In most cases in today's mortgage market, property values are derived with what is known as the appraisal. On occasion, when a lender receives a loan application, the applicant will typically list what the potential borrower thinks the house is worth. With a purchase, the qualifying value will typically be the sales contract. A mortgage company will use what is entered on the contract, but on some occasions, a second opinion is needed. This second opinion is an appraisal review. What does an appraisal review look for?
Lenders will first determine that the current market of the property is in line with similar, recently closed homes. Most often this isn't an issue, but sometimes the lender will have a couple more questions. This is done by a review used with a computer or mobile device. The value is provided and the lender looks at other homes in the area, most often no more than 12 months. The newer 'comparable' sale will carry the most recent weight. This is referred to as a 'desk review.'
For example, let's say a home has a contract on it that states the property is worth $300,000 but surrounding homes that have recently sold are at $200,000. The lender will definitely want some more information. An appraisal review also makes sure the appraiser followed proper guidelines when completing the review.
At the same time, if the property comes in at a value much higher than recently sold homes, there will also likely be a review.
In many cases where the borrower is well-qualified along with a decent down payment, a full appraisal will be waived completely with the lender using data grabbed from the local multiple listing service, or MLS.
Full appraisals these days are relatively rare, but when they do occur, it's because the lender wants to feel a little more comfortable about making the loan. A full appraisal means the appraiser physically visits the home, and takes photos of both the inside and outside of the home.
All appraisals are reviewed, it's just the level of scrutiny that makes the difference. When someone makes an offer on a home, it's their agent that helps determine that asking price based upon what has recently sold in the area. The closer the 'comps' are to the subject property, lenders use this proximity to provide greater weight to the nearest comp.