When divorcing, should you obtain an appraisal or a Comparative Market Analysis? What's the difference?
The two most common methods for obtaining real property value are obtaining an appraisal from a licensed appraiser or having a real estate professional provide a CMA— but what's the difference between the two? Both methods are an opinion of value, and no two will ever give you the same value. The primary difference is perspective.
Understanding the primary difference of valuation methods as well as the requirements for obtaining mortgage financing may eliminate obstacles and frustration during the divorce settlement process.
- A Comparative Market Analysis (CMA) is completed by a licensed real estate professional who bases their opinion of value on what the property may potentially sell for in the current real estate market.
- An appraisal is completed by a licensed residential appraiser who bases their opinion of value on recent comparable home sold sales data. Though licensed appraisers use comparison methods similar to an agent's CMA, unlike a real estate agent, appraisers have no vested interest in the sale of the property.
While both opinions of value are valid, it is crucial to understand the perspective of each opinion and how the two methods apply to the current situation of the marital home. For example, when considering the option of one spouse retaining the marital home and refinancing, an appraisal may be the better option. On the other hand, if considering a sale of the marital home, a CMA may be a better option.
How does a mortgage company value real property when mortgage financing is needed?
When a mortgage is needed to refinance the marital home, a mortgage lender must order their independent appraisal from a licensed appraiser. The lender cannot use an appraisal ordered by the homeowners or attorney for settlement purposes. This may cause issues when an Equity Buy-Out is needed, and a value was already established during the settlement process because the values can be significantly different.
John and Mary had their marital home appraised by a licensed appraiser during the divorce settlement process, and the valuation came in at $750,000. There is an existing mortgage on the home with a balance of $500,000, leaving $250,000 to be divided during the settlement process. Mary hopes to retain the marital home and agrees to refinance the current mortgage and pay John his equity share of $125,000.
During the refinance process, Mary's mortgage lender orders their own independently owned appraisal, and the value comes in at $710,000—a difference in the value of $40,000. Depending on the circumstances of Mary's financial picture, she may not be able to access the entire $125,000 in equity needed to acquire John's ownership interest.
When mortgage financing is needed to refinance the marital home, it would be prudent to involve a Certified Divorce Lending Professional and use a lender-owned appraisal. This way, all parties involved are using the same valuation, and you may be in a better position to avoid any hurdles that come up during the process.
Obtaining a CDLP™ Divorce Mortgage Planning and Real Property Report can provide the divorce team and the divorcing homeowners with an in-depth look at the real property details and the financial outlook for obtaining mortgage financing. Certain aspects of the real property, beyond the borrower's appraised value or creditworthiness, can affect the ability to effectuate the divorce decree successfully.
It is always important to work with an experienced mortgage professional working with divorcing clients. A Certified Divorce Lending Professional (CDLP™) can help answer questions and provide excellent advice. Please don't hesitate to reach out to me directly to provide additional information.
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