Understanding property valuations

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If you’re applying for a mortgage, you probably expect the lender to take a look at your income, debt, credit history, employment and assets. There’s another loan element the lender will consider that may be less familiar: an objective property valuation.

 

Related: Mortgage pre-approval process

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What Is a Property Valuation?

Sellers may use a property valuation to determine how much their house is worth and how much they can charge on the open market.

 

A mortgage lender’s property valuation is slightly different. It helps the lender determine the value of the property you’re hoping to buy based on factors like size, location, condition and demand.

 

Why would lenders require this type of home appraisal? They want to know that the loans they offer are backed by a sufficiently valuable property so that if a borrower were to default on the loan, they can recoup their losses.

 

Consider this: Sellers can choose any listing price they want — whatever they think someone is willing to pay. But if the buyer needs financing, the selling price must be supported by market value (what comparable homes have recently sold for in the area) before a lender will pony up the cash for a loan.

 

If the home you want to buy is appraised for less than the sales price, the seller would need to lower the price to the appraised value, you would have to make up the difference, or you’d exit the deal.

Who Carries Out a Property Valuation?

A lender’s property valuation typically will be carried out by a professional appraiser assigned by a third party. The lender, buyer and seller are not to have any relationship with the appraiser so that the valuation is unbiased. Buyers can hire an independent appraiser, but the valuation would not be official.

 

The kind of valuation required by lenders depends on factors such as the type of home you’re looking to buy, the type of loan you’re applying for, your credit score, and whether you’re buying a single-family or multifamily home.

Home Appraisals, Explained

The most common kind of property valuation is an appraisal.

How Does a Home Appraisal Work?

An appraisal is an independent estimate of the home’s value by a licensed or certified real estate appraiser. Appraisers weigh factors like location, the condition of the home, size and layout, the year it was built, and any renovations that have been done. They also consider “comps” (what similar homes in the neighborhood recently sold for), tax records and zoning.

 

The appraisal will determine a market value that is either “as-is” or “subject to” certain conditions, such as completion of repairs or upgrades. Lenders rely on the appraiser’s market value to come up with the loan-to-value ratio of a property, which influences the amount they’re willing to lend and the terms of the loan.

When Does an Appraisal Happen and What Does It Cost?

The federal government no longer requires appraisals for homes that cost less than $400,000, allowing simpler evaluations to stand in their place. That said, most mortgage lenders probably will still require an appraisal.

 

The appraisal typically occurs once the seller has accepted an offer and is normally performed within the loan contingency date of the purchase contract, usually 21 days. The buyer pays for the appraisal ordered through the lender. The cost depends on the type of property, city, size and features, but for a single-family home, it averages $348, according to a national survey from HomeAdvisor, an online platform for home services professionals. A desktop appraisal may cost much less than that.

What If You Get a Low Appraisal?

If the appraised value is as much as the agreed-upon price or more, that encourages the lender to move forward with the home loan, assuming that the other aspects of the property and your application are in order. If the appraisal comes in under the agreed-upon price, the lender may reduce the amount of the loan it’s willing to offer. You or the sellers can dispute the appraisal with the lender or ask for a second appraisal. If the value is still too low, there are three routes:

  • You can agree to contribute the difference in cash.
  • You can try to get the seller to reduce the price.
  • You and the seller may agree to split the difference.

Buyers can back out of the deal if the contract includes an appraisal contingency. A clean offer, one with as few contingencies as possible, caught on in the recent hot market, but buyers take risks in dropping contingencies.

Alternatives to a Full Home Appraisal

In certain situations or stages of the homebuying process, you may not need to go through a full formal home appraisal. Here are some alternative methods lenders use for home valuations.

Automated Valuation Model

Algorithms take into account the size of the home, the number of bedrooms and bathrooms, comps, and other factors to estimate property value. Some lenders of conventional mortgages using Fannie Mae or Freddie Mac’s automated underwriting systems may receive a waiver for a full appraisal, thanks to robust sales in the neighborhood to support the purchase price, the amount of the down payment, strength of the borrower or the type of transaction.

 

Some lenders also use automated valuation models when deciding whether to extend or adjust a home equity line of credit.

Drive-by or Exterior-Only Appraisal

A drive-by appraisal (also known as a summary appraisal) refers to an inspection that only looks at the exterior of a home. The appraiser will photograph the front and sides of the home, as well as the street in both directions. The appraiser takes notes on the neighborhood and the condition of the home and looks at comps when coming up with an estimated value.

