Property Appraisal and Valuation Flashcards

How is the Loan-to-Value (LTV) ratio calculated, and what is its significance to mortgage lenders?

Answer: LTV = loan amount / appraised value (or purchase price, whichever is lower); a higher LTV indicates greater lender risk

LTV is calculated by dividing the loan amount by the lower of the appraised value or purchase price; a higher LTV means the borrower has less equity, representing greater risk to the lender if the borrower defaults.

When an appraisal comes in lower than the agreed-upon purchase price, what is the typical mortgage lending implication?

Answer: The lender will base the loan on the lower appraised value, requiring the buyer to cover the gap or renegotiate the price

Lenders base the loan amount on the lower of the appraised value or purchase price, so a low appraisal means the buyer must either increase their down payment to cover the gap, renegotiate the sales price, or potentially cancel the transaction.

What is the primary function of an Appraisal Management Company (AMC) in the mortgage lending process?

Answer: To act as an independent intermediary managing the appraisal process between lenders and appraisers, ensuring independence

AMCs are independent intermediaries that manage the appraisal ordering, assignment, and review process on behalf of lenders, helping ensure appraiser independence as required by federal regulations and the Home Valuation Code of Conduct.

Under appraiser independence requirements established by the Dodd-Frank Act, which of the following actions is PROHIBITED?

Answer: A lender or its agents pressuring, coercing, or incentivizing an appraiser to reach a predetermined value

Dodd-Frank strengthened appraiser independence protections by explicitly prohibiting lenders, mortgage brokers, real estate agents, and their agents from coercing, influencing, bribing, or pressuring appraisers to adjust value opinions to facilitate a loan transaction.

What is a 'drive-by' or exterior-only appraisal (Form 2055), and when is it typically used?

Answer: A limited appraisal in which the appraiser inspects and photographs only the exterior without entering the property

Form 2055 is a limited appraisal report where the appraiser conducts an exterior-only inspection, relying on public records and comparable sales data for interior information, and is sometimes used for lower-risk refinance transactions.

What is the difference between 'as-is' value and 'as-improved' (subject-to) value in a property appraisal?

Answer: 'As-is' reflects the property's current condition and value; 'as-improved' reflects its value after specified repairs or improvements are completed

'As-is' value reflects the property in its current physical condition, while 'as-improved' or 'subject to' value reflects what the property would be worth once specified repairs, renovations, or construction are completed — critical for renovation loan products like the FHA 203(k).

For single-family residential mortgage appraisals, which valuation approach is typically given the greatest weight and why?

Answer: The sales comparison approach, because it directly reflects recent actual buyer behavior and market pricing

For single-family residential properties, the sales comparison approach is given the most weight because it is derived directly from what buyers have actually paid for similar properties in the current market, making it the most reliable indicator of market value.