Home Appraisal

A home appraisal is a written valuation of a property prepared by a licensed or certified appraiser and ordered by the lender in connection with a mortgage application. Federal regulation does not use the phrase "home appraisal" at all; the regulated object is "appraisals and other written valuations" developed in connection with an application for credit secured by a first lien on a dwelling (12 CFR 1002.14). That wording matters twice over. It sweeps in automated valuations and desk reviews as well as a full appraisal, and it limits the rights below to first-lien dwelling credit, which covers a purchase mortgage or a refinance but not every second-lien loan.

An appraisal is routinely confused with a home inspection, and FHA's own buyer form settles the difference in four words: "Appraisals are NOT Home Inspections!" The appraisal estimates value for the lender. The inspection assesses condition for the buyer, and only happens if the buyer arranges it.

The appraisal is one of the few points in a mortgage where the consumer holds specific, dated, enforceable rights, and they are easy to let lapse unused.

The rights, at 12 CFR 1002.14. The creditor must mail or deliver written notice of the right to receive a copy of all written appraisals no later than the third business day after receiving the application. It must then provide a copy of each appraisal or other written valuation "promptly upon completion, or three business days prior to consummation of the transaction ... whichever is earlier." It may not charge for the copy, though it may charge a reasonable fee for the appraisal itself. And the rule that gets overlooked is subsection (a)(4): those requirements apply "whether credit is extended or denied or if the application is incomplete or withdrawn." Someone turned down for a mortgage is still entitled to see the valuation that helped turn them down.

The appraiser is meant to be insulated from the outcome, and the regulation says so in unusual detail. Under 12 CFR 1026.42(c)(1) nobody with an interest in the transaction may cause a value to be based on anything other than the appraiser's independent judgment, and the examples the rule gives are the practices it was written to stop: seeking a minimum or maximum value, withholding payment because a value came in low, implying that future work depends on the number, dropping an appraiser for reporting a value below a threshold, and conditioning the fee on the loan closing. This is why a borrower who thinks a value is wrong generally has to challenge the reasoning, comparable sales and factual errors rather than ask for a different answer.

On some purchases the lender must obtain two appraisals and may charge for only one. For a higher-priced mortgage loan financing a principal residence, 12 CFR 1026.35(c)(4) requires two written appraisals where the seller acquired the property 90 or fewer days earlier and the new price exceeds the seller's acquisition price by more than 10 percent, or acquired it 91 to 180 days earlier and the price exceeds theirs by more than 20 percent. Different appraisers must perform them, one must analyze the price difference, market changes and any improvements made, and the creditor "may charge the consumer for only one of the appraisals." Both appraisals require a physical visit of the interior. The rule exists for quick resales at a large markup, and it is the closest thing in federal mortgage law to a second opinion the buyer does not pay for.

What the appraisal does not do is the part worth being blunt about. It does not certify that the roof is sound, that the systems work, or that the house is worth what it costs to live in. FHA's form states that FHA "does not guarantee the value or condition" of the home, and that if problems turn up after closing, FHA "cannot give or lend you money for repairs" and "cannot buy the home back from you."

You apply; the lender orders the appraisal, usually through an independent management company, and usually passes the fee to you at or before closing. An appraiser inspects the property to the extent the assignment requires, compares recent sales of similar nearby homes, adjusts for differences, and delivers a written opinion of value. The lender then sizes the loan against the lower of the contract price and that value.

A hypothetical example. Nadia agrees to buy a house for $520,000 and plans to put 20 percent down, which is $104,000 against a purchase price of $520,000, leaving a $416,000 loan and no private mortgage insurance. The appraisal comes in at $500,000.

The lender now measures everything against $500,000. Eighty percent of $500,000 is $400,000, so keeping the loan at 80 percent means putting down $120,000 instead of $104,000, an extra $16,000 in cash. Her alternative is to borrow the original $416,000 against a $500,000 value, which is an 83.2 percent loan-to-value ratio and brings mortgage insurance with it. The third route is to renegotiate the price, and the fourth is to withdraw if the contract carries an appraisal contingency and she is inside its deadline. What is not on the list is asking the lender to use the higher number.

Pros

• It is an independent professional check on the price, arriving at the point where a buyer's own judgment is least reliable.
• The applicant is entitled to a free copy of every valuation, so the reasoning and the comparable sales are readable rather than hidden.
• The independence rules give the number real weight, because the appraiser is not supposed to be reachable by anyone who wants the deal to close.
• On a quick, marked-up resale of a principal residence, a second appraisal can be required at the lender's expense.

Cons

• It measures value, not condition, so a clean appraisal says nothing about the roof, the wiring or the furnace.
• The borrower usually pays for a report commissioned for the lender's benefit.
• Comparable sales are a backward-looking method, so in a fast-moving market the value can lag the prices buyers are actually paying.
• A low value transfers a cash problem to the buyer without changing anything about the property or the price.