Most people are surprised to learn what appraisers actually look at when determining the value of a real estate property.
A common misconception homeowners generally have is that the value of their home is determined after the appraiser has completed their physical property inspection.
However, the appraiser actually already has a good idea of the property’s value by the time they have scheduled an appointment to stop by the property.
The good news is that you don’t have to worry so much about pushing back an appointment a few days just to “clean things up” in order to help influence the value of your property.
While a clean house will certainly make it easier for the appraiser to notice improvements, the only time you should be concerned about “clutter” is if it is damaging to the dwelling.
The Key Components Addressed In An Appraisal
Location, view, topography, lot size, utilities, zoning, external factors, highest and best use, landscaping features…
Quality of construction, finish work, fixed appliances and any defining features
Age, deterioration, renovations, upgrades, added features
Health & Safety:
Structural integrity, code compliance
Above grade and below grade improvements
Is the property conforming to the neighborhood?
Is the property functional as built – style and use?
Garages, Carports, Shops, etc..
Curb appeal, lot size, & conforming to the neighborhood are obvious to the appraiser when they drive down into the neighborhood pull up in front of your home.
When entering your home, they are going to look at the overall design, condition, finish work, upgrades, any defining features, functional utility, square footage, number of rooms and health and safety items.
Be sure to have all carbon monoxide and smoke detectors in working condition.
Since the appraisal provides half the weight in any credit decision involving the security of real estate, the appraisal should be done by a qualified, licensed appraiser whom is familiar with your neighborhood, and the type of home you are buying, selling or refinancing.
If you’re interested in what specifically appraisers are looking for, here is a copy of the blank 1040 URAR form that is used by every appraiser in the country.
Related Update on HVCC:
Appraisers hired for a mortgage transaction on a conforming loan are chosen from a pool of qualified appraisers at random. Neither you nor your lender has the flexibility of deciding which appraiser will inspect your home.
This recent change was brought on with the Home Valuation Code of Conduct HVCC, and is effective with conventional loans originated on or after May 1, 2009.
Related Appraisal Articles:
Hey, I gave my real estate agent a $5000 Earnest Money Deposit check… Where does that money go?
According to Wikipedia:
Earnest Money – an earnest payment (sometimes called earnest money or simply earnest, or alternatively a good-faith deposit) is a deposit towards the purchase of real estate or publicly tendered government contract made by a buyer or registered contractor to demonstrate that he/she is serious (earnest) about wanting to complete the purchase.
When a buyer makes an offer to buy residential real estate, he/she generally signs a contract and pays a sum acceptable to the seller by way of earnest money. The amount varies enormously, depending upon local custom and the state of the local market at the time of contract negotiations.
An Earnest Money Deposit (EMD) is simply held by a third-party escrow company according to the terms of the executed purchase contract.
*It’s important to keep in mind that the EMD may actually be cashed at the time escrow is opened, so make sure your funds are from the proper sources.
- Earnest Money is submitted to an escrow company with the accepted purchase contract
- At the close of escrow, the EMD is credited towards the down payment and / or closing costs
- If there are no closing costs or down payment, the EMD is refunded back to the buyer
Who Doesn’t Get Your Earnest Money:
- Selling Real Estate Agent – A conflict of interest
- Sellers – Too risky
- Buying Agent – They shouldn’t have your money in their account
Related Articles – Closing Process / Costs
By including title insurance when purchasing property, your title insurer takes on accountability for legal expenses to defend your property title, should it ever be challenged.
Many different occurrences can come into play to warrant the need for title insurance.
The title company responsible will then take on the legal expenses to defend the property for as long as you are in possession of an interest in the property under the title.
If the defense is not successful, you will be reimbursed for any loss of value of the property.
