Misconceptions and Terms

Common Home Appraisal Misconceptions

Though most of us will undergo a home appraisal at some point in our lives, it is still not something that we experience on a regular basis. As a result, many people are unfamiliar with the complete home appraisal process and may hold several misconceptions about it.

Following are the top seven misconceptions that most people have about the home appraisal process as well as the actual truth for each misconception.

Misconception: Appraisers use a specific formula (for example, price per square foot) to figure out exactly how much a home is worth.
Truth: Appraisers actually weigh the location of the home, its proximity to desirable schools and other public facilities, the size of the lot, the size and condition of the home itself, and recent sale prices of comparable properties, among numerous other factors.

Misconception: An appraisal’s primary purpose is to ensure that a buyer does not pay too much for a house.
Truth: While providing valuable information to both the buyer and the seller, an appraisal’s primary purpose is usually to protect the lender, who does not want to be stuck owning overpriced property.

Misconception: There is nothing I can do to improve my home’s valuation.
Truth: The overall maintenance of a home is of primary interest to appraisers. They will look to see: if the walls, flooring, and floor coverings are in good shape; if the built–in appliances are in good working order; and if the mechanical systems (plumbing, electrical, heating, and cooling) are functioning properly. So keeping a well–maintained home is of vital importance to receiving a good valuation. In addition, while good housekeeping is not a requirement, having a clean, orderly home can also indicate to an appraiser that a home has been well taken care of.

Misconception: Anyone can be an appraiser.

Truth: Federal law requires states to establish minimum standards and licensing practices for real estate appraisers.

Misconception: Appraisers have no obligation to reveal home defects to buyers.
Truth: If the buyer is applying for a mortgage that will be insured by the Federal Housing Administration (FHA), the appraiser must survey the physical condition of the home and disclose potential problems to the buyer. No such obligation exists for non–FHA mortgages.

Misconception: An appraisal is identical to a home inspection.
Truth: An appraisal is not a substitute for a professional home inspection. The appraiser formulates an opinion of the property’s value for the lender, while the inspector educates the buyer about the condition of the home and its major components.

Common Home Appraisal–related Terms

Appraisal –
The determination of property value based on recent sales information of similar properties.

Appraiser –
Someone who is professionally licensed to determine the value of a home.

Assessment –
Determining a property’s value for the purpose of taxation.

Appreciation –
Increases in property value due to fluctuations in the market, inflation, etc.

Asset –
Valuable items, encumbered or not, owned by a person, corporation, or entity.

Broker –
An individual in the business of assisting in arranging funding or negotiating contracts for a client but who does not loan the money himself. Brokers usually charge a fee or receive a commission for their services.

Certificate of Reasonable Value (CRV) –
An appraisal that has been performed on a property that is being paid for with a VA loan. After the property has been appraised, the Veterans Administration issues a CRV.

Deed –
A legal document which affects the transfer of ownership of real estate from the seller to the buyer.

Depreciation –
In real estate and mortgage terms, the decline in the property value.

Equity –
The difference between the current market value of a property and the principal balance of all outstanding loans.

Home Inspection –
A thorough assessment by a professional regarding the structural and mechanical condition of a property.

Lender –
The bank, mortgage company, or mortgage broker offering the loan. Many institutions only "originate" loans and then resell the obligation to third parties.

Loan –
The principal, or amount of total borrowed money, that is repaid with interest.

Loan – To – Value Ratio –
The relationship between the amount of the mortgage loan and the appraised value of the property expressed as a percentage. A LTV ratio of 90 means that a borrower is borrowing 90% of the value of the property and paying 10% as a down payment. For purchases, the value of the property is assumed to be the purchase price, for refinances the value is determined by an appraisal.

Mortgage –
A legal document that pledges property to a creditor for the repayment of the loan, and is the term used to describe the loan itself. Some states use the term First Trust Deeds to refer to mortgage loans.

Mortgagee –
The lender in a mortgage agreement.

Mortgage Banker –
A financial intermediary that originates or funds loans, collects payments, inspects the property, and forecloses if necessary.

Mortgage Insurance –
Insurance that covers the lender against losses incurred as a result of a default on a home loan. This is usually required on all loans that have a loan xto xvalue higher than 80%. Mortgages that have an 80% LTV that do not require mortgage insurance have higher interest rates. The lenders then pay the mortgage insurance themselves. In addition, FHA loans and some first xtime homebuyer programs require mortgage insurance regardless of the loan xto xvalue.

Owner’s Title Policy –
A policy protecting the buyer for the amount of the purchase price in the event of a future title dispute.

Private Mortgage Insurance (PMI) –
Paid by a borrower to protect the lender in case of default. PMI is typically charged to the borrower when the Loan xto xValue Ratio is greater than 80%.

Purchase Agreement –
A written contract signed by the buyer and seller stating the terms and conditions under which a property will be sold.

Realtor –
A real estate agent, broker, or associate that holds an active membership in a local real estate board that is affiliated with the National Association of Realtors.

Refinancing –
The process of paying off one loan with the proceeds from a new loan, using the same property as security.

Second Mortgage –
A mortgage that has a lien position subordinate to the first mortgage.

Survey –
A drawing or map that shows the precise legal boundaries of a property, the location of improvements, easements, rights of way, encroachments, and other physical features.