Appraisal 101: The Year 2020 - 2021

 

Appraisal 101:  The Year 2020 - 2021

 

Many of my clients show deep interest in their upcoming appraisal and appraisal process at the time of their mortgage application.  Rightfully so, as their appraisal and value estimate arrived at on the appraisal could have a direct impact on their final loan amount ... and their Loan Approval too.

The two terms "appraisal" and "home inspection" are often used
incorrectly and interchangeably by my borrowers when we first speak.   Some are somewhat confused by the differences between a home inspection (seen on purchase transactions) and the real estate appraisal that will be performed during their mortgage process. 

As a loan officer that carried an IL Residential Real Estate Appraiser License for well over 20 years, these clients have stepped directly into my wheelhouse.  I'm very happy to address and discuss the differences between the two thoroughly so they're more fully educated before we move forward. 

FHA (Federal Housing Administration) provides a great explanation touching upon those differences via their "For Your Protection: Get a Home Inspection" form. 

 

In it they state ...

"The Appraisal is NOT a Home Inspection and does not replace an inspection.  An appraisal estimates the market value of the home to protect the lender.  An appraisal does not examine or evaluate the condition of the home to protect the homebuyer.  An appraisal only makes sure that the home meets FHA and/or your lender's minimum property standards.  A home inspection provides much more detail."

But my simpler, "boiled down" version of an explanation is:  The Appraiser is the Lender's "eyes" as it pertains to the overall condition of the home, its function, and marketability as a property ... as it translates to Market Value at that specific point in time.  

Ultimately, the Appraiser estimates value, as reflected by real-time data.  That real-time data includes recently closed sales (often referred to as "Comps" or "Comparable Sales").

The Appraiser typically is tasked to inspect the property, INSIDE AND OUTSIDE.  They are called upon to note:

• The Condition of the Property
• Property Features
• Room Sizes
• Number of Bedrooms
• Number of Baths
• Garage/ParkingSpace(s)
• Basement (and if finished)
• Heating and Cooling
• Functionality of Plumbing
• Functionality of Electrical
• Other Mechanical Systems
• Location of the Property & Lot Size/View must also be noted and addressed (as both have obvious impacts on the property/value)
• Noise Factors (from nearby highways, railroads, airports, industry, commercial uses should also be noted/addressed)
• More

*  All of the above should be noted and addressed just as any Buyer or Seller obviously would/does of any property.

Perhaps the most important function of the Appraiser is to accurately measure, observe, and describe the overall condition and appeal of the Subject Property.  The Appraiser measures the standard detached Single Family Residence from the OUTSIDE walls and calculates the overall living area square footage.

Basements ... and even partially below-ground areas ... are excluded from the square footage calculation.  These areas are described separately.

Now take a look at the attached Appraisal Grid/Worksheet ...

Please Note:  Separate categories for describing the Basement, Garage, Deck, Porches are recognized for their "contribution to value", but they are never included in the "Gross Living Area" (Square Footage) of a home.  

Ultimately, value rests upon the Comparison of a Subject Property's characteristics, as compared directly with other nearby properties in similar Market Areas, that have recently sold (in the last 3 months). 

If properties are unavailable from the last 3 months, the time period is expanded to 6 months ... or possibly up to one year.  This most often occurs in rural areas or areas considered very "stable".

It's this "Sales Comparison" method within their Appraisal Report that most all Appraisers ultimately complete and relies on most heavily. 

So when I'm asked, "What does an Appraiser look for when inspecting a home?", my short answer is:  "The minimum information required to complete the grid found within all appraisals".

It's important that Loan Officers read and understand the contents of the appraisals they receive on their transactions.  Those appraisals contain valuable info and insight into the Subject Property being considered for financing.  

Appraisals are viewed by Mortgage Underwriters as a portion of the Underwriting Process.  A successful Loan Approval relies on them. 

Any issues (such as those that might exist on an Appraisal Report) that can be found and addressed by a Lender early in the process ... and prior to entering Underwriting ... will speed the entire mortgage process along and potentially aid in receiving Loan Approval.