Common Things Title Insurance Covers:
1. UNDISCLOSED HEIRS, FORGED DEEDS, MORTGAGE, WILLS, RELEASES AND OTHER DOCUMENTS
2. FALSE IMPRISONMENT OF THE TRUE LAND OWNER
3. DEEDS BY MINORS
4. DOCUMENTS EXECUTED BY A REVOKED OR EXPIRED POWER OF ATTORNEY
5. PROBATE MATTERS
7. DEEDS AND WILLS BY PERSON OF UNSOUND MIND
8. CONVEYANCES BY UNDISCLOSED DIVORCED SPOUSES
9. RIGHTS OF DIVORCED PARTIES
10. ADVERSE POSSESSION
11. DEFECTIVE ACKNOWLEDGEMENTS DUE TO IMPROPER OR EXPIRED NOTARIZATION
12. FORFEITURES OF REAL PROPERTY DUE TO CRIMINAL ACTS
13. MISTAKES AND OMISSIONS RESULTING IN IMPROPER ABSTRACTING
14. ERRORS IN TAX RECORDS
Related Articles – Closing Process / Costs
* Disclaimer – all information in this article is accurate as of the date this article was written *
The FHA Mortgage Insurance Premium is an important part of every FHA loan.
There are actually two types of Mortgage Insurance Premiums associated with FHA loans:
1. Up Front Mortgage Insurance Premium (UFMIP) – financed into the total loan amount at the initial time of funding
2. Monthly Mortgage Insurance Premium – paid monthly along with Principal, Interest, Taxes and Insurance
Mortgage Insurance is a very important part of every FHA loan since a loan that only requires a 3.5% down payment is generally viewed by lenders as a risky proposition.
Without FHA around to insure the lender against a loss if a default occurs, high LTV loan programs such as FHA would not exist.
Calculating FHA Mortgage Insurance Premiums:
Up Front Mortgage Insurance Premium (UFMIP)
UFMIP varies based on the term of the loan and Loan-to-Value.
For most FHA loans, the UFMIP is equal to 2.25% of the Base FHA Loan amount (effective April 5, 2010).
>> If John purchases a home for $100,000 with 3.5% down, his base FHA loan amount would be $96,500
>> The UFMIP of 2.25% is multiplied by $96,500, equaling $2,171
>> This amount is added to the base loan, for a total FHA loan of $98,671
Monthly Mortgage Insurance (MMI):
- Equal to .55% of the loan amount divided by 12 – when the Loan-to-Value is greater than 95% and the term is greater than 15 years
- Equal to .50% of the loan amount divided by 12 – when the Loan-to-Value is less than or equal to 95%, and the term is greater than 15 years
- Equal to .25% of the loan amount divided by 12 – when the Loan-to-Value is between 80% – 90%, and the term is greater than 15 years
- No MMI when the loan to value is less than 90% on a 15 year term
The Monthly Mortgage Insurance Premium is not a permanent part of the loan, and it will drop off over time.
For mortgages with terms greater than 15 years, the MMI will be canceled when the Loan-to-Value reaches 78%, as long as the borrower has been making payments for at least 5 years.
For mortgages with terms 15 years or less and a Loan -to-Value loan to value ratios 90% or greater, the MMI will be canceled when the loan to value reaches 78%. *There is not a 5 year requirement like there is for longer term loans.
Related Articles – Mortgage Approval Process:
- Basic Mortgage Terms
- How Much Can I Afford?
- Common Documents Required For A Mortgage Pre-Approval
- Top 8 Questions To Ask Your Lender During Application Process
- What’s The Difference Between An Investment Property, Second Home and Primary Residence?
- Seven Items Real Estate Agents Need To Know About Your Mortgage Approval
Calculating the net benefit of refinancing can be a challenging task if you do not understand what to calculate. We are going to focus on the net benefits of refinancing from the standpoint of lowering your interest rate.
Although there are several reasons to refinance, lowering your mortgage rate to save on interest payments over the term of the loan is the most popular.
Calculating the actual savings can be a tricky chore unless you know the difference between cash flow savings and interest savings. If your refinance objective is to only save on the interest by lowering your rate, then the interest savings should be done with the calculations below.
Calculating Interest Savings:
(Loan Amount x Interest Rate) / Months in year = Interest paid per month
($200,000 x 6% or .06) / 12 = $1,000.00
*Remember to do the calculation in the parentheses first*
We now know that you are paying $1,000.00 per month in interest. You should take the new interest rate you are getting with your refinance and calculate what your new interest payment will be.
