What purpose does an appraisal serve during the mortgage process?

An appraisal serves a critical function in the mortgage process by determining the fair market value of the property. This valuation is essential for both the lender and the borrower. For the lender, knowing the fair market value helps assess whether the property serves as adequate collateral for the loan being requested. If the property value is lower than the loan amount, the lender faces increased risk. On the other hand, for the borrower, understanding the true value of the property ensures that they are not overpaying or taking on a loan that exceeds the property's worth.

A thorough appraisal includes an evaluation of the property's condition, comparison with similar properties in the vicinity, and consideration of market trends. This process ultimately influences the loan-to-value (LTV) ratio, a critical factor in determining loan eligibility and terms.

The other alternatives do not reflect the appraisal's role. For example, outlining the terms of the loan agreement pertains to the loan documents, calculating the borrower's income is part of the underwriting process, and verifying the borrower's credit history relates to assessing creditworthiness. Each of these elements plays distinct roles in the mortgage process but does not align with the specific purpose of an appraisal.