When homeowners begin to consider refinancing an existing loan, the topic of property value is soon to come up. Refinancing an existing conventional loan means there are actually two different approvals. One for the borrower and one for the property. The borrower’s income, credit and employment will be evaluated among other things and the property must also pass muster.
First, the property must be in good condition with no deferred maintenance. While the appraiser does not perform a full physical inspection, that’s the job for a licensed property inspector, but can make note of any noticeable issues with the home. A sagging roof or foundation cracks come to mind. That said, the current property value must also be in line with the rest of the neighborhood. When a full appraisal is needed, the appraiser first does a little homework at the office before visiting the property. A bit of research is performed identifying homes in the area that have recently sold, primarily within the past six to twelve months. The appraisal is important to the lender because in essence the home is the lender’s collateral.
Most conventional loan programs allow for the loan-to-value, or LTV, with a refinance be as high as 90% of the current market value of the property for an owner-occupied home. If the value exceeds this 90%, the loan might not make it through the approval process. If for example the LTV is 92%, the borrowers must decide whether or not to move forward. Moving forward means paying the current loan balance down to the 90% level or requesting a second opinion from another appraiser.
With a purchase transaction, the appraiser has a head-start. The value of the property is the lowest the sellers were willing to accept meeting the highest price the buyers were willing to pay. The appraiser then begins the process with this information. With a refinance however, there is no such sales price. The appraiser must begin with recent sales in the area. What is the value the appraiser must look for?
On a mortgage loan application there is a space where the owner’s opinion what the current value should be. This is based upon knowledge of similar homes that have recently sold in the neighborhood. That’s a starting point. But if value may be a concern, there are some things homeowners can do to boost the value.
The first is to pay attention to curb appeal. How does the property look from the street? This “first impression” can play a key role in helping the property appraise. Is the lawn trimmed? Trees cared for? Is the property clean? Maintaining the landscaping and physically cleaning the exterior will help the property shine.
Next, the interior needs some treatment. The floors should be scrubbed and polished. New paint will help. Do the appliances sparkle or do they need a little love? You can give the interior of your home a thorough cleansing, but many choose to hire a professional team to give the inside a fresh, new look.
Finally, let the appraiser know of any recent ‘for sale by owner’ transactions. Such sales won’t be listed in the local multiple listing service. Appraisers count on this sales data to help arrive at a final value. A private sale could help boost the value of your home, so if this is the case, it’s important to point out that property to the appraiser.