Are Home Appraisals Required for Mortgage Loans in California?

Is a home appraisal required for a mortgage loan in California? This is a common question among first-time home buyers, and also a common source of confusion.

The short answer is yes, a thorough appraisal conducted by a licensed appraiser is almost always required for mortgage loans in California. Below, we will talk about why it’s necessary and how it can affect you as a home buyer.

What Is a Home Appraisal?

The Merriam-Webster dictionary defines an appraisal as “a valuation of property by the estimate of an authorized person.” You can appraise any kind of asset, whether it’s a diamond ring or an antique car or a luxury home.

In a real estate context, home appraisals are conducted to determine the current market value of a home. These assessments are conducted by professional appraisers who receive special training and licensing.

The appraiser’s primary goal is to figure out how much a particular home is worth in the current real estate market. They do this by looking at similar homes that have sold recently in the same area, and comparing those sale prices to the house that’s being appraised.

Note: Home appraisals and inspections are two different things. Here’s a related article on our website that explains why the inspection is usually optional.

How It Works for Conventional Loans

A conventional mortgage loan is one that is not insured or guaranteed by the federal government. The term “conventional” is used to distinguish these “regular” home loans from programs such as FHA and VA, which do receive government backing.

In California, home appraisals are usually required for conventional mortgage loans, especially in purchase scenarios. The appraiser’s report gives the mortgage lender better insight into the actual market value of the home. The lender wants to avoid issuing a loan that exceeds the market value of a property, and that’s where the appraisal comes in.

Conventional loans are commonly sold into the secondary mortgage market through Fannie Mae and Freddie Mac. These government-sponsored enterprises (GSEs) purchase loans from lenders, securitize them, and then sell them off to others investors.

Fannie and Freddie have specific requirements for the loans they purchase, and a home appraisal is one of those requirements.

As it states on the Freddie Mac website: “Freddie Mac requires that the [mortgage] Seller obtain an appraisal report that accurately reflects the market value, condition and marketability of the property.”

They go on to define the market value as: “The most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale…”

Bottom line: If you use a conventional loan to buy a house in California, an appraisal will probably be required. It’s needed to determine the market value of the property. And, as the home buyer, you will probably be the one who pays for that service.

Government-Backed Mortgage Programs: FHA and VA

Government-backed mortgage programs usually have an appraisal requirement as well. This is true for both the VA and FHA home loan programs, the two most popular types of government-backed mortgages.

Home appraisals are required for all FHA loans in California, and for a couple of reasons. The primary reason is to determine the value of the house, as we discussed in the “conventional” section above.

But with an FHA-insured mortgage loan, the appraiser must also review the condition of the home, to ensure it meets all requirements set forth by the Department of Housing and Urban Development (HUD).

The same is true for VA loans, which are popular among military members and veterans. In California, a home appraisal is nearly always required for VA-guaranteed mortgage loans.

Why Appraisals Are Required

We talked about the primary purpose for the home appraisal. The appraiser is trying to determine how much a particular property is worth, based on current conditions within the real estate market.

He or she will examine the home in question and compare it to others that have sold recently within the same area. In doing so, the appraiser can come up with an educated guess as to the home’s current market value.

In California, mortgage lenders usually require home appraisals as part of the loan review and underwriting process. It’s a common requirements and an industrywide standard. Regardless of what kind of mortgage loan you use, you will most likely need an appraisal to complete the process and close the deal.

Mortgage lenders bear a certain level of risk when issuing home loans to borrowers. Additionally, there are secondary requirements imposed by organizations like Freddie Mac, Fannie Mae, and the Federal Housing Administration.

It all boils down to one thing – home appraisals are required for nearly all California home loans.

The Home Buyer’s Role in All of This

As a home buyer in California, you won’t really have an active role in the appraisal process. You’ll probably have to pay for it, which is customary. Buyers usually foot the bill. But there’s not much for you to do at this stage, other than “wait and see.”

The appraiser will evaluate the property, coordinating with the homeowner to gain access. The appraiser will then conduct a thorough review of comparable sales in the area, to get to a point of comparison.

Finally, he or she will issue an appraisal report with the estimated market value of the property in question. This report is delivered to the mortgage lender and usually ends up in the loan file or package. Aside from paying for the appraisal, the home buyer has a limited role in this process.

Have mortgage questions? We’ve been helping California home buyers and homeowners with their mortgage needs for nearly two decades. Please contact us if you have questions about obtaining a mortgage loan to buy or refinance a home. We look forward to helping you!