What is an Appraisal Report?
An appraisal report provides an independent opinion on the value of a property at a specified point time for a given purpose. The opinion of value is known as the appraised value and the person providing the opinion is known as the appraiser. The report may include the factors and information that was relied upon and the methodology or approach that was used in preparing the report. The appraisal report is prepared by an appraiser who is licensed or certified to provide such reports.
In context of a mortgage transaction, an appraisal report provides the appraised value of the property that is used for determining the property value. The property value is generally the lower of the purchase price and appraised value. The property value is used for determining the loan amount, insurance coverage, and other purposes. The appraisal report also provides information on the condition of the property and the general trends in the neighborhood.
Intended Use of an Appraisal
Appraisal reports are prepared for a particular purpose. They may be prepared in connection with real estate sales, loan transaction, settling insurance claims, tax purposes, estate sales, etc. An appraisal prepared for real estate sales or loan transaction focuses on determining the fair market value of the property. However, an appraisal for insurance purposes may focus on determining the cost price. Therefore, the purpose of the appraisal determines the type of value provided by the appraiser.
Fannie Mae Form 1004
Fannie Mae Form 1004, Uniform Residential Appraisal Report, is the most common form of appraisal report used in residential mortgages. Its use is required by a number of investor and agency guidelines.
Automated Valuation Models are not Appraisals
Valuations that are obtained through automated valuation models (AVMs) are not considered as appraisals. Therefore, AVMs cannot be used where an appraisal is required.
Use of Appraisal Report for Mortgages
The most common uses of appraisal report during loan origination are:
- Property Value: The appraisal provides the value that is used to derive the property value. For purchase transactions, property value is the lower of appraised value and purchase price.
- Condition of Property: The appraisal report includes information about the property, its neighborhood, includes pictures, and information about comparable properties. Unfinished sections of the property, non-conforming use of the property, and other factors that may prevent the lender from using the property as collateral for the loan.
- Flood Zone Verification: The flood determination is performed by obtaining a Standard Flood Hazard Determination Form (SFHDF). The appraisal report indicates whether the property is in a flood zone and can be used as a quality check to confirm the flood zone determination. If the appraisal report is inconsistent with the flood determination then the appraiser should be asked to research and make corrections if required.
- Private Mortgage Insurance Cancellation: Borrowers that have loans requiring private mortgage insurance (PMI) can ask their lender to cancel PMI when the principal balance on the mortgage loan falls to 80 percent of the original value of the home. In order to cancel PMI, the lender may require evidence that the value of the property has not declined from the time when the loan was obtained. For this purpose the lender can ask the borrower to obtain an appraisal report. If the value has declined then the borrower may be unable to get the PMI cancelled.
Contents of an Appraisal Report
An appraisal typically report contains the information listed below.
- Purpose and Transaction Information: The purpose of the appraisal report and the type of transaction (purchase, refinance)
- Property Information: Address, legal description, occupancy, condition, description, zoning, and other information.
- Neighborhood Information: The type of neighborhood, general price trends, representative marketing time, and type of location. Pictures showing interior and exterior of the house are included in the appraisal report.
- Comparable Properties: The comparison of the subject property with other similar properties. The comparable properties are generally used when determining the fair market value of the property using sales comparison approach. The appraisal report also contains the pictures of the comparable properties.
- Floor Plan and Maps: Floor plan sketch, location map, plat map, and aerial map are included to show the location of the property.
- Assumptions and Conditions: The appraiser’s assumptions and other conditions that the appraisal report is subject to.
- Appraiser’s Certification: The certifications represent that the appraiser has the skills and experience to perform the appraisal and exercised due care and professional standards.
- Copy of Appraiser’s License: A copy of the image license is included within the appraisal report in addition to the details of the appraiser.
Lender Orders the Appraisal Report
The appraisal report is ordered by the lender and the appraiser is of the lender’s choice. The fee for the appraisal report is disclosed in the Good Faith Estimate or Loan Estimate and charged at the time of loan closing.
Receive and Review Appraisal Report
You will be able to review the appraisal report before the loan closing. The lender will send you a copy of the appraisal report when it has received a completed appraisal, but it will be no later than three business days prior to loan closing. You should review the appraisal report and ensure that the information relating to the property and the transaction is correct. Therefore review the property address, APN, square footage, purchase price, and other similar information.
Underwriting and Seller Guidelines
The underwriting and seller guidelines provide requirements that need to be followed when obtaining and using the appraisal report. The requirements may include obtaining multiple appraisals, specify the type of appraisal required, a desk review of the appraisal, the timeliness of appraisal, and prohibitions for using certain appraisals.
Appraiser Independence and Regulation Z
An appraiser must be independent of the mortgage transaction so that he/she can provide an independent, unbiased, and objective opinion of value. The appraiser must not be a party to the transaction and should not be under any influence or coercion. For mortgage loans that are secured by borrower’s primary residence, you must ensure that you are in compliance with the valuation independence rules of Regulation Z (12 CFR 1026.42).
Regulation B Appraisal Rules
CFPB Regulation B has specific guidelines on the timing and delivery of appraisal report in connection with an application for a residential mortgage loan. Read more about these rules in the Regulation B Appraisal Rules page
Appraisal report provides an independent opinion on the value of a property at a specified point time for a given purpose.
Use in Mortgages
An appraisal report provides the appraised value of the property that is used for determining the property value. It also provides information on the condition of the property and the general trends in the neighborhood.
Life Cycle Stage
Sales / Origination / Servicing
Retain till the life of the loan.
Fannie Mae Form 1004 (For residential mortgages)
12 CFR 1026.42, 12 CFR 1002.14