And that brings us back to the very beginning of this article ... as Lenders must, of course, be able to explain all this information (and the impact it has) to their clients too.  Any confusion they have must be cleared up.

People will tell you that an Appraisal is "just one person's opinion".  And while some of that is true, it's also important to point out that the Appraisal itself also has some absolutes on it.

Those absolutes are critical to both client and Lender and determine the success of the mortgage application at hand.  It's important that all parties involved in the transaction understand how the appraisal can affect them.

 

At a time when homebuyer demand is typically exceeding the supply of homes for sale, the appraisal and an understanding of how values are arrived at have become a key component of the mortgage loan process. 

* Are you dreaming of buying or refinancing a home or Investment Property in New Lenox - Will County - Chicagoland ... IL or WI?


Contact me today! I'll put my 40 years of mortgage experience and expertise to work on your behalf. I'm easily found at:

Gene Mundt

Mortgage Originator - NMLS #216987 - IL Lic. 031.0006220 - WI #216987

American Portfolio Mortgage Corp

NMLS #175656

Direct: 815.524.2280

Cell: 708.921.6331

eFax: 815.524.2281

gmundt@goapmc.com

www.genemundt.com

  

             

   

 

  

Gene Mundt, Mortgage Originator, an Originator with 40+ years of #mortgage experience, will offer you exemplary mortgage service and advice when seeking: 

#Conventional, #FHA, #VA, #Jumbo, #USDA, and Portfolio Loans in 

#Chicago and the greater Chicagoland region, including: 

The #LincolnWayArea, #WillCounty, (#NewLenox, #Frankfort, #Mokena, #Manhattan, #Joliet, #Shorewood, #Crest Hill, #Plainfield, #Bolingbrook, #Channahon, #Romeoville, #Elwood, #Lockport, #Naperville, #Wilmington, #Peotone, etc.), #DuPage County, the City of #Chicago, #CookCounty, and elsewhere within #IL & #Wisconsin. 

Your Referrals & Testimonials are Greatly Appreciated!

A Winning Equation: Less Debt + Low Interest Rates = More Buying Power

 

A Winning Equation: 

Less Debt + Low Interest Rates = More Buying Power

In marketplaces where high demand for home buying is coupled with a short supply of homes for sale ... additional factors are pushing prices higher ...  

The short supply of homes now available for sale in many of the areas across the U.S. weighs heavily in the equation.  The National Association of Realtors recently reported that, in September, the total housing inventory in the U.S. hit a new record low.  

There was just a 2.7 month supply of homes available for purchase during the month of September.  That rate sunk even lower in October, falling to a 2.5 month supply.

But during that same time period and previous months, many hopeful homebuyers have been: 

• Eliminating debt 
• Lowering their monthly debt 
• Saving more money for a down payment & closing costs 

These NAR statistics, plus other economic factors (shared below) are creating new opportunities for buyers and sellers alike.  As a loan officer, I'm finding that many of my clients and new home buyers are now seizing the unique set of circumstances and opportunities before them.  

Current homeowners are calling to assess their ability to sell and then buy again.  If not wishing to sell, they're considering a refinance of their current home as a way to save money or buy an investment property for additional income.

Many of these applicants have established a simple goal for themselves during this unique time period.  They've established and followed a budget that allowed them to save more money.  They had a goal in mind ... to begin a home search or investment property search sooner than later.  

Their goal, paired with what is perhaps the only positive of the current pandemic ... forced savings ... has helped them to reduce their debt, improve their credit scores, accumulate a downpayment, save for closing costs, and start their home buying search more quickly than previously expected.  It truly speaks to the old adage, "turning lemons into lemonade".

Add to the above advantageous equation, the low low interest rates available to consumers at this time.  Teamed together, they are helping current home buyers by expanding their home buying power.  Borrowers are now able to qualify for higher loan amounts and homes with higher purchase prices.

Less debt typically translates into higher credit scores for consumers too.  That is especially important for those buying a home. Higher credit scores = Lower interest rates = lower monthly mortgage payments.  

