How Does a Lender Decide What My Home Is Worth?
By Gina PogolMortgage Credit Problems Columnist
Mary Asks: Dear Gina, I had bad credit but it's much better now. I thought my home was worth enough to make me eligible for a mortgage refinance. My lender said that my home's appraised value came in too low for me to get my loan. How did they decide this?
Gina Says: Your lender probably has a Uniform Residential Appraisal Report in your file. You are entitled to a copy of this report--and here's how to read it.A Lot Depends on Your Neighborhood
The appraiser begins by researching your part of town--especially recent sales prices (increases are good, decreases are bad), and how long it takes to sell the homes--three to six months is typical; longer than that is not a good sign.
As of April 2009, the appraiser has to fill out a "market conditions addendum" plus the regular appraisal. It requires a lot more detail about housing values and trends where the property is located than lenders ever used to want--they are trying to avoid a repeat of last year's foreclosure crisis. More equity is required if your home is in an area with declining values.
Next, the appraiser looks for houses like yours--with similar square footage, construction, views, and features--that sold recently. These homes are called "comps." The appraiser takes pictures of the street, your house, and the comps. Then, he or she takes a lot of notes and creates that complex report.
Understanding Those Two Pages
Page one describes your house--called the "subject property"--it's age, condition, features like swimming pools and landscaping, and any major defects or maintenance problems.
Page two contains the comps and the calculations. The quality and features of your house are compared to homes that were sold and adjustments are made. For example, your house might get $40,000 more value than your neighbors' houses if you can see a lake and they can't.
The Value Is On Page Two
Your home is appraised two ways. The first calculation, found in the upper left-hand corner, is estimated cost, which is the value of the lot, plus improvements to the property, less any depreciation. But while this is important to your home insurance broker, it's the figure on the bottom of the page that matters to a lender--the market value of the home, or what could be recovered if you default on your mortgage.
To get a higher value and better mortgage rates, make sure your house and yard look good before you apply for your loan. Items like "quality" and "view" are subjective, and appraisers are human. Unfortunately, homes in California where you live are not increasing in value right now so you may have trouble refinancing. Your other option is to try and qualify for a loan modification or refinance through the Making Home Affordable program.
Good luck and thanks for writing,
Gina
About the Author
Gina Pogol has over a decade of mortgage lending experience, in addition to practice as a paralegal for a bankruptcy attorney, and as a business credit consultant for Experian. She is also certified to underwrite Fannie Mae loans. She earned her BS in Financial Management from the University of Nevada.
All information provided “as is” for informational purposes only, and is not financial advice. MortgageCreditProblems.com, its affiliates, and any of the independent providers of information on this site shall have no liability for any informational errors or incompleteness, or for any actions taken in reliance on information contained herein.
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