Why Is an Appraisal Done for a Loan Modification?

An appraisal is completed for a loan modification so the lender can be assured of the current value of the property for which the modification has been requested.

Reasons for Modifications

Loan modifications modify the original loan agreement. They address such things as a change in interest rate, an increase in funds, changing the amortization, extending the loan term, releasing or adding guarantors, releasing part of the security/collateral and delaying payments.

Market Fluctuations

Like any other market, the real estate market fluctuates. Increases result in appreciation, while decreases can result in depreciation or at least a break-even level.

Lender Value Requirements

The current appraised market value of the property will determine how, if at all, the lender will view the loan modification request. If the value has fallen, the lender may require that the principal be reduced to a satisfactory level before approving a modification. Of course, if the value has increased, the lender's collateral is safe.

Regulatory Agencies

Banks, life insurance companies and other lenders require an appraisal as part of a loan modification for regulatory purposes. Companies are assessed ratings and cash reserve requirements, depending on the quality of their loan portfolio.

Documentation

Loan modifications may still be made if the appraised property value has decreased. A lender will at times work with a good borrower to avoid foreclosure. Based on the new loan to value the lender may reduce the outstanding loan balance, extend the amortization thus decreasing the payments or defer payments. The appraisal is one part of the paper trail that will document the lender's reasoning, and will satisfy internal and external audits.