real estate appraisals
10. Real estate appraisals and Loan to Value
Lenders will want to know the value of the property you are taking the mortgage against. The property will be pledged as collateral for the loan, which means if you default on the loan, they take the property and sell it to get their money back. They want to be sure the property is worth what you are paying for it. Therefore, they will order an appraisal, which you will have to pay for. Appraisals will usually cost several hundred dollars, and are conducted by an unbiased and professional real estate appraiser.
The lender will not want to loan you more than about 85% of the value of the property. That leaves a buffer if for some reason the property value declines or if they are saddled with big liquidation fees because they have to foreclose on the loan and take over the property. Some will loan you greater amounts but because the lender’s risk of losing money in a foreclosure is greater, they will ask for a higher mortgage interest rate.
Here’s one more thing to know about loan to value. If you only mortgage 75-80 percent of the value of the property, that means you will have a bigger cash down payment. It also means you’re a very low risk for loan default and foreclosure because of all the money you have tied up in the property. That means you can probably qualify easier for the loan amount you want and you can also probably get the lowest possible mortgage interest rate.
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