One of the most important components of any home financing transaction, be it a purchase or refinance, is the appraisal.
An appraisal is the process of valuating the property. The purpose is to give the institution that is lending money an idea of what the property is worth should the borrower be unable to make payments once the financial transaction is complete. The value of the property will be based on what similar homes in the area have been selling for in recent months. These other properties are called comparables.
While no two properties are completely identical, appraisers can make adjustments to account for such things as different square footages, number of bedrooms and lot sizes.
Appraisers must use properties within a close proximity to the subject property, usually within a mile radius, and those that have sold within the past several months.
In the event there are few or no comparables that can be used, as often happens in areas with low sales activity, the appraiser can go outside of the immediate area.
The appraisal process itself can take a few days to a few weeks, depending on factors such as the workload of the appraiser and what comparables are available.
Rules were put in place under the Home Valuation Code of Conduct in an attempt to keep appraisers and lenders separate from one another. As a result, most lenders are now ordering appraisals through appraisal management companies.
These third parties complete the appraisals and then forward the completed appraisals to the lender.