The various types of mortgage appraisals can be confusing and every lender can choose what type should be used for a particular transaction. The Secondary Market Agencies (FHA, Fannie Mae, Freddie Mac) set the standards and the guidelines for appraisal types and the lender chooses the correct type to make the loan in compliance with guidelines so it can be secured in the Secondary Market.
A full appraisal is when the appraiser inspects the inside and the outside of the property, pulls data from all available sources (MLS, assessor, tax records) and compares the subject property with 3 recent sales of similar homes in the same area or neighborhood. This report costs $300 or more and comes back with 2-8 pages of information about the subject property, photos of the subject from the front, back and the street scene. There are also photos of the front of the 3 comparables, plus pages of legalese stating that this is an independent opinion and was not influenced by the lender, the seller, the realtor, etc.
A simplified version of a full appraisal might be called a “drive-by” or an “exterior only” inspection. The data is pulled for the subject and the comparable sales in the same manner as for a full appraisal, but the physical inspection of the house is limited to a visual confirmation that it exists where it’s supposed to (drive-by photo) or perhaps the exterior is measured and photographed from front and back (exterior only). This report is still pricey, but required for some loan programs that are too risky for an electronic value, but not risky enough to require a full inspection and list of condition, etc.
The quickest and easiest valuation can be obtained in several ways, but the most popular currently is the electronic value. Freddie Mac and Fannie Mae, as well as many other companies, have vast amounts of property information stored in databases because of the millions of mortgages that pass through their systems.
Patterns of value across the nation can be extracted from those databases and with the aid of MLS data, tax records and public records tracking sales and building permits, a reasonable guess at the value of a particular property can be produced. This valuation is missing only the physical “eyeballing” of the interior that confirms room count and amenities and is missing the judgement calls of the appraiser who is experienced at comparisons.
The most critical element of a full appraisal is the comparison of subject property to three recent sales and if that is done electronically by pulling information from a database, then there is less chance that an unscrupulous party will misrepresent the value by making adjustments in areas that are very subjective.
When a mortgage deal is being made based on a solid “A paper” borrower with excellent credit and solid assets, the value of the property is not as critical because it is assumed that the buyer is capable of sound financial decisions and the lender has little risk that the loan will default.
If the deal being structured is risky in any area or even contains multiple layers of risk, then the value of the property is all-important because there is a degree of certainty that the lender may have to foreclose and sell the property to get the money back.
You should be told within a few days of application if a full appraisal will be required. The Good Faith Estimate of charges must be given to you within 72 hours of application and it should show the fees for appraisal. You need to be certain whether your lender is quoting you actual fees you will be charged or whether the disclosure is just a “range” or estimate. Don’t make any assumptions when it comes to understanding what services will be performed and what costs you will be responsible for.
Copyright: Judi M Moore, 2rhouse.org, August 27, 2005, all rights reserved