Conventional Loan Appraisals: What Homebuyers Need to Know

When you’re buying a home with a conventional loan, you’ll go through a home appraisal as part of the process.

This important step helps determine the current market value of the property and influences how much your lender is willing to loan you. It’s not just a formality, the appraisal can impact your loan terms and the final price you pay.

The appraisal protects both you and the lender from overpaying by ensuring the home’s value aligns with the agreed-upon purchase price.

Knowing how appraisals work can make the home-buying process smoother and more transparent.

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What is a conventional loan home appraisal?

A home appraisal for a conventional loan, whether it’s a 15-year or 30-year term, is a legally required evaluation that determines the market value of a property.

This process ensures that the lender isn’t loaning more than the home is worth, as conventional loans are not backed by the government.

The appraisal protects both the lender and the buyer by confirming the home’s value aligns with the purchase price.

Unlike FHA appraisals, which also assess health and safety standards due to their government affiliation, conventional appraisals focus more on valuing the property against comparable homes sold in the area.

This valuation ensures lenders that the loan amount is not higher than the property’s worth, protecting the financial interests of both the lender and the borrower.

Key facts about conventional loan appraisals

• The appraisal assesses the property’s market value.
• It involves comparing the property to similar ones recently sold nearby.
• Adjustments are made for differences in features and conditions.
• Appraisals are required to protect the lender’s investment.
• It differs from FHA appraisals by focusing more on value than safety.

The 3 key steps of a conventional loan home appraisal

In a conventional loan appraisal, three key steps determine a property’s value.

1. The market value assessment involves comparing similar homes recently sold in the area.
2. A property review includes thoroughly inspecting the home’s interior and exterior, as well as checking systems and structural integrity.
3. Adjustments are made to account for differences between the subject property and the comparable homes, ensuring an accurate valuation.

Why are conventional loan appraisals required?

Conventional loan appraisals are required as a standard part of the mortgage process to ensure the loan amount accurately reflects the property’s market value.

This legal requirement protects both the lender and the borrower by preventing overborrowing, which could lead to financial difficulties later on.

Here’s why they’re essential:

1. Risk assessment: Appraisals give lenders a clear picture of the property value, which is necessary for assessing their risk in lending money. If a home is valued less than the loan amount, the risk of loss for the lender increases if the buyer defaults.
2. Loan-to-value ratio: The appraisal determines this ratio, a key factor lenders use to decide loan conditions, including interest rates. A lower ratio often results in more favorable loan terms because it indicates less risk to the lender.
3. Buyer assurance: For buyers, appraisals confirm that the price they agree to pay matches the property’s worth, which is vital in making an informed purchase decision.
4. Negotiation power: If an appraisal comes in below the agreed purchase price, buyers have the leverage to renegotiate the price or terms with the seller, ensuring they don’t overpay.

How to prepare for a conventional loan appraisal

To prepare for a conventional loan appraisal and potentially enhance your home’s value, consider the following actions:

• Fix structural and functional issues: Repair any damages like cracked ceilings, leaky faucets, or broken windows.
• Enhance cleanliness and aesthetics: Deep clean the home and replace any worn-out carpets to improve the interior’s appearance.
• Address exterior maintenance: Repair any broken exterior elements such as garage doors or sidewalks. Ensure the outside of your home looks neat and well-maintained.
• Improve landscaping: Trim overgrown bushes, clear out dead plants, and tidy up the yard to boost curb appeal.
• Update home fixtures: Replace outdated fixtures such as old light fittings and bathroom taps to modernize your home’s feel.
• Document recent upgrades: Compile a list of any major improvements like a new roof, updated HVAC systems, or modern appliances to inform the appraiser of added value.

How to deal with a low home appraisal

When an appraisal comes in lower than the agreed purchase price, it can be disconcerting for both buyers and sellers. In such situations, buyers might negotiate with the seller to lower the sale price to match the appraised value, which could facilitate the mortgage process by aligning the loan amount with the appraised value.

If the seller is unwilling to drop the price, buyers may need to consider increasing their down payment to cover the difference, ensuring the loan-to-value ratio remains acceptable to the lender.

Comparing conventional and FHA appraisals

Conventional and FHA appraisals both assess a property’s market value, yet they serve slightly different purposes and adhere to distinct guidelines set by their respective loan programs.

Buyers should consider an FHA appraisal if they suspect the property might have safety issues or if they benefit from FHA’s lower down payment requirements.

Conventional appraisals:

• Primarily focused on determining the market value of the property
• Evaluates comparable recently sold properties to estimate the home’s value
• Less stringent about property conditions unless they significantly affect the property’s value

FHA appraisals:

• Determine market value, with an added emphasis on ensuring the property meets specific health and safety standards
• Similar to conventional in terms of evaluating comparables, but includes an assessment of physical condition against HUD’s safety, security, and soundness criteria
• Requires properties to be free of hazards and in good repair, which can include anything from ensuring proper electrical wiring to checking for lead-based paint and structural integrity

Comparing conventional and FHA appraisals:

• FHA appraisals are more rigorous, often leading to additional repair requirements before closing.
• The outcome of an FHA appraisal might affect the possibility of FHA loan approval, whereas conventional loan appraisals focus more on value for loan coverage.
• If a property is older or needs repairs, an FHA appraisal may identify issues that a conventional appraisal might not, affecting the closing process and potential negotiations.

Get started with a conventional loan today

Preparing for a conventional loan appraisal is key to moving forward in the homebuying process.

Whether you’re buying or refinancing, understanding how your property is valued can make all the difference. Ready to get started?