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Mortgage Financing Appraisal

 

What Is an Appraisal?

An appraisal is an independent and professional assessment of a property’s market value. Before approving a mortgage, most lenders—such as banks, credit unions, or private lenders—require an appraisal to confirm that the property securing the loan is worth a sufficient amount to reduce their financial risk.

To determine the property’s true market value, a lender may use one or more of the following methods:

  • The sale price
  • Municipal assessment data
  • An Automated Valuation Model (AVM)
  • A drive-by appraisal
  • A desktop appraisal
  • A full appraisal

 

Appraisals for a Property Sale

An appraisal is commonly conducted during the purchase of a home or investment property. In these cases, the lender (or mortgage broker) requests the appraisal to verify that the agreed-upon sale price is supported by market data.

Since buyers sometimes pay above or below market value, the appraisal ensures that the lender’s loan-to-value ratio remains within acceptable limits, that the property is in good condition and marketable, and that there are no significant issues affecting its value.

For a sale, the listing realtor typically provides property access. The appraiser then performs an interior and exterior inspection and submits the completed report directly to the lender for review.

  • If the appraised value is equal to or higher than the purchase price, the lender generally proceeds with financing at the agreed loan-to-value ratio.
  • If the appraised value is lower than expected, it may reduce the loan amount available or, in some cases, cause the financing to fall through entirely.


Appraisals for Refinancing

When a homeowner refinances an existing mortgage, an appraisal becomes even more critical since there is no sale price to reference. The appraisal determines the property’s current market value, which directly affects how much the homeowner can borrow.

A higher appraised value allows for a larger mortgage amount. For instance, if the lender permits an 80% loan-to-value (LTV) ratio and the home appraises at $1,000,000, the homeowner may qualify for a mortgage of up to $800,000.