In housing finance, clarity around property valuations is vital, as different methods bring unique insights and regulatory requirements. Knowing when to use a residential evaluation instead of a full appraisal can be a significant factor in ensuring guidelines are met and smoother transaction timelines. Here, we’ll dive into the distinctions between these two methods, focusing on how they benefit both lenders and borrowers.
Defining Residential Evaluations
A residential evaluation, such as Valligent’s eVAL, is a streamlined alternative to a traditional appraisal. Evaluations offer a way to assess a property’s value without the more intensive requirements of a traditional appraisal, which can make them especially useful for certain types of loan approvals, such as moderate-risk loans or properties with average value and complexity.
With eVAL, the process is quick and efficient: a highly trained real estate professional first conducts an inspection of the property, which can be done in person or virtually. Then, an analyst reviews the data and finalizes the valuation. Evaluations can be a cost-effective option when a traditional appraisal isn’t required, helping lenders access reliable information quickly. The eVAL service also adheres to Interagency Appraisal and Evaluation Guidelines (IAEG) and meets regulatory requirements for evaluations, ensuring that even with its shorter timeline, lenders are still in compliance.
Understanding the Appraisal Process
A traditional appraisal, on the other hand, is a more comprehensive analysis of a property’s value, typically required when a home buyer is seeking a conventional or reverse mortgage. Performed by a licensed or certified appraiser, appraisals involve an in-depth examination of the property itself and comparable properties in the area. The appraiser follows rigorous standards outlined by the Uniform Standards of Professional Appraisal Practice (USPAP), which ensure consistency and accuracy across different appraisals.
The appraisal process includes a thorough in-person inspection where the appraiser assesses both the interior and exterior, looks for any special features or upgrades, and considers the property’s condition. Additionally, a licensed or certified appraiser compares the property with recent sales data from similar homes (known as “comps”) to arrive at a market-based value. This detailed approach is why appraisals tend to be the standard for conventional home loans; they provide lenders with confidence in the security of the loan, particularly when larger sums are at stake.
Breaking Down the Key Differences
Though both evaluations and appraisals aim to determine property value, they differ in purpose, regulatory standards, process, and cost. Here’s a closer look at these distinctions:
1. Purpose and Use:
• Evaluation (eVAL): Evaluations like Valligent’s eVAL are ideal for moderate to low-risk situations or specific loan products where a full appraisal isn’t necessary. For smaller loan amounts (under $400K), some lenders may choose an eVAL instead of a full appraisal due to its cost-effectiveness and efficiency. eVAL provides a quicker and more accessible way to confirm that a property meets basic lender criteria for loans such as home equity or refinancing.
• Appraisal: Appraisals provide a thorough assessment of a property’s market value and are generally required for higher risk or larger mortgages. Full appraisals are beneficial for non-conforming or complex properties or if known condition issues exist. By focusing on detailed property characteristics, appraisals help lenders avoid the risk of over-lending based on inflated values, making them critical for loans that involve higher amounts or higher-risk properties.
Portfolio loans held by lenders, where the lender has more control over underwriting standards often have tailored evaluation processes and may still opt for an appraisal for loans under $400K to manage their own risk tolerance levels.
2. Regulatory Requirements:
• Evaluation (eVAL): Although evaluations don’t follow USPAP standards, they do meet specific lender requirements and are conducted according to the Interagency Appraisal and Evaluation Guidelines (IAEG). This offers a regulatory-compliant solution for lenders looking to expedite the lending process for qualifying properties without unnecessary delays.
• Appraisal: Appraisals must adhere to strict USPAP standards, overseen by bodies like the Appraisal Foundation, ensuring uniformity and professionalism. This regulation supports a standardized approach to property valuation, which is why appraisals are frequently used in complex transactions or high-risk loans.
3. Process and Methodology:
• Evaluation (eVAL): Evaluations involve less detailed analysis than appraisals and may at times rely more on market trends and less on direct comparable property research. Often completed in hours or within a business day, eVAL is ideal for transactions where time is of the essence, particularly in home equity lending.
• Appraisal: Appraisals involve a comprehensive examination of the property, including both interior and exterior assessments, as well as an analysis of local market data. They’re conducted by a certified appraiser who follows established steps to determine the fair market value. Valligent also offers GSE compliant hybrid and desktop appraisals, as well as non-GSE desktop appraisals (ValPRAZE) which bifurcates the inspection from the opinion value determination to drive turn time efficiencies.
4. Cost Implications:
• Evaluation (eVAL): Because an appraiser is not involved in the evaluation, they can be more cost-effective than appraisals, making them suitable for smaller loans or refinancing situations.
• Appraisal: Appraisals cost more due to the depth of analysis and expertise required. The price can vary based on factors like property size, location, and specific loan requirements, but the increased cost often aligns with the added risk protection they provide.
Why These Differences Matter
For lenders, these distinctions can inform which valuation method to use based on the loan type, property characteristics, and regulatory requirements. For example, an eVAL may be sufficient for a home equity line of credit (HELOC), while a full appraisal might be necessary for a conventional mortgage on a higher-risk property. The choice between eVAL and appraisal ultimately allows lenders to better manage risk while also meeting the unique demands of each loan scenario.
Borrowers, too, benefit from knowing which process will be used for their transaction, as it impacts the costs, time frame, and level of detail involved. If they know an appraisal will be conducted, for example, they can prepare for a more in-depth valuation of their property. Meanwhile, an eVAL allows for a quicker turnaround and lower costs, which can be beneficial if they’re looking to access equity promptly.
In Summary
While both eVALs and appraisals serve the purpose of assessing a property’s value, they differ significantly in terms of purpose, regulatory oversight, methodology, and cost. These distinctions are important for anyone involved in real estate transactions, helping both lenders and borrowers set appropriate expectations and make informed decisions.
If you’re interested in learning more about Valligent’s eVAL or traditional appraisal services, feel free to reach out or visit our product pages for further details. Whether you need a quick, cost-effective solution or a comprehensive appraisal, Valligent’s suite of services has you covered for your real estate valuation needs.
