The current housing market has been met with low housing inventory, yet demand is still relatively high. Prospective borrowers, especially first-time homebuyers, need to be ready for what they’ll encounter during the homebuying process, including home appraisals. That’s where you, the lenders, can step in and help.
But with obstacles in the way for many, lenders need to stay updated on market trends and understand how every part of the homebuying journey might be impacted. This is true for appraisals, too. Recent trends are surfacing, and more instances of hybrid appraisals are changing how appraisals are conducted. Lenders are able to mitigate risk by staying informed, undoubtedly, but they’re also providing their borrowers with the knowledge that they’ll need to help them achieve the dream of homeownership.
Let’s explore how from the lens of David Foster, Enact’s Senior Real Estate Appraiser.
The appraisal is a report with an independent opinion of value of how much a property is worth. There is an on-site visual inspection of the property and a suggestion of improvements followed by the research, analysis and development that produces the appraisal report. This report not only gives a value opinion, but it also provides details pertaining to local market trends, provides the reader an understanding of conformity to the area, and addresses any concerns with location influence and/or physical conditions.
Bankrate provides a home appraisal checklist that may look like the following:
- Sales trends and price ranges for comparable homes in the neighborhood
- Location of the home
- Neighborhood (Is it urban, suburban, rural? Is it old or is it newer and growing?)
- Square footage of the house and the lot
- Layout of the house
- Hazards such as flood hazards or other adverse conditions
- Age and condition of the foundation, roof, walls and overall structure
- Amenities, such as a fireplace, deck or swimming pool
- Condition of appliances
- Rental income?
- Fees associated with the property (such as HOA or cost to build a similar home from the ground up)
Appraisals are an important step to helping borrowers reach closing. They matter to the lender to ensure the property is sufficient collateral for the loan amount. On the other hand, they’re important for buyers because they may identify physical concerns that either require more qualified inspections or repair and confirm that they are paying the fair market value.
Hybrid appraisals and how they impact closing
A hybrid appraisal is like a traditional report, as it still employs the same logic and rationale, but the subject data collection is performed by an independent third party. Thus, the parties conducting each part of the appraisal, inspection vs. research, are completed by two different people instead of one. They could be a licensed appraiser and an authorized real estate agent, two appraisers, etc. These appraisals include but are not limited to measurement of the home for gross living area, identifying the subject condition including recent updates, quality/condition of materials, and any physical deficiencies that may require inspection or repair.
This type of approach may shorten the time it takes to return the appraisal to the lender. The appraiser may save time in the physical inspection of the property. For traditional products and hybrid, the accurate identification of physical features and location is paramount in the development of a credible value opinion. Accuracy, as well as efficiency, are key to make this trending appraisal type successful.
Market trends and their effect on borrowers
Since the pandemic, the past 2-3 years brought rapid home appreciation and higher interest rates, with rates currently over 7%. Plus, the high demand for housing mixed with low inventory has certainly created many obstacles for borrowers. Now, we are starting to see a correction in trends. Many publications seem to offer contradicting details for market strength. Despite this, those of us in the mortgage industry are staying alert and vigilant.
Lenders may get a feel for the market when they access the appraisal report, as it does provide details for market conditions. They should focus on the market trends, supply/demand, and marketing times when reviewing the report. If declining conditions are reported, but supply/demand is in a shortage with marketing times below 90 days, this could signal a correction. If the appraiser does report declining conditions, it is imperative they account for it in the sales comparison approach.
Risks lenders should consider
Over the years the appraisal review process has grown, along with many resources that allow for data validation, and Automated Valuation Model (AVM) products that offer details for sales in the area. That said, the appraisal is still considered the most reliable option when it comes to an independent value opinion.
It is important to read the appraisal report to ensure accuracy of data, and to ensure the appraiser provides a supported value opinion. This can be achieved by reviewing reports that Fannie Mae’s Collateral Underwriter® and/or Freddie Mac’s Loan Prospector® send when an appraisal is submitted for consideration and referring to various online listing resources. Online listing sources can be used to view photos and Realtor comments pertaining to sales used in the comparison approach, using sites like Realtor.com, Zillow, Trulia, etc.
Lenders and those in the mortgage industry should also consider their internal risk appetite when utilizing the appraisal report. Not all properties can conform to internal guidelines, but they may still offer a low risk in acceptance. Only the user of the report can determine their assessed risk.
What we can do to help
We offer underwriting services, along with training resources, to help you understand the nuances of navigating the appraisal review. In order to help your borrowers navigate the market and the homebuying process, preparedness and proactivity are key!
Be sure to make the most of your MI experience too. If you need some extra insight, you can always contact your Enact Sales Rep for more info. They’ll be happy to help you meet your business needs, answer questions, and point you in the right direction.
Source: David Foster is a Senior Real Estate Appraiser at Enact Mortgage Insurance.
The statements in this article are solely the opinions of David Foster and do not necessarily reflect the views of Enact or its management.
Never miss a post by subscribing to the Enact MI Blog! We’ll send you our most up-to-date topics right into your inbox.