Residential Appraisal FAQ’s

Why is an appraisal necessary?
The lender orders the appraisal to obtain an accurate description of the property and an independent opinion of value. The lender uses the appraisal to document that the real estate is appropriate collateral and determine whether the value of the property is sufficient to support the lending decision.

Why isn’t the consumer considered to be the client when he or she pays the appraisal fee?
Federal banking regulations require the financial institution to be the client, regardless of who pays the fee.

How does the appraiser develop the value opinion?
The appraiser researches market data, public records and talks with buyers, sellers and real estate brokers active in the market area. Data researched includes sales, leases, and current listings of similar properties. Other data include land sales and residential construction costs. After all factors affecting the value are considered, the appraiser develops an opinion of value and prepares an appraisal report.

What information should I provide to the appraiser?
The more information the appraiser has about your property, the better he or she will be able to develop a credible result. The appraiser will be interested in knowing if there are any private agreements or restrictions, easements or rights of way, encroachments, “agreed to” arrangements with abutters (e.g., fences, walls) on the property, etc. The appraiser may ask about the property’s title, sales and rental history, and occupancy. He or she might ask if the property is under a pending purchase and sales agreement or option and, if so, the details about the agreement or option. If the property sold in the past three years, the appraiser may ask about the details of the transfers. Finally, the appraiser may inquire about physical characteristics of the property, including any additions, permits, etc. If you are hiring the appraiser directly, the appraiser will want to know what the intended use of the appraisal will be. (NOTE: If you are engaging the appraiser to prepare an appraisal for a federally-related transaction, you should know that the lender or the lender’s agent is required to engage the appraiser).
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What is a Residential Appraisal?

An appraisal is an opinion of value. For estate planning, financial planning, or sale price decisions, individuals, a trusted advisor or a lender usually orders an appraisal. When an appraisal is used to obtain an opinion of value of a property for loan purposes, federal regulation requires the lender or its agent to place an appraisal order. The lender or its agent contacts a state licensed or certified appraiser and identifies the property to be appraised and the intended use of the appraisal. The appraiser then determines the appropriate scope of work for the assignment. The appraiser’s scope of work typically includes the type of property inspection (interior, exterior only or none), what approaches to value are required, and any lender-specific requirements.

There is no single standard appraisal report form, format, or style. However, for residential mortgage lending, Fannie Mae (FNMA) and Freddie Mac (FHLMC), which are Government Sponsored Enterprises (GSEs) that purchase mortgages on the secondary market, have developed residential appraisal report forms that are commonly used to communicate the appraisal of properties used as collateral.

THE APPRAISAL PROCESS

• If an appraisal requires an interior inspection, an appraiser will contact the homeowner (or, in the case of a sale, an agent or the seller) to inspect the interior and exterior of a property. As previously mentioned, an appraisal may not require an interior inspection.

• An appraiser will research county and municipal records, Multiple Listing Service (MLS) records, and other data services for information and documentation concerning the subject property and market area.

• An appraiser will review recent sales and listings of comparable properties. Comparables are recently sold or listed properties that have similar utility, quality, age and amenities as the subject property and are located in the subject property’s market area. In markets where few sales have recently occurred, comparables may be from similar or competing neighborhoods located some distance from the subject property.

• An appraiser may use the sales comparison approach to develop an opinion of value. Often the primary approach to develop an opinion of value for a residential property, the sales comparison approach utilizes recent sales of comparable properties. An appraiser will analyze and compare characteristics that include the living area of the home, land area, style, age, quality of construction, number of bedrooms and bathrooms, presence or absence of a garage, etc.

• The cost approach is another method an appraiser may use to develop an opinion of value. The cost approach is the appraiser’s opinion of the current replacement cost of constructing a reproduction of the existing structure, less any estimated depreciation, plus the value of the land. The cost approach is a valuable approach to use when appraising newer homes that might have little or no depreciation.

• Lastly, an appraiser may utilize the income approach. The income approach is most often used in appraisals of properties that have two, three or four living units, where income is a factor in the decision-making process of buyers and sellers. It is generally not used for one-unit residential properties in areas where the majority of the homes are owner-occupied.

• After data collection and analysis, the appraiser will develop an opinion of value by considering the indicated value(s) of the sales comparison approach, as well as the cost approach and/or income approach, if applicable. The values indicated by the approaches utilized will be reconciled to a final opinion of value. The appraiser will present his or her findings and conclusions in a report to the lender.

Overview of Homeowner’s Insurance Basics

If you’re a homeowner, your house needs to be insured for a minimum of 80 percent of its value (not counting the value of the land). Be proactive and review your current homeowner’s coverage periodically to make sure that your insurance is sufficient to rebuild or repair your home after a disaster. So, what do you need to look for during the review of your homeowner’s policy?

Actual-cash-value coverage: If you have a policy that pays the actual cash value of your home’s contents, you’ll get a check for what your stuff was worth before it was destroyed — not what it would cost to replace it all.

Declarations page(s): This annual statement from your insurance company outlines your coverage and your annual premium. Keep it with your policy.

Full replacement cost: If your property is destroyed, the insurance company is obligated to fully replace or rebuild your property without any deduction for depreciation. Obtaining full replacement cost on your personal property will cost you only about 10 to 20 percent more than the actual-cash-value coverage. Comprehensive homeowner’s coverage must include full replacement cost to repurchase all the items in your home today if they’re lost, stolen, or destroyed.

