How Do Lenders Use Real Estate Value?
During the process of obtaining a mortgage loan, many first-time homeowners receive a home appraisal report but are unclear about what determines the value of their property. The process of evaluating a home’s potential worth can be daunting, as there is a lot of interplay between various organizations.
What Is Value?
The value of a home is its estimated current worth, plus the future benefits that would come from owning the property. These benefits are gained over a long period of time, sometimes over the full term of the loan. This means that value is influenced by government regulations, economic trends and other social factors that impact the housing market.
Real estate value is not equivalent to cost; the latter looks at today’s expenditures, such as the materials and labor used to build the home. A house that cost $100,000 to build could have a higher value if it is located in a great school system or it could have a significantly lower value if there’s a major problem with its foundation.
Exact value calculations differ. Potential factors include cost of the home and property, its location, expected appreciation of land value, future investment implications and age of the home.
For a mortgage, you’ll get an appraisal that determines market value, which is the price at which the home is most likely to sell today.
Lenders and Value
Many mortgage companies use appraisal management companies (AMCs) who employ or contract with licensed, local appraisers to obtain their appraisals and determine the market value of homes. This allows mortgage companies to eliminate the cost of maintaining a panel of investors. AMCs ensure adherence to federal appraisal requirements and help lenders to provide unbiased values.
AMCs take different approaches to determining value, considering the conditions mentioned above as well as values for comparable homes in the area.
The lender is still responsible for reviewing the appraisal and monitoring the AMCs for accuracy. Although the mortgage loan company cannot determine the value of a home at appraisal, the lender is ultimately responsible for ensuring that the value provided by a licensed appraiser is supported by due diligence investigation and reasonable for current conditions.
This often results in additional reviews in cases when an appraisal report may not have sufficient support for its conclusion. Most lenders use appraisal evaluation tools to determine which appraisals require a closer look.
Many lenders use an asset valuation model (AVM) to determine the real estate value for second mortgages. AVMs calculate a technology-driven value based on mathematical modeling. The AVM generally includes an analysis of:
- public record data
- tax assessor valuation
- recent sales history
- comparable sales analysis