What is an Appraisal?
An appraisal is the estimation of a home’s current market value, or more broadly defined as an opinion of value that is used for real-estate-related financial transactions. Appraisals are required by a state-licensed or certified appraiser for most transactions above $250,000. An appraiser’s report will typically include the type of property inspection, approaches to value required, and any lender-specific requirements. Appraisals are required by mortgage lenders to be sure that the money they are lending to a new homeowner or a current homeowner is a fair amount for the home. The lenders want to be sure that the buyers are not overpaying for the property. If the borrower stops making payments on the home and the lender needs to sell it, the lender wants to be sure it can recuperate the amount owed on the loan. The value of the home will be calculated by examining the current local housing market and the comparable properties that have recently sold. It will also include the features of the home, square footage, and a number of bedrooms and bathrooms. The appraiser will also look at the overall condition of the home. If there is maintenance or repairs that will need to be completed, the appraiser will note these. The appraiser will then complete the appraisal report on a standard required form. An appraisal can potentially break the deal. If the selling price and the appraisal are not comparable, the lender will not approve the deal without additional funds from the buyer to cover the appraisal gap. An appraisal is an important part of the home buying process because it assures the lender the property has adequate collateral to make the loan. It is also important to note that not all mortgage loans have the same appraisal requirements or guidelines. Given the specific mortgage and lender guidelines and overall economic conditions, an appraisal is not always a concrete determining factor of market value. For instance, in economic environments where real estate values rise rapidly, appraisal values can lag cash sale transactions.
When dealing with Freddie Mae and Fannie Mac, additional criteria for not only the certification of the appraisers but how they perform the appraisal are outlined by each entity. Fannie Mae and Freddie Mac are federally backed home mortgage companies created by the United States Congress. They provide liquidity (ready access to funds on reasonable terms) to the thousands of banks, savings and loans, and mortgage companies that make loans to finance housing.
“Freddie Mac requires that the Seller obtain an appraisal report that accurately reflects the market value, condition, and marketability of the property. The Seller is responsible for compliance with the Appraiser Independence Requirements (AIR), the selection of the appraiser, the appraiser’s use of the appropriate Freddie Mac appraisal report forms, compliance with the Uniform Appraisal Dataset (UAD), and successful submission of the appraisal report to the Uniform Collateral Data Portal® (UCDP®), all as specified in more detail in this chapter. “
“Fannie Mae requires a lender (or its authorized agent) to use appraisers or supervisory appraisers that are state-licensed or state-certified (in accordance with the provisions of Title XI of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 and all applicable state laws). The lender (or its authorized agent) must document that the appraisers it uses are licensed or certified as appropriate under the applicable state law. The lender must ensure that the state license or state certification is active as of the effective date of the appraisal report. The appraiser must note his or her license or certification number on the individual appraisal report forms, in compliance with the Uniform Appraisal Dataset Specification, Appendix D: Field-Specific Standardization Requirements.”
In summary, appraisals determine a property’s worth and provide an unbiased estimate of value. Appraisers can be hired by the lender or seller, or even sometimes the buyer. There are more requirements for not only the appraiser but the type of report that they complete based on where your mortgage is from and who is backing it. For more information check out the websites below.
What is Market Value?
As defined by HUD, Market Value refers to the most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller, each acting prudently, knowledgeably and assuming the price is not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby: buyer and seller are typically motivated; both parties are well informed or well advised, and each acting in what they consider their own best interest; a reasonable time is allowed for exposure in the open market; payment is made in terms of cash in U. S. dollars or in terms of financial arrangements comparable thereto; and the price represents the normal consideration for the Property sold unaffected by special or creative financing or Sales Concessions granted by anyone associated with the sale.
Adjustments to the comparables must be made for special or creative financing or Sales Concessions. No adjustments are necessary for those costs, which are normally paid by sellers as a result of tradition or law in a market area; these costs are readily identifiable since the seller pays these costs in virtually all sales transactions. Special or creative financing adjustments can be made to the comparable Property by comparisons to financing terms offered by a third-party institutional lender that is not already involved in the Property or transaction. Any adjustment should not be calculated on a mechanical dollar-for-dollar cost of the financing or concession but the dollar amount of any adjustment should approximate the market’s reaction to the financing or concessions based on the Appraiser’s judgment.
- Appraisal Definition: https://www.nar.realtor/appraisal-valuation
- Market Value Definition: U.S. Department of Housing and Urban Development Handbook 4000.1, FHA Single Family Housing Policy Handbook, Title I content. page 601
- Fannie Mae: https://selling-guide.
fanniemae.com/Selling-Guide/ Origination-thru-Closing/ Subpart-B4-Underwriting- Property/
- Freddie Mac: https://guide.freddiemac.com/