Guaranteed replacement cost: Even if the damage exceeds the limits on your policy, the insurance company is obligated to fully replace or rebuild your property without any deduction for depreciation. Guaranteed replacement policies aren’t exactly what you might imagine. Insurers limit the amount that they pay out to replace or rebuild your home to usually no more than 20 percent above the amount for which your home is insured.

If your home appreciates beyond the level of coverage, the policy won’t cover that amount — even though you thought you had guaranteed replacement coverage. Guaranteed replacement coverage doesn’t end with just the dwelling itself, either; you must also think about the value of the contents of your home.

Liability: This type of insurance helps protect you financially if someone is injured by you on your property.

Rider: A rider is really a separate insurance policy that goes with your homeowner’s policy to insure special types of personal property. You must obtain a rider on your homeowner’s policy, for an additional cost, to fully insure these items. A copy of your purchase receipt and/or an appraisal may be necessary to substantiate the value of the items covered under each rider.

You may also want to consider whether your home falls under special circumstances that require additional coverage. You may need additional coverage on your home if the following conditions apply:

  • You operate a home-based business.
  • You live with someone to whom you aren’t married and who isn’t on the deed or title to the home.
  • You may be exposed to water damage due to storm sewer or water backup.
  • Earthquake coverage.

Escrow: What to Expect at Your Signing

As you near the end of your transaction, and when Escrow has received and prepared the required documents, you will be contacted to set an appointment for you to review, approve and sign your documents. This portion of your transaction is referred to as “the signing” and will usually occur a few days prior to your actual close date.

This instructional video will prepare you for what to bring and what you can expect at your signing.

Closing Disclosure

The Closing Disclosure is also required to be given to you by the CFPB. While your lender is charged with providing this document, it may assign that responsibility to your escrow or title company. You’ll receive your Closing Disclosure at least three business days prior to your transaction closing.

What is Escrow?

Buying a home is an exciting event, but the process of completing that purchase can be complex. When you make an offer on a property and sign a sales agreement with the seller, the next step is to open an escrow account.This account keeps funds and paperwork in the care of a neutral third party – like an escrow or title company – until all the requirements of the sale have been met. Watch this video to learn more about the process, keeping in mind that many aspects of the escrow process vary depending on local customs.

 

To complete the purchase of your home, you’ll have a major role to play throughout the escrow process. Your escrow officer will be required to follow the closing instructions and meet the requirements outlined in the sales contract you and the seller previously signed. It’s important to direct any questions regarding the escrow process to your escrow officer, and any questions about your loan directly to your lender. Watch this video to learn more about closing your transaction. And congratulations on your new home!

What is Escrow Infographic

The Loan Estimate: What Is It?

The Consumer Financial Protection Bureau, or CFPB, requires your lender to issue a Loan Estimate within three business days of receiving your mortgage application. The Loan Estimate details the terms of your loans along with estimated closing costs

Common ways to take title to California residential property

The completion and accuracy of this form is very important. This will indicate to the Escrow Officer or Title Officer how title will be held to the property. ‘How you hold title to your property can have serious tax consequences. It is strongly recommended that you seek tax and / or legal counsel when completing this form’. The Escrow Officer or Title Officer will not be able to advise you on the completion of this document.

Download (vesting-ways-to-take-title.pdf)

How to Read a Preliminary Title Report

Once you’ve opened escrow on a property, you will receive a preliminary report. This is an offer to issue a title insurance policy and it will describe the terms under which a policy will be issued.

The preliminary report will include items such as the owner’s name, property legal description, and any exceptions to the title policy. While every property will have some exceptions, certain exceptions must be removed before a title policy can be issued. One example is a deed of trust securing a loan. The loan must be paid in full in order to secure a release and issue a title policy. It is important to review your preliminary report and understand any exceptions or exclusions from title policy.

Your title representative or escrow officer can help you with any questions about your preliminary report.

Title Insurance: 2 Types

Your closing costs might include two types of title insurance policies, but do you know how these policies differ?

Loan Policy

Your lender requires title insurance when you secure a mortgage. A loan or lender’s policy protects the bank or lending institution for as long as they maintain an interest in your property—typically until your mortgage is paid off. If you refinance your loan, you’ll need to purchase a new policy to cover the new loan.

Owner’s Policy

An owner’s policy of title insurance helps protect your rights as the homeowner for as long as you or your heirs own the property. In some areas, it’s standard for the seller to purchase the owner’s policy for the buyer, whereas in other areas the owner’s policy is a recommended buyer purchase.

Why you need Title Insurance

Why you need title insurance. Title problems can surface after you close on your home and affect your homeownership rights. Some of the more common title problems include:

  1. Errors in public records, like a filing mistake or inaccuracy on a former deed
  2. Unknown liens resulting from unpaid debts of former owners
  3. Missing heirs who come forward years after the owner passes away and you’ve purchased the home
  4. Forgeries, like forged or falsified documents
  5. Survey or boundary issues that may affect your ownership and cause disputes

Title professionals are skilled at identifying—and curing, if possible—these types of problems and countless others before you take ownership. Your title policy then serves to help protect you from those issues that may still remain undiscovered.

Other potential Title problems:  70+ Ways to Lose Your Property