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In general, a home appraisal helps validate the value of your property. Lenders need to know the actual market value of your property to ensure that their investment is protected. They comply with the regulations and are not over-extending the mortgage amount.
If you are seeking a mortgage or trying to learn how the appraised value of your home will impact your mortgage loan request, this short guide is for you.
First, we’ll define a home appraisal, explain why they’re required in a mortgage transaction, when they’re needed, and how the appraised value affects your loan amount.
An appraisal is an unbiased expert opinion of your home’s value by a licensed property appraiser agent.
You will likely be required to appraise your house when seeking a mortgage loan.
Lenders require an appraisal of your property to confirm its market value. The appraised or market value is the basis of calculating your mortgage amount. Appraised value helps ensure that the loan amount a lender offers you is appropriate for the value and condition of your property.
Mortgage lenders have to protect their investments. By relying on the actual or appraised value of your property, the lender can protect itself against lending more than it might be able to recover if it has to sell the property in a foreclosure or power of sale proceeding.
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There are five reasons why a mortgage lender will require an appraisal of your mortgage – validate the condition of your property, safeguard investments, comply with regulations, not overextend the loan amount, and an insurance requirement.
Mortgage lenders need an appraisal report to confirm the actual market value of your property. Because the property value forms the basis of the mortgage calculation, the home appraisal will help ensure that the lender is not lending more than what the property is worth.
To a mortgage lender, a mortgage loan is an investment. The interest you pay each month is the return of that investment. To mitigate the risk of this investment, and as part of the due diligence process, lenders often request an appraisal report to confirm the property’s actual value.
Lenders want to make sure that the property and the neighbourhood have marketability concerns that will affect their ability to sell the house and recover their loan if the mortgage goes into foreclosure.
Mainstream lenders like banks, credit unions, and other institutional monoline lenders can only lend up to a certain percentage of the house value.
A lender can only lend up to 80% of your house value for refinance transactions. A lender can lend up to 95% of the house value for purchase transactions if the loan is default-insured.
The lender must take the necessary steps to ensure that the loan amount offered is appropriate to the property’s value and is within the regulated limits.
Getting the house appraised is a step lenders tend to rely on if they doubt the actual value of your property.
For a mortgage, your home is used as collateral for the loan. As a risk measure, lenders will need an appraisal report to review the details of your property, like the condition of the property, the usage of the property, and the shape of the neighbourhood.
The appraisal report will also help lenders assess the potential marketability of the property and their ability to recover the loan amount if the mortgage has to be foreclosed.
The mortgage insurer can also request the appraisal report. This is common for properties in rural communities and areas with low real estate activities. The default insurance provider may request that the lender validate the property’s value with an appraisal report, in which case, the lender will be required to get that done.
The request for a home appraisal can come from the lender or the default insurance provider. Most mortgage lenders have a list of their approved appraisers. These lenders will only accept appraisal reports completed by one of their approved appraisers.
If required, the lender will schedule the home appraisal with the appraiser expert on your behalf. If that is not the case, your broker will do it on your behalf. If that is not the case, your broker will do it on your behalf.
The appraiser will issue a report at the end of the process. The report will
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An appraisal report may be needed before or after your mortgage approval.
If the mortgage default provider requests that an appraisal be completed for your house, ensure the report is completed before the approval decision is made. The good thing here is that you don’t have to worry about funding the appraisal fee or coordinating with the appraiser’s agent.
Like most mortgage lenders, mortgage default insurance providers like CMHC, Canada Guaranty, and Sangen have a network of appraiser agents. The default insurance provider will manage the scheduling of the appraisal inspection.
The appraiser agent will work with the listing agent to complete the inspection. The completed report is delivered directly to the insurance provider. In this case, the insurance company will cover the cost of the report.
Also, a mortgage lender can require an appraisal inspection to be completed on your home before they approve. Or they will provide you with approval conditioned on completing an appraisal report.
The report must support the property’s value declared in your mortgage application. That means you give a property value of $500,000 in your mortgage application. The lender expects the appraisal report to support this property value.
Suppose the appraised value differs from the value declared in your mortgage application. In that case, the lender will re-underwrite the mortgage using the appraised value as the basis of the mortgage calculation.
Let’s say the lender has offered a loan at 80% of the $500,000 property value, conditional on the home appraisal report. That means the loan amount afforded at the $500,000 property value is $400,000
But if, instead, the appraised value of your home is lower, say $450,000. The lender will use this new appraised value to recalculate the loan amount.
Therefore, the loan amount will be $360,000.
This can be an issue when you are buying a house. Either you will have to negotiate with the home’s seller to lower the house’s price, or you will have to come up with the $40,000 shortfall ($400,000 – $360,000).
On the flip side, if the house comes in higher than the value you provided in the mortgage application, say instead that the appraised value is $550,000.
You can use the increased value of the property to either increase the loan amount (if you qualify for a high loan amount) or reduce your down payment.
Some of the factors that will affect the appraised value of your property include:
A home appraisal is an essential element of your mortgage application. Mortgage lenders rely on the appraised value and the information in this report to determine how much loan to offer you.
Mortgage lenders have to protect their investments. By relying on the actual value or appraised value of your property, the lender can protect itself against lending more than it might be able to recover if they have to sell the property in a foreclosure or power of sale proceeding.
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