full property appraisal for all other FHA loans, including those used in the purchase of a home.
So from your perspective, as a seller, you will most likely go through one at some point during the transaction. The only scenario where you might not see an appraiser is an all-cash purchase, which is often the case with investors. But it sounds like there’s not a lot of that activity in your local housing market. So yes, there’s a good chance you’ll have to go through an appraisal in order to sell your home to a mortgage-dependent buyer.
What Is the Appraisal Based On?
Home appraisals are based on a variety of factors that, when combined, suggest the “fair market value” of a particular house. And because every appraiser does things slightly differently, there is no standard formula that applies to all scenarios.
With that being said, home appraisals are primarily based on the price of comparable homes that have sold recently. A comparable house, or “comp,” is one that is similar in size, style and features to the house that is being appraised.
The appraiser will look at the recent comps in the area, and he will also visit the house that is being appraised (obviously). Based on his findings, he will adjust upward or downward from the comps. For instance, if the house in question is similar to the average price of the sold comps, but it has a much larger lot or nicer features of some kind, he would probably adjust the value upward.
There are other factors as well, such as the tax-assessed value of the home. But recent sales tend to “weigh” the most with most appraisers.