How Does a Lender Evaluate Properties?

Property valuation, or home appraisal, is a process in which a qualified appraiser provides you with an estimate of the monetary value of your home and property. Getting a property valuation is an important step in the mortgage loan application process in order for you and your lender to understand the value of the property to be mortgaged.

When conducting the appraisal, the lender will usually take into consideration the following aspects of the property:

  • The location of your property. This includes the city, county, and state, as home value is affected by the neighborhood and whether the property is urban, rural, or suburban.

  • The value of other properties in your neighborhood. Usually, the value of your property will not be much different from the values of your neighbors' properties.

  • The condition of your property. The condition of the property is also significant to determining its monetary value. A new and well-equipped property would be valued higher than a property that is old and in poor condition.

  • The After Repair Value (ARV) of your property. ARV is not the current value of your property; rather, ARV is an estimated value of the property assuming improvements are made. ARV also affects the monetary value of a property because if you default on your mortgage, lenders could potentially take your property and make improvements to raise its value before resale. Lenders also consider the cost of repairs in addition to ARV when evaluating properties because a high cost will negatively affect potential gains.