Desktop Appraisal

Never having to leave the desk, an appraiser uses property tax records, comps and other public record data in lieu of a physical property inspection. The Federal Housing Finance Agency made desktop appraisals, implemented in March 2020 amid lockdowns and social distancing, permanent for purchase loans starting in early 2022. That means both Fannie Mae and Freddie Mac will allow appraisals to be conducted remotely.

Broker Price Opinion

A broker price opinion is an estimate of a property’s value determined by a real estate agent or broker, rather than a licensed appraiser. A client may request this estimate to underpin a home’s listing price.

 

A lender may request a broker price opinion when a borrower is behind on payments and will use the unofficial assessment to see whether the home value is below the amount of the loan, potentially making the borrower eligible to negotiate a short sale.

 

Broker price opinions can also be used to buy and sell mortgages on the secondary market. Lenders prefer them in these cases because a full appraisal isn’t required and because the valuations are fast and generally less costly.

The Takeaway

An unbiased professional appraiser determines real estate valuation based on factors like home size, condition, location and comparable sales. When big money is at stake, a lender needs to determine the true property valuation.

 

Learn more:

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Understanding mortgage basics

 

Do you ever window shop for the perfect home, whether by browsing online or taking a stroll through your favorite neighborhood? You’re not alone. It’s fun to dream about owning a place all your own.

 

If you’re getting more serious about buying a home, you’re probably aware that some of the next steps are, well, not quite as fun. One of those is acquainting yourself with the mortgage process.

A mortgage loan, a loan to buy a home or other real estate, provides people with the opportunity to purchase a home without having all the money upfront—which most people simply do not have.

While it is wonderful that mortgage loans open up homeownership to so many, taking out a mortgage is also a big responsibility. This home affordability calculator estimates what might be in your budget.

 

Taking the time to learn about mortgages before you dive headfirst into the buying process may be the way to go.

 

Related: What is mortgage amortization?

 

FabioBalbi/istockphoto

 

A mortgage loan, also known simply as a mortgage, is issued to a borrower who is either buying or refinancing real estate.

 

The borrower signs a legal agreement that gives the lender the ability to take ownership of the property if the loan holder doesn’t make payments according to the agreed-upon terms.

 

The homebuyer will pay monthly principal and interest payments for a specific term. The most common term for a fixed-rate mortgage is 30 years, but terms of 20, 15, and even 10 years are available.

 

A shorter term translates to a higher monthly payment but lower total interest costs.

 

DepositPhotos.com

 

When homebuyers apply for a loan, they’ll need to choose whether they want a fixed interest rate or an adjustable rate and the length of the loan.

 

 

Chainarong Prasertthai // istockphoto

 

The interest rate doesn’t change, so the monthly principal and interest payment remains the same for the life of the loan.

 

 

SARINYAPINNGAM / istockphoto

 

With an ARM, the interest rate is generally fixed for an initial period of time, such as five, seven, or 10 years, and then switches to a variable rate of interest. The rate fluctuates with the rate index that it’s tied to.

 

As the rate changes, monthly payments may increase or decrease. These loans generally have yearly and lifetime interest rate caps that limit how high the variable rate can adjust to.

 

Next, borrowers will need to decide what type of mortgage loan works best for them.

 

DepositPhotos.com

 

Conventional loans are loans that are not backed by a government agency, aand must adhere to the requirements of Fannie Mae, Freddie Mac, or other investors.

 

Private mortgage insurance commonly known as PMI, is generally required on loans with a down payment of less than 20%.

 

The coverage protects the lender against the risk of default. Your mortgage servicer must cancel your PMI when the mortgage balance reaches 78% of the home’s value or when the mortgage hits the halfway point of the loan term, if you’re in good standing.

 

PMI typically costs 0.5% to 1% of the loan amount per year.

Down payment: Generally between 3% and 20% of the purchase price or appraised value of the home, depending on the lender’s requirements.

 

designer491 // istockphoto

 

Loans insured by the Federal Housing Authority are attractive to first-time homebuyers or those who struggle to meet the minimum requirements for a conventional loan.

 

These loans usually require a one-time upfront mortgage insurance premium, which typically can be added to the mortgage, and an annual insurance premium, which is collected in monthly installments for the life of the loan in most cases.

 

Down payment: Starts at 3.5%

 

designer491 / istockphoto

 

Loans guaranteed by the U.S Department of Veterans Affairs are available to veterans, active-duty service members, and eligible surviving spouses.

VA-backed loans require a one-time “VA funding fee,” which can be rolled into the loan.

 

The fee is based on a percentage of the loan amount, and may be waived for certain disabled vets.

 

Down payment: None for nearly 90% of VA-backed home loans.

