From a Lender’s Perspective

In any real estate transaction, there are three key players: the purchaser, the appraiser, and the lender. The lender’s role is very clearly defined — he’s the money man. Because most average purchasers can’t afford to buy a house outright, they turn to the lender. But the lender can’t do anything until he knows the amount the loan will need to be for, and for that, he needs the certified appraiser. The appraiser’s determination of the property’s value dictates how much the lender is willing to loan — if anything at all.

Most mortgage lenders require that the appraiser employ the market-data approach in determining value, meaning the appraiser will find similar properties in the area that sold recently and use that information to determine an approximate value. This method can be time-consuming, so some lenders use a less formal method that speeds appraisals, waiving the need to find comparable homes in the area and relying instead on the experience of their appraisers.

Lenders generally combine the market-data approach with the cost approach, where the property’s value is determined by what it would cost to acquire the land and build the house. Older homes are usually appraised using the market-data approach, and newer homes are usually appraised with the cost approach.

Of course, once an appraiser has made a determination of a property’s value, the lender still has a number of criteria to consider with regard to the potential purchaser – factors like credit history, available down payment, references, and LTV (loan to value, the amount of the loan as a percentage of the value of the property). But as long as the property has a solid appraisal from a certified appraiser and a good candidate to buy, the lender’s job is made that much easier.

By: Present Value

Tags: lender, LTV, market-data approach
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