After you make an offer on a home and use your VA eligibility for a home loan, one of the first steps your VA lender takes is ordering your VA appraisal. The appraisal is a multi-page report reviewing various aspects of your new property. What's in your VA appraisal?
A comparable sale, sometimes simply called “comp” is a report listing information about a recently sold home, similar to yours, that sold in your neighborhood. VA appraisals will require at least three comps sold in your area with the previous 12 months, with at least one of those sales within having occurred within six months of the date of the appraisal report.
A VA lender evaluates comps to validate and support the sales price on the home you're buying. For example, if you make an offer on a 2,000 square foot home for $200,000, that's $100 per square foot. Just down the street six months ago, a similar 2,000 square foot home sold for $210,000, or $1.10 per square foot. The recent sale down the street supports the current value of your home.
On the other hand, if the home down the street sold for $190,000, or .95 cents per square foot, there might be a valuation issue. A lender doesn't have a problem with a property down the street having sold for more than your property, but if the comp down the street sold for much less than yours, the lender will question the appraisal. The lender needs to know that should the home be foreclosed on, what would the home sell for today. $1.00 per square foot or .95 cents per square foot?
Comparable sales are the primary tools VA lenders use to help establish the market value of a home.
A VA appraisal will have a thorough inspection as part of the appraisal report. The appraiser will visit the site and make an interior as well as exterior inspection as to the general condition of the property. In addition to providing a list of comparable sales to the VA lender, the appraiser will note if the property is structurally safe and sanitary and meets the construction standards in the area.
If a significant structural issue is found, it will be noted in the report. For instance, the appraiser may notice various cracks in the wall around door jambs or a fireplace. Such crack placement could indicate a faulty foundation. The lender will stop the loan approval process and require the foundation be inspected by an engineer who specializes in foundation work and settlement issues. Perhaps the appraiser notices missing shingles or evidence of moisture in the basement. Any such conditions will need to be addressed and when needed, repaired before the loan can be approved.
Market Approach vs. Cost Approach
The main focus of a VA appraisal is to help determine the market value of the home. The market value is the dollar amount a home could be expected to be sold for in an open market. Your newly signed sales contract is an exhibit of the apparent market value of the property.
A VA appraisal will also determine the value of the home based upon the Cost Approach. The cost approach attempts to determine the cost of building the property to its exact stature on the existing lot. The appraiser will estimate the current value of the lot as if it were vacant then calculate what it would take to build the home from scratch. The appraiser will then consider the current age of the home and apply a depreciation value to the replacement cost to arrive at a final cost value.
Lenders do not use the cost approach when establishing values or loan amounts but the cost approach is important to insurance agents who use the appraisal report to determine replacement costs for a property and establish an insurance premium.
One final note regarding your VA appraisal, even though you paid for your appraisal, the appraisal is actually the property of the lender. On the front of the appraisal report it will specifically state who the appraisal was made for with your lender's name on the report. However, you have the right to receive a copy of the appraisal report and you will receive a disclosure from your lender informing you of your right to obtain a copy.
Grant Moon is founder and President of VA Loan Captain Inc., which assists veterans with VA loans, and author of a soon-to-be-released guide on VA loans.