($200,000 x 5% or .05) / 12 = $833.34
Now we need to find out the difference between the two interest rates.
Current Interest Payment – Proposed Interest Payment = Interest Savings
$1,000.00 – $833.34 = $166.66
Now you have figured out that by dropping your interest rate 1% on $200,000 you will be saving $166.66 per month or about $2,000 per year.
Anyone would want to save $2,000 per year, where do I sign… right? Not so fast, you’ll want to calculate the break-even point to find out how you will benefit after your closing costs.
Net Benefit Formula (Break-Even):
(Closing Costs – Escrows) / Interest Savings = Month of Break-Even
($6,000 – $1,000) / $166.66 = 30 Months
In other words, it will take 30 months for you to recoup the cost of your refinance. If you plan to keep your mortgage for at least 30 months then you might want to consider this deal.
Okay, now we can calculate your net benefit for refinancing with one more calculation.
(Monthly Savings * Months you plan to keep mortgage) – (Closing Costs –Escrows) = Net Savings
($166.66 * 120 months) – ($6,000 – $1,000) = $14,999.20
If you kept the mortgage for 120 months (10 years) you would save $15,000.
Okay, now you can find out where to sign.
Calculating the net benefits of a refinance is crucial in determining if it is strategic for you to refinance. Keep in mind that each mortgage is slightly different and you may need to adjust calculations accordingly.
Frequently Asked Questions:
Q: I heard that I should only refinance if I drop 1% on my mortgage is that true?
Some people say ½% , 1% to never. Every mortgage is different.
For Example: A no cost loan can have a 1 month break-even point with only a .25% drop in interest rate. Now that you know how to calculate your net benefit, you are able to figure out what may be beneficial for your situation.
Q: Why can’t I just compare my current payment to the proposed payment and figure out my net benefit?
You could just compare just the two payments if you wanted to find out your cash flow savings, but the current and proposed loans may have two different amortizations.
Let’s assume you currently have a 15 year mortgage and you’re comparing it to a 30 year mortgage. If both loans have the same interest rate and loan amount but the amortization is different, your interest savings per month would be $0. However, you are going to show a cash flow savings with the 30 year mortgage because of the longer amortization.
Related Article – Refinance Process:
- Refinance Process Overview
- Mortgage Approval Process
- Four Possible Reasons To Refinance
- Should I Refinance Or Get A Home Equity Loan To Make Improvements?
- What Do Appraisers Look For When Determining A Property’s Value?
- Understanding The Difference Between Appraised Value vs Neighborhood Listing Comps
- Five Myths About Home Values
Why is there such a difference between what my appraised value is and the price similar homes are selling for on my street?
It’s a great question, and you don’t have to be a mortgage professional or a real estate agent to understand the answer.
The distinction lies in the purpose of the two valuations and who is responsible for creating them.
The purpose of an appraisal is to make sure that an independent non-interested third party verifies the “most likely” sale price based on the market value and condition of the home.
Appraisals are meant to be a realistic determination of the value of a home if it were to sell in the current market, in its current condition.
In addition, appraisers are governed by rules intended to standardize the subjective process of determining a home’s value.
Some of the key factors appraisers look at are: location, above ground size, room count, bathroom count, style of home, condition of property, amenities, and market conditions such as how long it takes for home to sell and if values are increasing, decreasing or steady.
Appraisers are also asked to look only at comparable sales within a certain distance, usually one mile except in rural areas, and within a specified period of time, which is 3 months in the current market.
Listing prices on the other hand are influenced by the real estate agent, and set by interested and often emotional sellers.
Sellers are not held by any rules when they list a home. In some cases, sellers take what they paid for the house, add what they have spent on improvements and even add amount for profit.
Often times, sellers will list their home based on the amount needed to pay for the real estate agent, closing costs and cover the amount of the mortgages.
Extra low prices are generally the result of an extra motivated seller that has to sell and move in a rush, so they’ll list their property below market comps in order to be the most competitive.
Throw in bank owned homes (foreclosed properties), and listing prices may be all over the place without a logical explanation due to an asset manager making decisions from another part of the country.
While list price is never a good indication of what a home in your neighborhood is worth, appraisals are not an exact science that will determine the true value of your home either.