Just look at how a lower interest rate (associated with better credit scores) reaps real savings:

         LOAN                         TERM                      RATE

         $225,000                     30 Years                     3.00%             

  Equals = $948.61 Principal & Interest Payment monthly

       $225,000                     30 Years                     4.50%

  

  Equals = $1,140.04 Principal & Interest Payment monthly

• $192.00 Difference in monthly payment
• $68,916 Difference in interest over the life of the loan
• $38,000 more in Buying Power
• 1.5% Difference in Interest Rate

* Interest Rates are for illustration purposes only

* Note:  A 4.50% interest rate was fairly typical 2 years ago. For those that purchased at that time and have that interest rate on their mortgage, it would be wise financially to talk to a lender to see if a refinance is possible.

So even though a large portion of the year 2020 has been difficult for all in many ways, there have been some positives for consumers within mortgage financing and housing markets.  Although unintended, these consequences have proven good for those in a position to take advantage of them.

Everything mentioned above can lead to more sellers being successful when listing and selling their homes.  It allows them to relocate, downsize, and/or buy the step-up home they've been dreaming of.  

The benefactors of that scenario could be:

• Home Builders 
• People looking to turn equity into a second home purchase  
• Investment Property buyers looking for rental income

Remember I mentioned additional economic factors above? 

Fannie Mae and Freddie Mac (Government Sponsored Enterprise/GSEs) have also just announced that they are increasing Loan Limits for the upcoming 2021 year.  

In most of the U.S., the new maximum loan limit will be:

• $548,250, an increase from $510,400 or $37,850 higher than 2020. (Conforming loan limit (CLL) for one-unit properties)

Please note:  

1. New limits also apply for 2-4 Unit properties (and up).  Contact a Lender for further info
2. For those portions of the country where housing prices are much higher, different conforming loan limits apply.  Click HERE for a map of conforming loan limits across the U.S.

While this higher loan limit does not affect all buyers, it may provide relief to those home buyers previously considering a Jumbo Loan.  With the new higher loan limits announced, those considering a higher-priced home purchase can broaden their choice of potential mortgage lenders.  They also may find the qualification for their loan accomplished more easily.  The use of a Jumbo Loan may be circumvented entirely.

The GSEs announcement reinforces the overall message that ... for those dreaming and capable of buying or refinancing a home or property purchase at the present time ... opportunity for savings exists within mortgage financing and home buying.  The equation of higher loan limits, less debt, and low interest rates currently translates to more home buying power for consumers.

No one can predict for certain how long these positives and opportunities to buy or refinance may last.  So now might be the time for you to take action.  

Don't hesitate to reach out to a lender to ask questions and get the facts and information you need to make a sound decision.

* Are you dreaming of buying or refinancing a home or Investment Property in New Lenox - Will County - Chicagoland ... IL or WI?


Contact me today! I'll put my 40 years of mortgage experience and expertise to work on your behalf. I'm easily found at:

Gene Mundt

Mortgage Originator - NMLS #216987 - IL Lic. 031.0006220 - WI #216987

American Portfolio Mortgage Corp

NMLS #175656

Direct: 815.524.2280

Cell: 708.921.6331

eFax: 815.524.2281

gmundt@goapmc.com

www.genemundt.com

  

             

   

 

  

Gene Mundt, Mortgage Originator, an Originator with 40+ years of #mortgage experience, will offer you exemplary mortgage service and advice when seeking: 

#Conventional, #FHA, #VA, #Jumbo, #USDA, and Portfolio Loans in 

#Chicago and the greater Chicagoland region, including: 

The #LincolnWayArea, #WillCounty, (#NewLenox, #Frankfort, #Mokena, #Manhattan, #Joliet, #Shorewood, #Crest Hill, #Plainfield, #Bolingbrook, #Channahon, #Romeoville, #Elwood, #Lockport, #Naperville, #Wilmington, #Peotone, etc.), #DuPage County, the City of #Chicago, #CookCounty, and elsewhere within #IL & #Wisconsin. 

Your Referrals & Testimonials are Greatly Appreciated!