One of the standard procedures before making a loan is to determine the value of the property. This is done by an appraisal, which determines a value for the property for loan purposes. The lender may have its own appraisers (in-house appraisers), or it may use an independent (outside) appraiser.
There are several different types of appraisals, some of which are highly complicated and require the appraiser to complete special education and licensing procedures. Appraising a home, especially a tract house or condominium, is relatively easy. The most common appraisal method used is to compare similar properties that have recently sold. A computer database with this information is available to the appraiser, who physically inspects the subject property to assess its condition. The property is then valued based on the sale prices of similar properties in the area, called comparables or comps. If the comps are not exactly the same model as the subject property, a price adjustment is made for square footage, lot size, and any amenities, such as a swimming pool or room addition.
For certain types of loans in which there is an extremely low loan-to-value ratio, the lender may even use a desktop appraisal. With this method, the values of comparable properties are checked on a computer and there is no physical examination of the property beyond a drive by by the appraiser.
The amount of money you ask the bank to lend you compared to the value of the property is the loan-to-value ratio. The lower the ratio, the lower the risk for the lender. For you, the lower the ratio, the lower your credit score can be.
Example: If you wanted to borrow 50% of the value of the property, your credit score would not need to be as high as if you wanted to borrow 90%.
Note: As you have probably noticed by now, your credit score keeps coming up in all phases of the loan. A high credit score will not just give you a better chance to get a loan, it will also save you money on certain fees and on interest.