Key Takeaways
- Appraisals must be performed by state-licensed or certified appraisers; certified appraisers can appraise any property while licensed appraisers have transaction value limits
- FIRREA (1989) established appraiser independence requirements and created the Appraisal Subcommittee to oversee state appraiser regulatory programs
- The Appraiser Independence Requirements (AIR) prohibit loan production staff from selecting, retaining, or influencing appraisers; violations can result in civil penalties
- Loan-to-Value (LTV) = Loan Amount / Lesser of Purchase Price or Appraised Value; CLTV includes all liens on the property
- The three approaches to value are Sales Comparison (most common for residential), Cost Approach (new construction), and Income Approach (investment properties)
- Automated Valuation Models (AVMs) use algorithms and public data for property valuations and are commonly used for HELOCs and refinances with appraisal waivers
Property Valuation
Property valuation determines how much a home is worth, which directly affects loan amounts and risk assessment. Understanding appraisal requirements, independence rules, and valuation methods is essential for MLOs.
Why Property Valuation Matters
Property valuation serves several critical purposes in mortgage lending:
| Purpose | Description |
|---|---|
| LTV Calculation | Determines loan-to-value ratio |
| Collateral Assessment | Ensures property secures the loan |
| Risk Management | Prevents over-lending |
| Market Verification | Confirms property's market position |
| Investor Requirements | Meets secondary market standards |
Types of Property Valuation
| Method | Description | Common Use |
|---|---|---|
| Full Appraisal | Licensed appraiser inspects property | Purchase, most refinances |
| Drive-by Appraisal | Exterior-only inspection | Some refinances |
| Desktop Appraisal | No physical inspection | Certain refinances with waivers |
| BPO | Broker price opinion | HELOCs, defaults (not for most mortgages) |
| AVM | Automated valuation model | HELOC, waivers, internal use |
Appraisal Requirements
Who Can Perform Appraisals
Appraisals must be performed by state-licensed or certified appraisers who meet federal qualifications.
| Credential | Requirements | Limitations |
|---|---|---|
| Licensed Appraiser | State-licensed, entry level | Transaction value limits |
| Certified Residential | Additional education/experience | Non-complex 1-4 units |
| Certified General | Highest qualification | Any property type/value |
Federally Related Transactions
Appraisals are required for federally related transactions, which include:
- Loans made by federally regulated institutions
- Loans sold to Fannie Mae, Freddie Mac
- FHA, VA, USDA insured/guaranteed loans
- Loans exceeding de minimis threshold ($400,000 for some)
Appraisal Report Contents
A typical appraisal report includes:
| Section | Contents |
|---|---|
| Subject Property | Address, legal description, ownership |
| Neighborhood Analysis | Location, market conditions, trends |
| Site Description | Lot size, zoning, utilities, improvements |
| Improvements | Structure details, condition, quality |
| Comparable Sales | Recent similar sales with adjustments |
| Value Conclusion | Appraiser's opinion of value |
| Certification | Appraiser's statement and signature |
Appraiser Independence Requirements
Appraiser independence is critical to prevent fraud and ensure accurate valuations.
FIRREA (1989)
The Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) established:
- Federal appraiser qualification standards
- State licensing/certification requirements
- Appraisal Subcommittee oversight
- Independence requirements
Appraiser Independence Requirements (AIR)
Key prohibitions under AIR:
| Prohibited Action | Description |
|---|---|
| Coercion | Cannot pressure appraiser for specific value |
| Selection by Production | Loan officers cannot select appraisers |
| Compensation Tied to Value | Cannot pay more for higher values |
| Withholding Payment | Cannot refuse to pay for unfavorable results |
| Retaliation | Cannot remove from panel for honest work |
Who Can and Cannot Select Appraisers
| CAN Select Appraisers | CANNOT Select Appraisers |
|---|---|
| Appraisal management company (AMC) | Loan officers |
| Lender's appraisal department | Loan processors |
| Correspondent lender | Branch managers |
| Borrower (with requirements) | Real estate agents |
Penalties for AIR Violations
- Civil money penalties up to $25,000 per violation
- Cease and desist orders
- Removal from position
- Potential criminal prosecution
The Three Approaches to Value
Appraisers use three approaches to determine property value:
1. Sales Comparison Approach
The most common method for residential properties. Compares the subject property to recently sold similar properties (comparables or "comps").
| Element | Description |
|---|---|
| Comparable Selection | Similar properties sold within 6-12 months |
| Adjustments | Add/subtract for differences |
| Reconciliation | Weight comps to conclude value |
Adjustment Examples:
| Feature | Subject Has | Comp Has | Adjustment to Comp |
|---|---|---|---|
| Garage | 2-car | 1-car | Add value |
| Pool | No | Yes | Subtract value |
| Square Feet | 2,000 | 1,800 | Add value |
| Bedrooms | 4 | 3 | Add value |
2. Cost Approach
Calculates what it would cost to rebuild the property minus depreciation. Best for:
- New construction
- Unique properties
- Special-purpose properties
Formula:
Land Value + (Replacement Cost - Depreciation) = Property Value
3. Income Approach
Values property based on the income it generates. Used for:
- Investment properties
- Rental properties
- Commercial real estate
Key Metrics:
| Metric | Formula |
|---|---|
| Gross Rent Multiplier (GRM) | Sale Price / Annual Gross Rent |
| Cap Rate | Net Operating Income / Property Value |
Loan-to-Value (LTV) Calculations
LTV is a crucial ratio that measures loan amount against property value.
