Sometimes past credit problems can be easily explained and a letter of explanation from the borrower may be appropriate. The security or collateral for residential mortgages is real property. These properties can be used for primary residence , second homes and investment . Before lenders issue a loan commitment, they want to know the value of the property so that they can assess the overall risk of the loan. An independent appraisal on the property is the most effective approach in determining the value.
Appraisals use three approaches in the valuation analysis.
The value of the land plus the cost of the improvements less depreciation. Determines the value based on the rental income that can be derived from the property. Although all three approaches are considered in an appraisal report , the market value approach is usually given the most weight because it reviews the most current sales surrounding the property. Most appraisals begin with a physical inspection of the property by a professional appraiser. During the inspection, the appraiser measures the property, locates the rooms on a drawing, and notes the overall condition of the property and surrounding neighborhood.