Appraisals play an important role in the lending industry. They are used by lenders to help determine the lending value of a property, but they are also useful to provide other information that is needed when the lenders are assessing someone’s application.
In addition to the final value, lenders will look at some of the following factors:
Land Value & Improvements
The breakdown of land value and the value given to improvements is critical if the home being purchased is in need of serious repair. They will check to make sure the improvements have a minimum value. If the improvements are valued too low, they may consider the financing based on the land only, or as a purchase plus improvements. They will also look at the remaining economic life of the property to ensure the amortization of the mortgage does not exceed the life left in the dwelling. Some lenders require a 5 year buffer between the remaining economic life and the maximum amortization.
This is an important factor in the bank’s risk assessment in the event of foreclosure. Lenders do not like to foreclose on properties, but they do need to know that if this unfortunate scenario unfolds, they will be able to sell the property quickly. A property that scores lower on the marketability scale may still be considered, but with a lower loan-to-value ratio.
Market or Economic Rent
If the home has a suite or is being purchased for rental purposes, the bank will often rely on the appraiser’s professional assessment of what the potential rental income will be with a Market Rent Report. Appraisers will take into account what the current rents are for similar properties in age, quality, size, and location. The rental estimate will be based on long term tenancy. Lenders will not work with short term nightly rental income, or roommate income for qualification purposes.
If you are obtaining an insured mortgage through CMHC, Genworth, or Canada Guaranty, chances are you will not need an appraisal. If the property passes through the insurers’ valuation system, the property will be auto approved. In some cases, they will ask for an appraisal to be done depending on the overall risk profile of the application, and the property type/location.
Appraisal Management Systems
If the bank does require an appraisal to finalize your approval, it will most likely be required to be ordered through an appraisal management portal, such as Solidifi or Nationwide Appraisal Services. The property information is input into the system and then referred to a bank approved appraiser. The appraiser will reach out to the realtor, or to you, for access to the property, depending on if the transaction is a purchase or a refinance. When the appraisal is completed, the report is uploaded to the portal. This is done to prevent fraud and to ensure authenticity. Technically, the lender is the owner of the appraisal, even if the cost is passed on to you. It is not common practice for the bank or lender to provide a copy of the report to the borrower.