Understanding the Lender/Appraiser Relationship

Borrowers are often confused by the appraisal process. Frequently they are disappointed by the value an appraiser assigns to their home, and can’t make sense of the written appraisal itself. It is important to know that appraisal guidelines are set by lenders, and that these guidelines have become stricter recently. Also, there are different types of appraisals with different rules, depending on what the use will be.

Basically, lender guidelines require appraisers to arrive at a fair market value on homes based on comparable sales in the same area, with adjustments to value based on the local marketplace. For instance, if the subject property does not have a fireplace but one of the comparison properties does, then an adjustment for that feature is made according to the appraiser’s best estimate of the value for a fireplace in that particular neighborhood. There are no national or state averages.

Upgrades to new homes can usually be included at full value, because the only way to obtain the upgrade is to pay more for it. However, it’s difficult to capture the full cost of remodeling or renovating an older home. This is because the property had value in its original condition, and the incremental value of the remodeling or addition has to be supported by comparisons within the same marketplace.

Comparisons must be taken from market activity within the last six months, and usually from closed sales. However, pending sales may be considered if there is a dearth of comparables or if the lender wants to see if there is a trend up or down. The guideline actually is for appraisers to base their opinion on the value of comparable properties which have closed escrow, and for any supporting evidence from pending sales merely to substantiate the opinion.

If property values are quickly rising, appraisers may be able to note this and put more weight on the information from pending sales and listings. Currently, lenders are more apt to insist on conservative appraisals.

In the case of very large loans or if a lender suspects an inflated appraisal, they may perform a field review. If they find that the value is too high, they will use their own appraised value, which can mean that the loan amount is reduced, or the terms of their offer worsen. Avoid problems and unhappy surprises by working with careful mortgage brokers who use reputable appraisers!