“Generally, the loan-to-value ratio is determined by the lower of the appraised value or the purchase price for a purchase transaction,” says Matt Hackett, operations manager of Equity Now, a New York-based direct mortgage lender. “For refinancing, the loan-to-value is determined by the appraised value. This ratio is very important from both a qualification and pricing standpoint.”
Appraisers look at the comparable sales in the neighborhood and generally “bracket sales with a lower sale, a higher sale and a very similar sale and arrive at a number they deem fit,” Hackett says.
The reasons for low appraisals are generally more due to an unrealistic idea of value than anything cosmetic,” Hackett says. “Appraisers are human and they will generally react more favorably to a well-maintained home.”
How to avoid: Look at the prices of homes sold within the past month that are similar in size and age to determine a range for your appraisal before it is conducted.
What you can do if the appraisal comes back low
However, homeowners cannot shop for appraisals and simply get a second one, Hackett adds.
“As a lender, we are not permitted to get a second appraisal unless the first appraisal is grossly incorrect,” Hackett says. “This would be extremely rare, as the lender is selecting the appraisal or at least the appraisal management company. We do a tremendous amount of due diligence on appraisers before engaging them, as they are determining the value of collateral supporting the loan and are crucial to the lending process.”