How an appraisal can affect your home loan
After months of searching, you’ve finally found the perfect home and can already picture your family relaxing in the den. The last thing you want is a problem during the loan process to derail your dream. Understanding the home buying process is critical to making things go smoothly, and one key item you need to know is the home appraisal.
What is an appraisal?
When purchasing a home and applying for a mortgage, one of the first steps the lender will do is order an appraisal. The house will need to be evaluated by an independent, unbiased professional appraiser in order to estimate the home’s current market value. A home appraisal is an expert’s opinion of the value of a given property.
What is an appraisal based on?
The value of a home is based on its general condition and age, the location, and it’s size. The number of bedrooms and bathrooms is an important factor, as are any major structural improvements, like remodeled rooms or additions. Amenities are also a consideration—Is there a swimming pool on the property, or a boat dock? Features such as hardwood floors or majestic views are also positive influencers when it comes to value.
The purchase price of comparable properties within in a given radius is one of the most critical components, however. These prices demonstrate what the market is willing to pay for a home similar to the one being appraised and generally carry the most weight.
Because the home will be used as collateral for the mortgage loan, the mortgage company needs to be assured that the amount of money being loaned to the buyer doesn’t exceed the value of the home, should the buyer default on the loan and the bank have to sell the property to recoup their money. The lender will typically order the appraisal, but the cost of the appraisal, generally between $300-$400, is paid by the buyer.
The appraiser will visit the home and conduct a visual inspection of the interior and exterior. He’ll take some measurements and note any conditions that might positively or adversely affect the property’s value. He’ll research recent home sales in the areas and then deliver a final appraisal report that includes an opinion of value.
What if the appraisal is lower than the sale price?
If the appraisal value is lower than the sale price, you’ve reached a fork in the road. The mortgage lender is not willing to approve a loan for more money than the home is worth. You can either use a low appraisal to encourage the seller to lower the price of the home, or you can choose to make a larger down payment so the amount you need to borrow is less than the appraised value of the home.
If you feel strongly that the value was understated, you could also challenge the appraisal or get a second opinion. Sometimes home values are depressed due to foreclosures or short sales in the area. You may be able to convince your appraiser that this was the case with some of the comparables while, at the same time, prove that your home is in significantly better condition than those that were sold at a discount.
What if the appraisal is higher than the sale price?
If the appraisal value is higher than the sale price, this transaction can keep moving along as planned. The expert opinion of the appraiser is that the value of your soon-to-be new home is higher than what you’ve agreed to pay. Congratulations—you already have equity in your new home!
The value of the appraisal
The appraisal process isn’t meant to put a roadblock between you and your dream home. It’s there to protect both you and the lender. You don’t want to unknowingly overpay for a home, especially if you need to sell it in the short-term. It could be worth less than you owe and that’s an unfortunate situation for everyone. From the bank’s perspective, they don’t want to own a house that they can’t sell to cover the outstanding loan balance in the event of a loan default.
In the home-buying process, the appraisal is just one of many things that need to be done in order to get to the closing table. Regardless of whether your appraisal comes in high or low, understanding the process is your best defense to managing the hurdles until you get to your home sweet home.