Loan Origination - Appraising Collateral

Appraising Collateral

The next step is to have a Real Estate appraiser appraise the borrower's property that he wishes to have the loan against. This is done to prevent fraud of any kind by either the borrower or the mortgage broker. This prevents fraud like "equity stripping" and money embezzlement. The amount that the appraiser from either the borrower's side or the lender's side is the amount that the borrower can loan up to. This amount is divided by the debt that the borrower wants to pay off plus other disbursements (i.e. cash-out, 1st mortgage, 2nd mortgage, etc.) and the appraised value (if a refinance) or purchase price (if a purchase) {which ever amount is lower} and converted into yet another ratio called the Loan to value (LTV) ratio. This ratio determines the type of loan and risk the lender is put up against. For example: if the borrower's house appraises for $415,000 and they wish to refinance for the amount of $373,500 - the LTV ratio would be 90%. The lender also may put a limit to how much the LTV can be - for example, if the borrower's credit is bad, the lender may limit the LTV that the borrower can loan. However, if the borrower's credit is in Good condition, then the lender most likely not put a restriction on the borrower's LTV. LTV for loans may or may not exceed 100% depending on many factors.

The appraisal would take place on location of the borrower's property. The appraiser may take pictures of the house from many angles and will take notes on how the property looks. He/she will type up an appraisal and submit it to the lender or broker (depending on who ordered the appraisal.) The Appraisal is written in the format compliant to FNMA Form 1004. The 1004 is the standard appraisal form used by appraisers nationwide.