What is an Appraisal?
The Uniform Standard of Professional Appraisal Practice (USPAP), published by the Appraisal Foundation in 2003, defines an appraisal as "the act or process of developing an opinion of value; an opinion of value."
Lincoln Appraisal & Settlement Services orders market value appraisal reports on residential properties in order to assist underwriters in the lending process. The reports contain a detailed description of the property being appraised and provide the reader with an estimated market value (what the property is worth). The appraised value is determined by comparing the property with other houses that have recently sold in the area. Comparisons are made based on property size and amenities, and adjustments are made as necessary to obtain a market value estimate.
Appraisals are used by mortgage lenders to ensure that the property value is adequate to support the requested loan. The property may be required to be worth more than the loan amount depending upon the lender's own criteria. Typically, the property value will be required to exceed the loan amount by 5% - 20%, depending upon the type of loan. The amount by which the property value exceeds the loan amount is called the amount of equity. The lower the equity, the higher the lender's risk in the event of foreclosure or when the property must be taken back by the lender due to buyer default on payments.
The appraisal not only serves to provide an estimate of value for the lender; but, depending on the type of appraisal report being completed, may provide information regarding the property condition and other physical features, such as size, location, and amenities. The home loan is graded by the amount of risk, or exposure that exists to the lender. Generally, the interest rate charged will mirror the amount of perceived risk that the lender anticipates.
Once a home loan is made, it can be sold as part of a package to the "Secondary Market." This replaces the originating lender's capital, or money loaned, so it can be loaned again. The appraisal is a permanent part of the loan package, which serves to justify the anticipated risk and relative value to the future owners of the loan. Home loans are sometimes sold more than once. Each time the loan is sold, the appraisal is part of the documentation that is reviewed to determine the loan risk and value.
The lending industry consists of many different players, each having different requirements for loan origination. Appraisal products therefore differ in order to conform to the requirements of any given lender, or loan and these differences are typically in the type of property inspection and the format of the appraisal report.
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