Refinancing your mortgage can be a smart way to lower your monthly payments, tap into your home's equity or secure a more favorable interest rate. However, the success of a mortgage refinance is often influenced by one crucial aspect: the refinance appraisal.
An appraisal for a refinance determines the current market value of your home, impacting the feasibility of your refinance and the terms you can secure. Let's dive into what you need to know about VA refinances and appraisals.
Appraisal vs. Refinance Appraisal
An appraisal for a purchase loan is conducted as part of the initial homebuying process. Its main purpose is to assess the market value of a home to ensure the mortgage amount does not exceed the value of the property. This process helps lenders determine the loan-to-value ratio, which is essentially how much money you're borrowing compared to the home’s purchase price.
An appraisal for a refinance serves a slightly different purpose. While it determines the property's current market value, it also evaluates how much equity is in the home and if your home value will cover your new loan amount. This may affect the interest rate offered or the amount of cash a homeowner might be able to take out if doing a cash-out refinance.
Both appraisals use a similar method to assess value and cost around the same price, but the refinance appraisal is more focused on the homeowner's equity and refinancing goals.
Do I need an appraisal to refinance?
Typically, you’ll need an appraisal when refinancing your home. This confirms your home’s value and helps determine the new loan amount. However, there are refinance options that do not require appraisals, so be sure to talk to your lender and see if your specific refinance needs a home appraisal.
What do home appraisers look for when refinancing?
Refinance appraisers evaluate your home’s overall condition, including your house’s size, where it is located and any improvements you’ve made while living there.
Here's a breakdown of key factors appraisers look for during a refinance appraisal:
- Exterior condition and materials: The exterior condition of the siding, roofing, windows and doors.
- Interior condition and upgrades: The condition of interior floors, walls, windows, doors and the quality of any upgrades or renovations.
- Size and usable space: The total square footage of your home, lot size, the living area, number of bedrooms/bathrooms and the usability of the space (e.g., functional layout, finished vs. unfinished areas).
- Systems efficiency and functionality: The condition and age of major systems like heating, cooling, electrical, and plumbing, along with any home's energy efficiency and smart home upgrades.
- Neighborhood and location: Your home’s location, quality of nearby schools, proximity to amenities and overall neighborhood condition.
- Comparable sales: Your home is compared to similar homes recently sold in the area. Appraisers may adjust the valuation based on differences between your home and the comps.
- Safety and code compliance: Any visible signs of safety hazards or non-compliance with local building codes.
- Overall market conditions: The current state of the real estate market in the area, including supply and demand dynamics, recent trends in property values and economic factors.
The purpose of a refinance appraisal is to give the lender a clear picture of the property's value and condition to make an informed lending decision.
The VA Has 2 Major Refinance Options
- Interest Rate Reduction Refinance Loan (IRRRL)
- Cash-Out Refinance
The IRRRL, also known as a Streamline refinance, allows qualified homeowners with an existing VA mortgage to refinance into a lower interest rate. The Cash-Out refinance option allows qualified homeowners with any loan type to refinance into a VA loan, snag a lower rate and extract cash from their home equity.
Let’s take a look at the appraisal requirements for each VA refinance type.
VA Streamline Refinance Appraisal
The VA Streamline refinance is meant to be just that—streamlined. The process is less involved than a VA purchase loan, especially if you obtain your Streamline refinance from your original lender. The VA's requirements regarding credit scores and appraisals for Streamline refinances are a bit looser. In fact, the VA doesn't require a credit score check or an appraisal for a Streamline refinance.
But many lenders will want to see a credit score check and appraisal for VA Streamlines. In the current lending environment, some lenders want to see a score of at least 620 from prospective borrowers. The topic of appraisals can get trickier.
There are situations where a lender will process a VA Streamline with no appraisal. In some cases, it may depend on who your lender is on the original mortgage. Other times, a lender may move forward without an appraisal if the borrower has some home equity and the lender can find a financial institution willing to purchase the loan in the secondary market.
It's accurate to say that some VA lenders, including Veterans United, can process a Streamline refinance with no appraisal. But it really depends on your unique circumstances.
VA Cash-Out Refinance Appraisal
VA Cash-Out refinance appraisal guidelines are a little more straightforward. The VA requires a credit check and an appraisal on all Cash-Out refinance loans. These loans require the same underwriting process that's applied to VA purchase loans.
Finding your home’s value is very important when Cash-Out refinancing since the cash you receive is directly based on the amount of equity in the home.
The potential source of confusion is whether a lender can refinance up to 100% of the loan or have a lower cap. Much like the Streamline appraisal issue, it depends on the lender and your specific situation.
How do I prepare for a refinance appraisal?
Preparing for a refinance appraisal can help you maximize your home’s value, potentially leading to more favorable refinance terms. Some steps you can take to prepare include enhancing your curb appeal, making any necessary repairs, updating fixtures and decluttering. The best advice is to showcase your home's strengths and potential, making it easy for the appraiser to see its value.
What will fail a refinance appraisal?
Typically, most lenders will not approve a refinance if your current home’s value is lower than your loan balance. The VA has some options for low appraisals, including the VA Tidewater Initiative and Reconsideration of Value.
However, some key appraisal issues that can prevent your lender from financing your mortgage refinance often revolve around the condition and marketability of the property. Significant structural problems, such as foundational issues or major water damage, are critical concerns that can drastically reduce a home's appraised value.
Older or inefficient systems in the home may indicate a need for expensive updates and raise questions about the home's overall maintenance. Any neglect, such as peeling exterior paint, an unkempt yard or significant wear and tear, can suggest a lack of upkeep and decrease the value.
The presence of mold, lead paint or asbestos, alongside any building code violations or illegal additions, are serious concerns that can lower the appraisal value. These issues often require immediate and costly remedies to meet legal and safety standards, making the property less attractive for refinancing.
By addressing potential issues upfront and showcasing your property's best features, you can enhance your chances of securing a favorable home appraisal value, and ultimately positioning yourself for more advantageous refinancing terms.
Talk to a Veterans United VA loan expert at 1-800-884-5560 to discuss your VA refinance options today!
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