The phrase “you get what you pay for” rings loudly for many homebuyers, but they aren’t the only ones concerned about a house’s value. Mortgage lenders have a lot riding on a potential sale, too. Enter appraisers, who help ensure a house is worth its cost to both buyer and lender.
Once a house is under contract, the mortgage company orders an appraisal to determine a home’s value. “The appraiser’s job is to assure the lender that the house is worth what we’re basing our loan amount on,” said Keith McClain, senior vice president at Home Savings & Trust Mortgage.
Without that assurance, banks and mortgage companies will not make a loan, said Neil Ollivierra of Ollivierra & Associates, an appraisal firm.
Appraisers get their numbers by studying comparables — similar properties in the area that have sold in the recent months, are under contract or are still up for sale — by looking at public records and by visiting the house itself.
Appraisals, which typically cost $400 to $500 and are paid for by the buyer, come in several forms. The main two, Ollivierra said, are full and drive-by. In a full appraisal, an appraiser goes to the house and scrutinizes it inside and out — taking measurements and noting problems, such as cracked pipes, and updates, such as a renovated kitchen.
In drive-bys, appraisers look only at the exterior of the home and study information about it in public records and the multiple listing service. “We assume that everything inside is average,” Ollivierra said.
The type of loan can determine the type of appraisal required. For instance, appraisals for a loan from the Federal Housing Administration or the Veterans Affairs Department require more scrutiny than conventional loans, although “FHA is not as picky as they used to be,” said Sue Bowers, co-owner of Suburban Appraisers & Consultants Inc.
Today the agencies focus on health or safety hazards, such as peeling paint or missing stair rails, over other details, Bowers said, and the seller is usually responsible for fixing them.
Because appraisers study an area’s recent sales activity, foreclosures and short sales can hurt appraisal rates. As the housing market crumbled, home values were coming back low, but that trend is reversing, McClain said.
If a house appraises for less than the contract price, the loan is unlikely to be approved. Buyers can renegotiate the price with the seller, ask the seller to make improvements to the home to raise the value or back out of the contract. It’s important to read the sales contract carefully, as the criteria for appraisals are spelled out for different types of loans.
Ollivierra and Bowers said that before the market collapsed, lenders held more sway with appraisers, threatening to terminate relationships with those who returned unfavorable numbers and shopping appraisals to find one that matched their needs. But the Home Valuation Code of Conduct, which took effect last May, eliminated direct contact between those parties. Now lenders go to appraisal management companies, which hire appraisers.
For help wading through the appraisal and loan process, a knowledgeable real estate agent is invaluable, McClain and Bowers said. A good loan officer is also crucial, Bowers added.
“That loan officer is going to tell [homebuyers] exactly what they can afford,” she said. “That is the most important thing about buying a house.”
