Property valuation for bank loan?
A valuation is an estimate of the amount of money a home may be worth. The valuation will also be based on information about the home including square footage, the number of bedrooms, bathrooms and the year it was built.
Appraised value
Professional home appraisals consider various factors to determine a home's value, including size, location, condition, upgrades and local comps (or what other, similar homes nearby have sold for). Mortgage lenders require an appraisal before they will approve your loan.
A lender uses an appraisal not only to assess the value of the property, but also to determine such things as your interest rate, required down payment, and whether you will be approved for the loan.
A bank compares the value from the appraisal or evaluation to the requested loan amount to determine whether the value of a property securing a loan provides adequate collateral protection for the bank. This helps to limit the bank's losses if the borrower defaults on the loan.
There's an acceptable variance when it comes to home appraisals. It usually depends on the prevailing market conditions. In markets with favorable conditions, the difference should be between 2% and 3% of the other values. For markets with challenging conditions, a 10% difference may be acceptable.
That said, most appraisals are in line with the selling price. On average, only one in 10 home appraisals come in low, but this can vary from region to region. If your house ends up in that 10%, here are some potential reasons why.
Your bank will not issue you a loan for more than the appraised value based solely upon the collateral. The single most important item to understand is that your bank will not give you a loan for your property for more than the appraised value unless the loan is based upon credit rather than collateral.
How much can you borrow with a home equity loan? A home equity loan generally allows you to borrow around 80% to 85% of your home's value, minus what you owe on your mortgage. Some lenders allow you to borrow significantly more — even as much as 100% in some instances.
The management company receives the request and randomly assigns it to an appraiser on their team. While the bank can select the appraisal management company, they can no longer directly select the appraiser.
If you've made an offer on a home and your lender's appraisal values the property at less than you've bid, the lender won't approve the full mortgage amount even if you qualify for it. In order for the purchase to go through, you may need to supply extra cash.
Are bank appraisals usually high?
It's long been known that lenders appraisals, that is, appraisals ordered by lenders to check on the value of homes, are usually at, or above, the price in the contract. Some people were suspicious that appraisers were just confirming the contract price to make their clients – the lenders – happy.
If you are ready to have your home appraised, you should address any significant issues that may affect your home's value—such as damaged flooring, outdated appliances, and broken windows. A messy home should not affect an appraisal, but signs of neglect may influence how much lenders are willing to let you borrow.
There are many things that can hurt a home appraisal, such as owning a unique home and having outdated appliances, home systems and other structural issues. Anything in a home that is old, outdated or not functioning properly can directly impact the home appraisal and the overall value of the home.
Home appraisals will never be 100% objective. After all, the appraiser is a human with their own biases and, oftentimes, incomplete sales data. That said, most appraisals are in line with the selling price. On average, only one in 10 home appraisals come in low, but this can vary from region to region.
Most appraisals come in at the right price. According to CoreLogic, in general, appraisals come in below contract only about 7-9% of the time. That average was skewed when the appraisal gap reached its peak at 20% in April 2022 but has been leveling out ever since.
One of the primary differences between bank appraisals and real estate appraisals is that the former is mandatory while the latter is optional. If you're buying a home and need a mortgage loan, you'll have to get a bank appraisal.
If the purchase agreement contains an appraisal contingency, the buyer is protected in the case of a low appraisal. If the buyer can't get the seller to adjust the price or come up with the difference in cash, they can walk away from the sale with their earnest money deposit returned to them.
Can the seller back out if the appraised value is too high? The conditions of the offer contract will determine when the buyer and seller can back out of the purchase. However, the seller may simply want to renegotiate if the appraised value comes back significantly higher than the selling price.
When appraising a property for a purchase, it's common for the sales price on the contract to match the appraised value. After all, everything being equal, it's an agreed-upon price which in turn reflects current market values. But sometimes they don't match.
Certain lenders, like large banks or credit unions, have the capability to offer limited appraisal waivers on eligible transactions, typically for pre-approved buyers in very strong financial standing. This allows them to approve loans without the condition of an appraisal.
Does appraisal need to match sale price or loan amount?
Most home buyers need a mortgage to buy a home. Before a mortgage is approved, the lender or mortgage broker usually hires an appraiser to verify the market value of the property. Ideally, the appraised value matches the price the buyer has agreed to pay.
Sometimes when you're trying to buy a home, your mortgage lender's appraiser says the house is worth less than you agreed to pay. This is known as an appraisal gap or a low appraisal. You may have to pay the difference in cash or renegotiate with the seller to keep the deal alive.
Loan payment example: on a $50,000 loan for 120 months at 8.40% interest rate, monthly payments would be $617.26. Payment example does not include amounts for taxes and insurance premiums.
Understand the reason for the denial
Lenders typically assess several factors, including your credit score, income, debt-to-income ratio and the amount of equity in your home. Request a detailed explanation from the lender for the denial to pinpoint the specific issue that needs addressing.
Most lenders do not dish out home equity loans worth more than the applicant's homeownership stake because that would leave a chunk of the loan potentially unsecured. Though each lender is free to choose, many won't lend more than 80% of the homeowner's interest in their property.
