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The Home Renovation Loan Appraisal - What You Need To Know Before Your Financing Gets Denied
The appraisal is just as important to your home renovation loan qualification as your income, assets and credit. The appraisal for a home to be rehabbed is even more important than an appraisal for a home that already exists. For a home renovation loan, the appraiser will do what is called a "plans and specs appraisal," meaning they will examine the plans and specifications for the home to be fixed up and compare it to existing homes in the immediate area that are similar.
An appraisal is an assessment by a licensed appraiser (an opinion, really) of the value of a particular home at a given time. The appraiser, who is licensed by the state, must follow certain rules regarding how an appraisal is conducted.
They must locate similar homes within a close proximity to your location (usually 1-3 miles) that are on similar size land. This is called finding "comparables," or "comps." A comp is not a comp if the home has not sold on the open market within the last six months. This can be stretched up to a year, but most lenders prefer six month old comps or less.
This means if you are building a 2000 square foot colonial style home on 1 acre, the appraiser must find at least three other roughly 2000 foot (usually within 15% of the size) homes on roughly 1 acre of land. If they cannot do this, there are often problems with establishing value. This could lead to a denial of your home renovation loan or to the lender making adjustments to the value (usually lower).
The best advice is to know the area you are building and not try to rehab a home that is way out of the ordinary for the area. We often see borrowers who want to build a home that is significantly larger and more expensive than the other homes in the area (overbuilding for the area). They may be perfectly qualified as a borrower, but if the appraiser has problems establishing a legal appraised value, the loan could be denied.
Another issue often arises with large lots. If you find a 15-acre lot in an area of half-acre lots, you may run into problems with the appraisal for your home improvement loan. Lenders do not want to be stuck owning a property (if you were to default on the loan for some reason) that is out of the ordinary from the rest of the area. They need to be able to sell it quickly and may have trouble doing so if it is not typical for the area.
Here are some other common issues to consider: lot size, type of construction, and location of your intended home.
Most lenders will limit the size of the land on which they will lend. As mentioned above, there must be comparable lots in the immediate area to justify the larger size. For example, your lender may be able to approve a loan for a home on a 32 acre lot, but there must be other similar sized lots with somewhat similar sized homes available as comps. If the appraiser cannot find comps for this project, the chances are you will be denied the home renovation loan no matter how well qualified you are as a borrower.
The type of construction is also an important consideration. This is a common issue with log homes, but it can be problematic with any type of construction that is different than a regular stick built home. The appraiser must be able to locate comps for the type of construction you are building. This means, if you are renovating a log home, there must be other log home sales in the immediate area within the last 6 months that are similar size and on similar land. See the potential for problems?
The other area of concern for home renovation loan appraisals is the location of the property. Your lot will be considered to be either in an urban, suburban or rural setting. This will determine how far away the comps can be. Typically, in an urban setting, comps must be a half mile or less from the subject. This may be stretched to a mile in some cases. For suburban properties, one to three miles is the maximum distance allowed in most cases. For rural properties, the comps should ideally be no more than five to ten miles away.
There are exceptions to these rules, but you should not count on an exception being made when it comes to your home improvement project. It is best to understand how an appraisal interacts with your loan application and do as much research as you can before you make any financial commitments. Often, if you find a house you like as a potential home renovation project, you can hire a local appraiser on your own to just "run comps" for your proposed home. Expect to pay for this service, as appraisers are professionals and should be properly compensated for their time and expertise.
But, this could be the best money you ever spend if there are any questions as to whether a good appraisal can be obtained for your proposed home renovation loan. It is better to know early instead of spending time and money on plans, deposits, the full appraisal and any other expenses you may incur.
About the Author Chris Esposito specializes in home renovation loans through CM Direct for people wishing to rehab a property that they already own or hope to purchase. To learn more about home improvement projects and loans, go to www.DirectRehabLoans.com, or call (877) 876-3688.
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