If you’re refinancing or selling a home, the appraisal is an important step in the loan process. It is an independent opinion of value of your home, and will determine the loan to value ratio, one of the key components that will determine your interest rate or cost of your loan.
The loan to value ratio, or LTV, is the percentage of your home’s value that you are borrowing. For example, if you have a $100,000 home value, and your loan amount is $70,000, you will have a 70% LTV. Typically, 60% LTV and lower will receive the best rates. Each 5% will add slightly to the cost of the loan. Go over 80% and in most cases you will need to add mortgage insurance.
Imagine you are refinancing your home and believe the value is roughly $300,000. You want to borrow $240,000, or 80% of the value. To your surprise, when the appraiser submits his or her report, you learn that your home is only valued at $285,000. Ouch! Now your loan to value ratio is up to 84.2%. Depending on your loan type, this may or may not be a big problem.
To avoid a lower than desirable appraisal from derailing your loan approval, here are some steps that you can take before the appraiser comes to your home:
♦ Do a walk through of your home starting from the front door with a critical eye. Even better, if you can invite a neighbor or friend to give you very honest feedback, they may be able to see things you overlook every day. Look for any potential issues such as loose or squeaky floorboards, stains on the ceiling from a leaking roof or past roof leak that has since been repaired, loose handrails, etc. If there are numerous minor issues, it gives the impression that the property is not maintained as well as it could be.
♦ Make a list of any improvements you have made since purchasing the home. Have you remodeled your kitchen or bath? Replaced the electrical panel? Installed a new water heater or furnace? Replaced the roof? Added a permitted addition? These are significant repairs that could positively affect your appraiser’s opinion of value.
♦ Have any homes very similar to yours in size and amenities sold recently on your street or in your immediate neighborhood? While the appraiser likely has the comparable sales that he needs, it never hurts if you have the best comps available to review.
♦ Is there a lot of new development in your area? New schools, shopping centers, or other major developments going up? Appraisers are not always local, and may not be aware of the most recent developments nearby. Appraisal reports always contain a brief section titled “Neighborhood” and include a short neighborhood description and notes on local market conditions.
♦ If you were planning any updates, however small, it would be ideal to complete them before applying for a loan. Changing flooring, light fixtures, faucets, or other cosmetic items will give the appearance of an updated home. Neutral and modern materials and colors are best.
IMPORTANT NOTE: Don’t start any major construction projects that cannot be finished before you apply for a loan, as a house under construction generally cannot qualify for financing.
♦ Check that your smoke alarms and carbon monoxide alarms are working properly, as these are required. In California, your water heater also needs to be double strapped and vented properly in order to pass the appraisal inspection. If not, you will likely incur an extra fee for the appraiser to come out and reinspect that the repairs have been completed.
♦ Clean, clean, and clean some more. Nothing makes a home look more appealing and well cared for than an organized, clutter free, fresh scented, and sparkling clean home. Clear off your counters, have the kids clean their rooms, pick up the laundry, and make all common living areas presentable as if you were hosting a very special dinner party.
♦ Don’t forget about your home’s curb appeal and back yard. In addition to mowing your grass and trimming your shrubbery, consider removing any dead trees before the appraisal inspection. Add a little color with flowers and remove weeds from flowerbeds. High curb appeal receives better appraisals.