What is a requirement for lenders regarding the appraisal of collateral?

The requirement that an appraisal of collateral must take place before loan closing is rooted in the need to assess the value of the property being used as collateral for the loan. This ensures that the lender is making a sound investment and has protection against potential losses. An appraisal provides an objective valuation of the property, which is crucial for determining the loan amount and the borrower's capacity to repay the loan based on the property's value.

Conducting the appraisal prior to closing allows the lender to evaluate whether the collateral meets their lending criteria and to verify that the property is worth the amount being loaned. If significant issues arise in the appraisal, the lender can make informed decisions about the loan, such as adjusting terms or declining the loan altogether.

In contrast, while other options might refer to standards or practices within the mortgage industry, they do not align with the specific requirement regarding the timing of the appraisal in relation to the loan process. This emphasis on appraisals before closing is critical for both the lender’s risk management and the protection of the borrower's interests.