How is a Home Appraisal Generated?

I’m a loan officer and today’s topic is understanding the home appraisal process. So what is an appraisal and why is it needed in lending? So an appraisal is performed to determine the value of the current market value of your home. These are done so the bank or mortgage company feel comfortable that they can lend out a specific amount of money and that the house is actually worth that money so they can resell the property if the owner doesn’t pay back their loan. You’ll need appraisals and different times while you own your property. The first appraisal is giving when you first get your mortgage. Your mortgage will likely include PMI or private mortgage insurance. To remove the PMI from your mortgage you’ll likely get another appraisal to ensure the home value hasn’t dropped in value and that the lender is comfortable to remove the mortgage insurance.

The way the appraisal is performed is by sending out an appraiser to actually check the physical property and the method that they use is the comparison approach or sales comparison approach model. So what they do is they will compare your home to 3 to 4 sometimes 5 other properties that are similar in square footage and these homes are preferably within a one mile radius of your property.

Sometimes if they can’t find homes that have similar square footage to your home they do actually go out a little bit further maybe 2 miles if there have been recent comparables. The other factor is that the comparables need to have sold within 3 months to give an accurate comparison to your property. That way they aren’t comparing your house to a home that sold years ago when the market wasn’t doing very well because this would undervalue your property.

Most of the time, most of the time this process is performed on closed properties, however sometimes if home values are going up so quickly like they may use active or pending sales to justify the increase in value. So they’ll use about 4 to 5 closed comparables in the neighborhood and compare to the subject property. They’ll go within a one mile radius and they choose 4 to 5 properties that are similar in square footage and they don’t have to have the exact square footage as your property. They can range up or down by about 25%, so on a 2000 square foot home they can go up to 2500 square foot and down to 1500 square foot if there is not similar comparables that are exactly 2000 square foot.

They will make adjustments for the square footage, so if it’s 500 square foot less they’ll make the adjustments on the appraisal and if it’s say a 4 bedroom and 2 bathroom and the comparable has only has 3 bedrooms and 2 bathrooms they’ll make adjustments as well. They’ll also make adjustments for the condition and conditions typically range from C1, 2, 3 and 4. Where if it’s a condition 4 that means it’s in the best condition versus a condition number 1. They’ll make adjustments for that. They’ll also make adjustments for upgrades. Have you done upgrades like granite countertops, hardwood floors, new painting. They’ll make adjustments for that too.