With the housing market starting to pick up again, more individuals and couples are purchasing homes. While we typically hear the term home mortgage in reference to the home buying process, many potential home buyers use hard money loans as opposed to conventional mortgage loans. Regardless of which type of loan is used, the home buyer is going to be required to get an appraisal on the home. This article talks about the two most common types of appraisals: as-is appraisal and subject-to-repairs appraisal. It also details the differences between a conventional mortgage loan and a hard money loan.
Appraisals Always Necessary
The one thing that conventional and hard money loans have in common is that they both require an appraisal. Very few, if any, lenders will borrow money for a home purchase without having an appraisal done on the property. An appraisal tells the lender and the home buyer how much the home is worth on the market or how much they might be able to get if it were sold.
Lenders will generally only borrow up to a certain percentage of the home’s appraised value. With conventional mortgage loans, the lender will usually borrow up to 80 percent of the value, whereas hard money loans will only go up to 65-75 percent of the value.
An as-is appraisal is just what the name implies. It’s an appraisal that’s based on the current condition of the home and how much it would sell on the market as is. However, it’s not just based on how much this particular home would sell. They also base it on similar homes in the area and how much they would get on the open market. Several factors go into determining the home’s appraised value such as size of the home, condition of the home, location of the home and sale value of similar homes in the neighborhood.
A subject-to-repairs appraisal is an appraisal that’s based on what the home should be worth after certain repairs are done on the home. If you’re buying a home that’s in need of renovations like new roof, heating system, windows and siding, this will be indicated on the subject-to-repairs appraisal. Say, for instance, you’re buying a home that’s currently valued at $100,000 but in need of the above repairs. If the completed repairs will increase the appraised value of the home up to $150,000, the subject-to-repairs appraisal value will be $150,000.
It’s important to remember that the value is based on the home’s value after the repairs not on the cost of the repairs. Subject-to-repairs appraisals are often done on hard money loans and lines of credit. They’re real common with construction loans because there really isn’t any value until the home is actually constructed.
When a Subject-to-Repairs Appraisal May Be Beneficial
There are situations where subject-to-repairs appraisals can actually save you money. This is particularly true for investors who buy homes with the intention of renovating and selling them. However, it can also help you save money as a home owner. An example would be in a home where you plan on doing some remodeling or adding on extras. Say your home is currently worth $150,000 and you plan on having an underground pool built in the backyard.
The total cost of the pool is $50,000. After having a subject-to-repairs appraisal done, the numbers indicate that the new value of the home will be $125,000. What this tells you is that you will probably not get your money back if you try to sell the home after the pool is installed. Subject-to-repairs appraisals can be used as guidelines to tell homeowners or potential homeowners if certain remodels, renovations or add-ons will be cost-effective.
Conventional Mortgage Loans vs. Hard Money Loan
Although conventional mortgage loans and hard money loans are both utilized to help someone buy a home, there are several differences between the two loan types. In a conventional mortgage loan, the buyer borrows the money from savings and loans, credit unions, banks and similar lending institutions. Many of these lenders sell the loans to larger bank or investment firms.
The money for hard money loans, on the other hand, comes from individual investors, investment firms or lines of credit. They generally stay with the original lender who originated and serviced the loan and are not sold to other lenders. Hard money loans can often be closed within a week, whereas mortgage loans often take weeks to close.
There are two other major differences between conventional mortgage loans and hard money loans. Mortgage loans offer terms from ten years to 30 years. Hard money loans are usually short-term loans that go for about a year and are interest-only loans. The interest rates on hard money loans is usually higher because they go for shorter periods.