 

designer491 / istockphoto

 

There are several components to a monthly mortgage payment.

  • Principal: The principal is the value of the loan. The portion of the payment made toward the principal reduces how much a borrower owes on the loan.
  • Interest: Each month, interest will be factored into payments according to an amortization schedule. Even though a borrower’s fixed payment may stay the same over the course of the loan, the amount allocated toward interest generally decreases over time while the portion allocated to principal increases.
  • Taxes: To ensure that a borrower makes annual property tax payments, a lender collects monthly property taxes with the monthly mortgage payment. This money is kept in an escrow account until the property tax bill is due, and the lender will make the property tax payment at that time.
  • Homeowners insurance: Mortgage lenders require evidence of homeowners insurance, which can cover damage from catastrophes such as fire and storms. Similar to property taxes, most lenders collect the insurance premiums as part of the monthly payment and pay for the annual insurance premium out of an escrow account. Depending on your property location, you may have to add flood, wind, or other additional insurance.
  • Mortgage insurance: When a borrower presents a down payment of less than 20% of the value of the home, mortgage lenders typically require private mortgage insurance.

 

DepositPhotos.com

 

reverse mortgage homeowners 62 and older to supplement their income or pay for health care expenses by tapping into their home equity.

 

The loan can come in the form of a lump-sum payment, monthly payments, a line of credit, or a combination, usually tax-free. Interest accrues on the loan balance, but no payments are required. When a borrower dies, sells the property, or moves out permanently, the loan must be repaid entirely.

 

The fees for an FHA-insured home equity conversion mortgage, by far the most common type of reverse mortgage, can add up:

  • An initial mortgage insurance premium of 2% and an annual MIP that equals 0.5% of the outstanding mortgage balance
  • Third-party charges for closing costs
  • Loan origination fee
  • Loan servicing fees

You can pay for most of the costs of the loan from the proceeds, which will reduce the net loan amount available to you.

 

You remain responsible for property taxes, homeowners insurance, utilities, maintenance and other expenses.

 

This HUD site details all the criteria for borrowers, financial requirements, eligible property types, and how to find an HECM counselor, a mandatory step.

If you’re considering a reverse mortgage, learn as much as you can about this often complicated kind of mortgage  before talking to a counselor or lender, the Federal Trade Commission advises.

 

Gerasimov174 / istockphoto

 

For lots of folks, it can be a good idea to shop around to get an idea of what is out there.

 

Not only will you need to choose the lender, but you’ll need to decide on the length of the loan, whether to go with a fixed or variable interest rate, and weigh the applicable loan fees.

 

The first step is to have an idea of what you want, then seek out quotes from a few lenders. That way, you can do a side-by-side comparison of the loans.

Once you’ve selected a few lenders to get started with, the next step is to get prequalified for a loan. Based on a limited amount of information, a lender will estimate how much it is willing to lend you.

 

When you’re serious about taking out a mortgage loan and putting an offer on a house, the next step is to get preapproved with a lender.

 

During the preapproval process, the lender will take a closer look at your finances, including your credit, employment, income, and assets to determine exactly what you qualify for. Once you’re preapproved, you’re likely to be considered a more serious buyer by home sellers.

 

When shopping around for a mortgage, it can be a good idea to consider the overall cost of the mortgage and any fees.

For example, some lenders may charge an origination fee for creating the loan, or a prepayment penalty if you want to pay back the loan ahead of schedule. There may also be fees to third parties that provide information or services required to process, approve, and close your loan.

 

To compare the true cost of two or more mortgage loans, it’s best to look at the annual percentage rate, or APR, not just the interest rate.

 

The interest rate is the rate used to calculate your monthly payment, but the APR is an approximation of all of the costs associated with a loan, including the interest rate and other fees, expressed as a percentage. The APR makes it easier to compare the total cost of a loan across different offerings.

 

Depositphotos

 

Is the world of mortgages a mystery? You’re in good company. Before taking on this colossal commitment, it might be best to soak up as much as you can about how mortgage loans work, what kinds of mortgages are available, potential landmines, and steps to qualify.

 

Learn More:

 

This article
originally appeared on 
SoFi.comand was
syndicated by
MediaFeed.org

.

SoFi Loan Products

SoFi loans are originated by SoFi Lending Corp (dba SoFi), a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law, license # 6054612; NMLS # 1121636  . For additional product-specific legal and licensing information, see SoFi.com/legal.

SoFi Home Loans

Terms, conditions, and state restrictions apply. SoFi Home Loans are not available in all states. See SoFi.com/eligibility for more information.

External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

 

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