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The Importance Of The Appraisal Process

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When financing the purchase of a home, the focus of most homebuyers is on credit scores, level of income and how much they will be shelling out as a down payment. While these are important metrics, which a lender will use to determine if a loan will be granted, the home appraisal should be considered just as important. It is through the appraisal that the home buyer will learn if they are over-paying for a home and provide the lender with a key metric to assist them in determining how large of a loan they can make on the property.

The Appraisal Report

The appraisal report is the end-product of the appraisal. It is the appraiser’s report that provides the valuation of the property and a detailed explanation on how that valuation was reached. While factors used to determine a property’s value can vary from property to property, there are three key parts of every appraisal. First, the appraiser will conduct on onsite inspection of the inside and outside of the property. During this inspection a determination will be made on the current condition and quality of the property and how the property “measures-up” to adjacent properties and other properties in the neighbourhood. In the second part, the appraiser will find homes of similar size, condition and quality that have recently sold, called comparable homes or “comps”, from which he or she will determine a market value for the home being appraised. The third part involves adjusting the market value based on any unique characteristics of the appraised property. These adjustments could reduce the value, if a home is in poor quality, or increase the value, if the home has been recently updated.  With the appraisal report in hand, the lender can reach a determination on the loan amount and the perspective buyer can be assured that they are not over-paying for the home

The Impact of Regulations on the Appraisal process

Following the 2008 housing crisis, state and national regulatory authorities greatly stepped up their regulation of the real estate industry. This increased scrutiny and regulation resulted in big changes in most areas of the real estate sale, financing and closing process. Due to the importance of the home appraisal, two regulatory authorities focused their sites on the appraisal process. The Consumer Financial Protection Bureau (CFPB) and the FDIC enacted appraisal regulations that were designed to protect both the prospective home buyer as well as investors who purchase mortgages on the secondary market. The CFPB’s new regulations pertaining to the appraisal of residential property required that an appraiser be licensed in the state in which the property is locate, that the appraiser examine the inside and the outside of the property, that if the property qualifies as a “flipped” property a second appraisal must be purchased by the lender and that the appraisal report must be provide to the buyer at least 3 days prior to the closing of the loan. On the commercial property side, the FDIC now requires their insured lenders to be completely neutral when it comes to ordering an appraisal report. Lenders can no longer place appraisal work out for bid, but instead must utilize and independent appraisal manager to place appraisal orders. While these regulations do increase the cost of the appraisal process for the home/property buyer, they do help assure that a competent appraiser has analyzed the property and generated an appraisal report that is free of any undue third-party influence.

Appraisal Report Review

The importance of accurate appraisals from qualified appraisers has resulted in the growing trend of lenders utilizing third parties to review appraisal reports. Independent reviewers, such as String, provide assurance in areas such as the completeness of the appraisal report, that the appraiser is properly licensed in the property state, that the comparable properties used are appropriate and that adjustments made are justified. With this added review, lenders can fund their loans knowing that their appraisal reports are sound and comply with regulations.

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