What Is An Appraised Value And Its Importance In Mortgage?

 

Introduction To Appraised Value

When a property’s value is evaluated based on a given point in time it is called an appraised value.

During the mortgage origination process, a professional appraiser performs the evaluation. The lender usually chooses the appraiser but it is the borrower who pays for the appraisal.

It is not important for the appraised value to correspond to an asset’s or property’s market value.

Knowing More About Appraised Value

For the period of the loan underwriting process, the appraised value of a home is a significant factor; it also plays a role in determining how much money can be borrowed and under what terms. the appraised value determines the loan to value (LTV ) ratio.

For instance, the lender will require the borrower to buy private mortgage insurance when the LTV is greater than 80%.

Whereas in a new appraisal if the LTV drops to 78%, the borrower may be able to eliminate the private mortgage insurance payments completely.

This appraised value does not necessarily need to correspond to the actual market value or selling price of a home or other asset.

If there is a bidding war or the real estate market in an area is hot then a home may sell for above-appraised value.

The Role Of Appraised Value In The Real Estate Market

The appraised value of a property can be different from the market value and also from the agreed-upon purchase price for a home.

The price that a buyer is willing to pay to purchase real estate is called the market value for a property.

For instance, if a home is marketed by the seller at $250,000 the buyer might offer $235,000. Leading to negotiations between the seller and buyers with a potential compromise price somewhere in-between.

Those price levels could still not match the appraised value that the lender will use to determine how much financing will be approved toward the purchase.

Components like the comparable sale prices for neighboring homes, curb appeal, any infrastructure issues that need to be sorted, and local crime rates can affect the appraised value of a piece of property.

Any of the above-mentioned factors or all of them would lead to a negative effect on the appraised value.

Other factors to dip the appraised value are when the property is located next to a source of noise pollution like the airport or train station.

So even if a property is in good condition, its appraised value could drop with similar properties in the surrounding area.

How To Improve Appraised Value?

Many property owners try and improve the appraised value of the real estate by making improvements like, a deck or patio which is added to the property by the homeowner to increase the recreation options.

More energy-efficient equipment may be used to improve the heating and ventilation system.

Smart controls may be installed, allowing appliances, lighting, and security systems throughout the home to be operated remotely and automatically.

To accommodate more vehicles the garage could be expanded. Bathrooms may be upgraded with new showers or tubs.

New ovens could replace the old ones as part of the kitchen renovation, the counter space increased and a garbage disposal system may be installed.

Permanent upgrades like these enhance the use of the property and can increase the appraised value.

The Calculations Of The Appraised Value

When calculating the appraised value of a home, an appraiser will consider the current market conditions, with recent sale prices of similar homes in that area.

The loan underwriting team uses the appraised value to determine how much money they should lend to cover the purchase of the home.

When Is An Appraisal Value Good?

If the appraisal value is in or around the price in the purchase agreement, then it is considered to be good.

Usually, mortgage lenders will lend only 80 to 97 % of the home value, so if the borrower’s down payment is between 3 and 20 %, then it would be a good appraisal value.

Conclusion

When a professional evaluation of a property’s worth is done it is called appraised value, the evaluation may not correspond to its actual market value or the selling price of the home.

To underwrite mortgage terms such as computing loan-to-value (LTV) lenders rely on appraised values.

With improvements, renovations and basic repairs a seller can seek to increase the appraised value.

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