What is Drive-by Appraisal?
Lenders establish a required “loan to value” or “LTV” for each loan program, even loans that do not require a down payment. The property is the lender’s collateral in the transaction and an independent appraisal will help support the value of the subject property. Private mortgage insurance, or PMI, can be waived if the loan amount reaches a certain LTV. For instance, a conventional loan might require PMI with a 10% down payment but waive the requirement with a down payment of 20% or more. Value is determined by an appraisal.
There are different levels of a property appraisal. A standard, or full appraisal is one where the licensed appraiser does some initial in-office research to identify recent sales of similar properties in the neighborhood. The appraiser will first identify similar properties and record the sales price of each home. After performing this initial research, the appraiser will then make a physical inspection of the home, both on the outside, or the exterior, and the inside of the home. The selected loan amount may set the guidelines for the type of appraisal required or the type of appraisal required will be identified in the “results” of an automated approval.
A full appraisal will require photos of the outside and inside of the home and include these in the report. The appraiser will also take exterior photos of the similar homes chosen by the appraiser. The photos will support the final value of the home. An interior inspection can also impact the final value. Both the interior and exterior of the home must be in good condition and the photos will support that.
On the interior however, two homes that look very similar from the outside might look very different on the inside. One home might have an upgraded kitchen with granite countertops and high end appliances while the other does not. These “adjustments” will be noted in the report. The home with the high end kitchen will have its value adjusted upward due to these improvements.
Another type of appraisal is a desk review. A desk review computes the value of the home by online research only. No physical visit to the property is necessary and all research is done in-house. A desk review typically is the result of a high-equity transaction. For instance, the loan amount requested is $200,000 and recent home sales in the area suggest a $500,000 value. When a loan application is run through an automated underwriting system, the results, or “findings” will indicate the level of an appraisal needed.
A drive-by appraisal includes in-house research as a starting point and then a physical visit to the subject property. A drive-by means the appraiser visits the home, makes note of the condition of the property and takes exterior photos. The appraiser can also take photos of the comparable sales used in the report.
When the findings indicate the type of appraisal needed, an individual lender can make its own guidelines. For instance, even though the findings ask for only a drive-by appraisal, the lender might override that decision and request a full appraisal. On the other hand, a lender can’t do the reverse and only do a drive-by or desk review when the findings ask for a full appraisal. And finally, because there is less work performed with a drive-by, the appraisal fee will be lower than a full appraisal.
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