Basic LTV Formula
LTV = Loan Amount / Property Value
Property Value = Lesser of purchase price or appraised value
LTV Example
| Scenario | Value Used |
|---|---|
| Purchase price: $300,000, Appraised value: $310,000 | $300,000 (lower) |
| Purchase price: $300,000, Appraised value: $290,000 | $290,000 (lower) |
Example Calculation:
- Purchase price: $400,000
- Appraised value: $410,000
- Loan amount: $380,000
- LTV = $380,000 / $400,000 = 95%
Combined Loan-to-Value (CLTV)
CLTV includes all liens on the property.
CLTV = (1st Mortgage + 2nd Mortgage + Other Liens) / Property Value
CLTV Example:
- Property value: $500,000
- First mortgage: $400,000
- HELOC: $50,000
- CLTV = ($400,000 + $50,000) / $500,000 = 90%
High Combined LTV (HCLTV)
HCLTV includes the full credit limit of revolving credit lines, not just the drawn balance.
HCLTV = (1st Mortgage + Full HELOC Limit) / Property Value
LTV Significance
| LTV Range | Implications |
|---|---|
| 80% or less | No PMI required on conventional |
| 80.01-95% | PMI required on conventional |
| Over 95% | Higher PMI rates, fewer loan options |
| Over 100% | Underwater (loan > value) |
Automated Valuation Models (AVMs)
AVMs are computer programs that estimate property values using algorithms and data analytics.
How AVMs Work
| Component | Description |
|---|---|
| Data Sources | Public records, MLS data, previous sales |
| Algorithm | Statistical models, machine learning |
| Output | Estimated value with confidence score |
AVM Advantages
- Fast (seconds vs. days for appraisal)
- Low cost ($10-50 vs. $400-800 for appraisal)
- Objective (no human bias)
- Consistent methodology
AVM Limitations
- Cannot inspect property condition
- May miss unreported improvements
- Less accurate in rural areas
- Limited comparable data in some markets
- Cannot assess unique properties
When AVMs Are Used
| Use Case | Description |
|---|---|
| Appraisal Waivers | Some refinances don't require full appraisal |
| HELOCs | Often use AVM instead of appraisal |
| Portfolio Monitoring | Lenders track collateral values |
| Pre-qualification | Initial value estimates |
| Quality Control | Compare to appraisal results |
Appraisal Waivers
Fannie Mae and Freddie Mac offer appraisal waivers for certain transactions.
Eligibility Factors
| Factor | Requirement |
|---|---|
| Property Type | 1-unit, primary residence typically |
| LTV | Usually 80% or less |
| Transaction Type | Purchase or limited cash-out refinance |
| AUS Finding | Must receive waiver offer from DU/LPA |
| Property Data | Sufficient data for AVM confidence |
When Waivers NOT Allowed
- Cash-out refinances (generally)
- FHA, VA, USDA loans (require appraisal)
- Construction loans
- Very high LTV transactions
- Properties with insufficient data
Appraisal Issues and Resolution
Common Appraisal Issues
| Issue | Potential Impact |
|---|---|
| Low Value | May require larger down payment |
| Condition Issues | Repairs may be required |
| Comparables Too Old | May need more current sales |
| Subject to Repairs | Completion required before closing |
Recourse for Low Appraisal
- Request Reconsideration of Value (ROV) with additional comparables
- Order a second appraisal (at borrower's expense)
- Renegotiate purchase price
- Borrower brings additional funds
- Cancel transaction (if allowed by contract)
Key Takeaways
- Full appraisals are required for most federally related transactions
- Appraiser independence rules prohibit loan production staff from selecting or influencing appraisers
- The sales comparison approach is most common for residential properties
- LTV uses the lesser of purchase price or appraised value
- CLTV includes all liens; HCLTV uses full credit line limits
- AVMs provide quick, low-cost valuations but cannot assess condition
- Appraisal waivers are available for certain low-risk transactions
Under appraiser independence requirements (AIR), which of the following is PROHIBITED?
A borrower is purchasing a home for $350,000. The appraisal comes in at $340,000. What value is used to calculate LTV?
A property is worth $400,000 and has a first mortgage of $300,000 and a HELOC with a $50,000 limit (current balance $20,000). What is the HCLTV?