An appraisal is key component in the home buying process, especially if you are using a mortgage. Those paying cash for a home have the option to waive an appraisal, but many still get one. So what is an appraisal and what purpose does it serve for loan approval? An appraisal is designed to determine the objective value of a home, which is very important for the bank providing financing.
A seller may feel their home is worth xx dollar amount. (Likely a few more x’s than two.) During negotiations, the buyer came to a place of what they were willing to pay for it. The appraiser comes in as a neutral third party to determine the fair market value of the property. If the buyer is obtaining a mortgage to purchase this property, the bank will look at the lesser value between the appraisal and sales price when it comes to their terms.
The lesser value?
The easiest way to explain this is with an example. Let’s say you are in contract to purchase a property at $350,000. The appraisal comes in at $345,000. For the purposes of your loan file, the only number relevant now is $345,000. Your down payment will be based on this lower amount. This means that if you don’t renegotiate your price – which you absolutely have the opportunity to do – you will have to pay that $5,000 difference aside from your loan. As in, in addition to your down payment and closing costs.
In this scenario, your realtor will go back to negotiations with the seller’s realtor to get a reduced sales price.
What happens if it appraises high?
You may be wondering what happens if things go the other way? Do you have to pay the higher amount? No way! The bank looks at the lesser value, which in that case would be the purchase price. The beauty of this scenario is that the appraisal belongs to the buyer, so you don’t have to share the report with the seller or their agent. Your realtor would simply state that we have a satisfactory appraisal and you get to feel good about getting a good deal.
Other Important Info from the Appraisal
In most cases, your lender will only have the appraisal inspection on the property. They will not review the full home inspection or any others you choose to do on the property – unless you’re using VA financing, which will require review of the pest inspection. So they are looking to the appraiser to call out any major health and safety issues. If the appraiser does make his/her value subject to the repair of anything – this will need to be handled in order to gain full loan approval, also known as a clear-to-close.
The appraiser will also need to state the estimated cost to rebuild the home so the underwriter can verify you have sufficient homeowner’s insurance in place to cover your home in case of a major hazard.
How are Appraisals Ordered?
Appraisal Management Companies were designed to help keep the appraisal process objective. The bank will order the appraisal through this third party and therefore doesn’t have direct contact with the appraiser. The goal here is to prevent the bank from influencing the appraiser on his or her report. Once the order is placed, it is randomly assigned to an appraiser in the area. The Appraisal Management Company will also review the report for Quality Control before submitting it to the bank.
Appraisals for Refinances
An appraisal is required for any type of mortgage transaction – including refinances. If you are interested in refinancing your home, whether it be for the purposes of lowering your interest rate, payment, loan term or with the goal of taking cash out – the value of your home and the appraiser’s inspection are equally important to the bank.