What Are Appraisal Requirements for a Conventional Loan?

By: Mark Moz

Before a lender offers terms for a conventional loan, an appraiser must evaluate the home’s market value. This protects the lending institution from making a loan that exceeds the value of the property, putting depositor and investor money at risk. Though there are three models for determining the appraised value of a home, the standard approach is the comparable sales model. Using this model for a conventional loan involves four general appraisal requirements.

  1. The Basics: All appraisals start with a collection of basic information about the home, including the square footage, number of rooms, etc. After that, the appraiser looks at the age and the condition of the home to establish a general price for the property. The final step in the initial appraisal is an examination of utility service and the cost of operating the home.
  2. State Of The Property: An appraiser will categorize a home in one of two ways. The first is “as-is”, a designation that sets that value of the home based on its current state. Homes that don’t meet the appraiser’s standards to be sold “as-is” are difficult to finance, because the lenders assume the risk for the repairs. The alternative designation is “subject-to”, where the value of the property is dependent upon the completion of repairs. Sometimes the repairs are minor, like replacing a rusted gutter or nailing down a loose board on the deck, while other mandated repairs are a major undertaking. If the repairs are minor, and the buyer is willing to accept responsibility for the repairs upon purchase of the home, the lender may waive its concerns and finance the purchase. In most cases, a property appraised “subject-to” can only be sold after the seller pays for the repairs out of their own pocket.
  3. Comps: Home prices don’t exist in a vacuum, and they are determined by the value and sale price of other properties in the area. A conventional loan calls for three comps, or comparative evaluations of similar properties within the same neighborhood. The appraiser or the lender will pull a list of properties sold within the last year or six months that have the same characteristics of the property on which the borrower wishes to secure a loan. If the appraised value of the home is substantially lower than the comps, the lender may hesitate in issuing the loan, seeing the difference as evidence of falling property values in that neighborhood, or problems with the property.
  4. Market Value: The largest factor in any appraisal for a conventional loan is the comparison of the market value of the property with the appraised value. When the appraised value is less than the market value, the lender won’t make the loan, because the lender stands to lose money on the transaction if the borrower defaults on the note. In every case, the appraised value must be at or above the market value for a conventional loan.

Unlike FHA loans, which take into account safety and security concerns as part of the appraisal process, conventional loans are approved solely on the value of the property. These looser regulations make conventional loans an attractive choice for homes that need a little bit of work, or need to be sold quickly.

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