The main thing you folks want to remember about appraisals prepared for mortgage lending is that the beneficiary of those appraisals is the lender whose money is being used to finance the mortgage. These appraisals are not being developed for the buyer to verify their purchase decision or for the loan originator to close a deal.
I say that by way of explaining that the decision of what type of inspection process is used to develop the appraisal originates at the lender. The big lenders use automated underwriting systems that recommend which types of appraisals to use for the different mortgage programs. Other lenders manually underwirte their loans and come up with similar criteria for which loan applications need a more thorough appraisal and which ones don’t. This is another expression of risk management, which is the current buzzword among lenders.
For example, if the borrower’s credit is good and the loan-to-value ratio being sought is below a certain point (like 80% of a purchase price), these lenders don’t see any added value in spending the extra $50 to have the appraiser physically measure the structure and conduct an interior inspection. It’s the lenders’ money and therefore it’s basically their call. The only exception is that the appraiser is SUPPOSED to be able to retain the right to bump the process up to the more thorough inspection if they think it’s necessary. That said, the appraisers usually don’t get paid additional if they exercise that discretion; and they are usually discouraged from exercising the discretion because it tends to slow down the process.
An appraiser will often insist on increasing their process to include an interior inspection if they suspect there are problems with the interior or if the size of the structure obviously doesn’t jibe with the information in their public records sources. Another reason would be if the borrower has mentioned recent interior upgrades that would affect the value. In other words, if they think they have a reason to do so they are supposed to do it.
It’s a given that an appraisal with no interior inspection requires the appraiser to make an assumption about the quality and condition of the interior; most appraisers assume the interior is consistent with what they see on the exterior. The fact that the appraisers are making that additional assumption is included in those reports, along with the appropriate notification that if that assumption proves to be incorrect it would probably have an effect on their value conclusion.