Some will argue that a home is worth what people will pay for it, so there’s obviously a little room for personal interpretation. Either way, the bank securing that piece of real estate for a mortgage loan generally always has the final opinion that matters the most.
Related Appraisal Articles:
Providing proper asset documentation and the actual source of the funds is a critical element of the loan closing process.
There’s nothing worse in a real estate purchase than making it all the way through the hoops and hurdles just to have a loan denied after the final documents have been signed due to the borrower using the wrong checking account for the down payment.
Seasoning of the down payment money is just as important as the source, which is why underwriters typically require at least two months bank / asset statements in the initial mortgage approval process.
A Few Acceptable Sources Of Down Payment Include:
- Bank Accounts – checking / savings
- Investment Accounts – money market, mutual funds
- Retirement Funds – keep in mind that borrowing against a 401K plan will require a repayment, which will be calculated in the Debt-to-Income Ratio
- Life Insurance – Cash value and face amount
- Gifts – Family members can gift down payment funds with certain restrictions
- Inheritance / Trust Funds
- Government Grants – Many state, county and city agencies offer special down payment assistance programs
It is extremely important to make sure your loan officer is aware of the exact source of your down payment as early in the process as possible so that all necessary questions, documentation and explanations can be reviewed / approved by an underwriter.
A good rule-of-thumb to remember is that whatever funds you’re using as a down payment have to be pre-approved by an underwriter at the beginning of the mortgage approval process.
Basically, if you accidentally forget to deposit money in your checking account on the way to the closing appointment, it is not acceptable to get a cashier’s check from a friend’s account until you have a chance to pay them back later.
Frequently Asked Questions:
Q: What if I don’t have a bank account and cannot properly source my funds to close?
Cash on hand is an acceptable source of funds for some loan programs, but make sure you bring that detail up at the application stage
Q: Can I use a bonus from my employer for my down payment?
Yes, but generally this needs to be a bonus you regularly receive
Q: Can I borrow the money from a friend?
No, any money that needs to be repaid is typically an unacceptable source of funds
Related Articles – Closing Process / Costs
What the heck are they talking about?
Many borrowers go through the closing process in a haze, nodding, smiling, and signing through a bunch of noise that sounds like Greek.
Even though you may have put your trust in your real estate and mortgage team, it helps to understand some of the terminology so that you can pay attention to specific details that may impact the decisions you need to make.
Common Closing Terms / Processes:
1. Docs Sent –
Buyers sit on pins and needles through the approval process, waiting to find out if they meet the lender’s qualification requirements (which include items such as total expense to income, maximum loan amounts, loan-to-value ratios, credit, etc).
The term “docs sent” generally means you made it!! The lender’s closing department has sent the approved loan paperwork to the closing agent, which is usually an attorney or title company.
Keep in mind that there may be some prior to funding conditions the underwriter will need to verify before the deal can be considered fully approved.
2. Docs Signed –
Just what it implies. All documentation is signed, including the paperwork between the borrower and the lender which details the terms of the loan, and the contracts between the seller and buyer of the property.
This usually occurs at closing in the presence of the closing agent, bank representative, buyer and seller.
3. Funded –
Show me some money!
The actual funds are transferred from the lender to the closing agent, along with all applicable disclosures.
For a home purchase, if the closing occurs in the morning, the funds are generally sent the same day. If the closing occurs in the afternoon, the funds are usually transferred the next day.
The timing is different for refinancing transactions due to the right of rescission. This is the right (given automatically by law to the borrower) to back out of the transaction within three days of signing the loan documents. As a result, funds are not transferred until after the rescission period in a refinancing transaction, and are generally received on the fourth day after the paperwork is signed.
(Note – Saturdays are counted in the three day period, while Sundays are not). The right of rescission only applies to a property the borrower will live in, not investment properties.
4. Recorded –
Let’s make it official. The recording of the deed transfers title (legal ownership) of the property to the buyer. The title company or the attorney records the transaction in the county register where the property is located, usually immediately after closing.
There you have it – an official translation of closing lingo.
As with any other important financial transaction, there are many steps, some of which are dictated by law, which must be followed.