How Do Banks Appraise a House for a Mortgage?
When an appraiser spends 15 minutes looking at your home, asking some questions and taking measurements, it's easy to believe that she can determine your home's value quickly. Most people do not see the behind-the-scenes research that an appraiser invests to write a credible appraisal of your home's value. The appraisal process plays a key role in the methods banks use to appraise a house for a mortgage.
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Appraisal Management Company
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Banks generally order an appraisal through an appraisal management company, or AMC, a disinterested party that establishes a layer of separation between lenders and appraisers. AMCs became the preferred method for conducting appraisal business with the Home Valuation Code of Conduct, or HVCC, written in 2008. HVCC intended to enhance ethical professional appraisal practices. Before HVCC, lenders sometimes pressured appraisers to meet the value needed to close the loan, even if the value was overstated. This practice was blamed as a contributory factor in the mortgage crisis. AMCs developed as a means to ensure that an appraiser can accept an assignment and provide a disinterested opinion of value for lending purposes.
Types of Appraisals
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Banks determine the type of appraisal they need to determine a home's value. If the loan application appears straight forward and the lender believes the home valuation will easily meet loan-to-value ratios, the bank may order an electronic appraisal. This type of appraisal gathers data from assessor records, multiple listing services and other public records to determine the value of the property. An electronic appraisal does not include a property inspection to assess the home's condition or improvements. An exterior-only appraisal depends on similar data but requires an appraiser to view the property from the road. It may ask the appraiser to measure the home's exterior for square footage information. An interior-exterior appraisal instructs an appraiser to visually inspect a home, noting its condition, the quality of construction, favorable or unfavorable aspects of the property and observations about the home that may not be reflected in public information.
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Appraisal Guidelines
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Licensed appraisers must conduct their research and analysis under the guidelines contained in the "Universal Standards of Professional Appraisal Practice." Although the property characteristics differ from home to home, the appraisal process remains the same. Appraisers systematically gather and verify data about the real estate market, the property and its improvements, recent comparable sales, listings, visual inspection of the home's condition and legal restrictions on land use. After gathering the information, the appraiser analyzes each element to determine the highest and best use for the subject property. For example, in a neighborhood that is zoned commercial, a residential home does not represent highest and best use. This key concept can strongly influence home's value. Comparisons of the subject to recent home sales in the neighborhood factor strongly in the overall marketability and value the home commands in the current market.
Appraisal Reviews
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Once the appraiser completes the analysis and reconciles a variety of valuation approaches, she submits a written report to the AMC. Generally the AMC staff includes review appraisers who read the report to ensure it complies with the USPAP standards. If the report supports its conclusion with facts and solid analysis, the valuation will be accepted for lending purposes. The review appraiser contacts the appraiser if the report raises questions or red flags.
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