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Mortgage Basics

Why get an Appraisal

Obtaining a loan is the most common reason for ordering an Appraisal, however there are other reasons to get one:

  • Contesting high property taxes

  • Establishing the replacement cost for insurance purposes

  • Divorce settlement

  • Estate settlement

  • Negotiating tool in real estate transactions

  • Determining a reasonable price when selling real estate

  • Protecting your rights in an eminent domain case

  • A government agency requirement

  • A lawsuit

 

What are Appraisal Methods?

There are three common approaches, or Appraisal Methods, used by Appraisers to establish property value. After thorough exercise of all three, a final value estimate is correlated. When evaluating single-family, owner-occupied properties, the Sales Comparison Approach is heavily weighted by an Appraiser.

Cost Approach – A formula is used to obtain the property value: Land value (vacant) added to the cost to reconstruct the appraised building as new on the date of value, less accrued depreciation the building suffers in comparison with a new building.

Sales Comparison Approach – The Appraiser identifies 3 to 4 comparable comps, recently sold properties in the neighborhood, ideally, sold in the previous 6 months and within ½ mile of the subject property. A comparison is done between the recently sold properties and the subject property including square footage, number of bedrooms and bathrooms, property age, lot size, view, and property condition. 
 

Income Approach – The potential net income of the property is capitalized to arrive at a property value. Capitalization is the process of converting a future income stream into a present value. This approach is suited to income-providing properties and is used in conjunction with other valuation methods.

Who determines the market value of a property?

The property seller sets the price, especially for residential property, not the Appraiser. Sellers usually don't order an appraisal because they want to obtain the highest price for their home and therefore don't want to be bound by the Appraiser's assessment. The real estate agent receives a percentage of the price as compensation and often represents the seller in the transaction and assists them in setting the sale price. They perform a Comparative Market Analysis (CMA), which real estate agents can perform in most states without an Appraiser's License or Certification. The CMA is vital to the agent’s preparation for a listing examining recent property sales in the neighborhood to arrive at a listing price. Typically, the agent will suggest a price to the seller based on the CMA however the seller may choose to list their property for a higher price.

How can I assist my Appraiser?

It's to your advantage to help the Appraiser perform the assessment by providing additional information:

  • What is the purpose for the appraisal?

  • Is the property listed for sale, and if so, for what price and with whom?

  • Is there a mortgage? And if so, with whom, when placed, for how much and what type (FHA, VA, etc.), at what interest rate, or other type of financing?

  • Are any personal properties or appliances included in the property?

  • With an income-producing property, what is the income breakdown and expenses for the last year or two? A copy of the lease may be required.

  • Provide a copy of the deed, survey, purchase agreement, or additional property papers.

  • Provide a copy of the current real estate tax bill, statement of special assessments, or balance owed on anything, i.e. sewer, water, etc.

What are Finance and Lender Charges?

Most people associate closing costs with finance charges levied by mortgage lenders. The charges you pay will vary among lenders, so it’s good to shop around for the best combination of mortgage terms and closing, or settlement costs:

Origination Fee – For processing the mortgage application there may be a flat fee, or a percentage of the mortgage loan.

Credit Report – Most lenders require a credit report on you and your spouse, or an equity partner. This fee is often a part of the origination fee.

Points – One point is equal to 1% of the amount borrowed and can be payable when the loan is approved either before or at closing. Points can be shared with the seller which is negotiable in the purchase offer. Some lenders will let you finance points which will add to the mortgage cost. If you pay the points up front they are tax deductible in the year they are paid. Different deductibility rules apply to second home loans.

Lender's Attorney's Fees – For your attorney to draw-up documents and to ensure that the title is clear, and for representation at the closing.

Document Preparation Fees – There are several documents and papers prepared during the home-buying process ranging from the application to the closing. Lenders may charge for this, or the fees may be included in the application and/or attorney’s fees.

Preparation of Amortization Schedule – Some lenders will prepare a detailed amortization for the full term of your mortgage. This is usually done for fixed mortgages or adjustable mortgages.

Land Survey – Lenders may require that the property be surveyed to ensure it has not been encroached and to verify the buildings and improvements to the property.

Appraisals – Professional Appraisers can do a comparison of the value of the property to that of other recently sold neighborhood properties. Lenders want to be sure the property is worth the value of the mortgage loan.

Lender's Mortgage Insurance – If your down payment is 20% or less, many lenders require that you purchase Private Mortgage Insurance (PMI) for the loan amount. If you should default on your loan, the lender will recover their money. These insurance premiums will continue until your principal payments, plus the down payment equal 20% of the selling price and may continue for the life of the loan. The premiums are usually added to any amount you must escrow for taxes and homeowner's insurance.

Lender's Title Insurance – Even with a title search for any property obstacles, liens or lawsuits, many lenders require insurance to protect their mortgage investment. This is a 1-time insurance premium usually paid at closing, and is for the lender only, not the homebuyer.

Release Fees – If the seller has worked with a contractor who put a lien on the house and is expecting payment from the proceeds of the house sale, there may be fees to release the lien. The seller usually pays these fees which could be negotiated in the purchase offer.

Inspections Required by Lenders – The lender may require a Termite Inspection if you apply for an FHA or a VA mortgage loan. In many rural areas a water test may be required to ensure the well and water system will maintain an adequate water supply to the house; for quantity not quality. Depending on the sales contract and property type, additional inspections may be required.

Prepaid Interest – The first regular mortgage payment is usually due from 6-8 weeks from closings; however, interest costs begin at closing time. The lender will calculate the interest owed for that period of time, and that fraction of interest is sometimes due at closing.

Escrow Account – Lenders often require that you set-up an Escrow Account, where you will make monthly payments to, for taxes, homeowner's insurance, and sometimes PMI (Private Mortgage Insurance). The amount placed in this account at closing depends on when property taxes are due and the timing of the settlement transaction. The lender can give you a cost approximation during the application process of your mortgage loan.