Most home buyers in the state of Washington use mortgage loans to help finance their purchases. And in these cases, a home appraisal is usually required to determine the value of the property.
The property appraisal can also affect the mortgage loan approval process, and in several ways. In this article, we will explore how home appraisals affect mortgage loan approval, and what a buyer can do to help keep the process on track.
What Is a Home Appraisal, Exactly?
A home appraisal is a professional evaluation of a property’s current market value, based on its location, size, condition and features.
During this process, a certified appraiser will evaluate the property being purchased, taking note of any upgrades or renovations that might add value. The appraiser will also compare the property to similar homes in the area, to help determine its market value.
In Washington, an appraisal is typically required whenever a home loan is being used. Banks and mortgage lenders order them so that they know how much a particular property is worth, before releasing funds.
This is in everyone’s best interest. The appraisal helps the buyer avoid a situation where they are overpaying for a home, perhaps without even realizing it. It also protects the lender from providing more money than a property is worth, based on its current value.
Determining the Loan-To-Value (LTV)
The appraisal is also used to determine the loan-to-value (LTV) ratio for the property being purchased. The LTV, in turn, can affect the borrower’s mortgage loan approval process. That’s because certain types of home loans have a limit, when it comes to the loan-to-value ratio.
Here are some LTV examples, using a home value of $400,000:
- Down payment of 20%: If you put 20% down on a $400,000 home, your mortgage will be $320,000. Your loan-to-value ratio will be 80%.
- Down payment of 10%: If you put 10% down on a $400,000 home, your mortgage will be $360,000. Your loan-to-value ratio will be 90%.
As you can see, the lower your down payment, the higher your loan-to-value ratio will be. And this is largely based on home appraisal valuation.
How It Can Affect Mortgage Approval
In a typical mortgage and home buying scenario in Washington, the appraised value is used to determine the maximum loan amount. If the appraised value turns out to be less than the purchase price, the borrower may need to come up with additional funds or renegotiate the sale price.
There are two scenarios that can occur when a home appraisal is conducted:
Scenario 1: Appraised value is equal to or higher than the purchase price.
In this scenario, the home buyer and borrower will likely have an easier time getting approved for a mortgage loan. That’s because the appraiser has determined the property is worth at least as much as the agreed-upon purchase price, if not more.
This means there is less risk for both the buyer and lender. So the loan is more likely to clear the underwriting process and proceed to closing.
Scenario 2: Appraised value is lower than the purchase price.
If the appraiser determines that the house is worth less than the agreed-upon purchase price, the home buyer might need to come up with additional funds to cover the difference. This can present certain challenges, especially for those buyers who can’t afford to put more money down.
A low appraisal can also interfere with a borrower’s ability to obtain mortgage approval, for the reasons stated earlier. So it might become necessary to renegotiate the sale price downward or walk away from the deal.
How Appraisers Determine Home Values in Washington
In the state of Washington, home appraisers must undergo a specific educational and training program to receive their licenses.
According to the Washington State Department of Licensing, a residential real estate appraiser must complete “a total of 150 classroom hours of approved real estate appraisal courses.” The course curriculum includes training related to basic appraisal principles, procedures, real estate market analysis, and more.
In short, home appraisers are trained to determine the current market value of a particular property. But how do they actually go about this?
The appraisal process can vary due to a number of factors. For example, an appraisal can be completed by using a combination of web-based and on-site evaluation methods. Or it can be a “desktop” process that only uses property tax records, MLS data, and other digital resources.
In a “traditional” home appraisal, the appraiser will actually visit the property to conduct a physical inspection. He or she will record the property’s size and square footage, layout, age, and overall condition. The appraiser will also consider any upgrades or renovations that have been made to the property, as this can could potentially increase the value.
Home appraisers in Washington will also research recent sales of comparable properties. These are homes that are similar in size, layout and condition to the home that’s being evaluated. The goal is to determine how much a particular home is worth based on the sale of similar properties in the same area.
Lastly, There’s the PMI Factor
In addition to affecting the mortgage approval, a home appraisal can also determine whether or not the borrower has to pay for private mortgage insurance, or PMI.
Borrowers who use the FHA loan program almost always have to pay for mortgage insurance. But when it comes to a conventional loan (that’s not backed by the government), mortgage insurance requirements are primarily based on the LTV ratio mentioned above.
Generally speaking, when a person takes out a loan for more than 80% of the home value, private mortgage insurance is required. And if you recall from earlier, it’s the property appraisal that helps determine the loan-to-value ratio for a particular transaction.
Home buyers in Washington don’t have any direct involvement with, or control over, the property appraisal process. But it can still affect their ability to qualify for mortgage financing. It can also determine whether or not they have to pay for mortgage insurance. So it’s an important concept to research and understand.