Understanding Appraisal Process When Buying or Refinancing a Home
One of the most critical parts of getting a mortgage is Appraisal. The purpose of an appraisal is to confirm the sales price for the lender.
What is an Appraisal?
An appraisal is a professional estimate of the value of the property that you are planning to purchase. The person who does the appraisal is called an appraiser.
Why Do We Need an Appraisal?
Lenders always require a home appraisal before they will issue a mortgage.
They do this to protect their investment: if the actual market value of the property is lower than the sales price, and you default on your mortgage, the lender won't be able to sell the property for enough money to cover the loan.
While Refinancing, you might get a Property Inspection Waiver (PIW). It happens when the loan amount is significantly lower than the estimated value of the home. Don't count on it even if your loan to value ratio is too low since it rarely occurs.
Be Sure to Ask for a Copy
While you pay for the appraisal, it is done to protect the lender, not you the buyer, and the report is usually sent directly to the lender. You can request a copy be sent to you as well, but it doesn't always happen automatically, so you have to ask for it.
Cost & Time
It usually costs between $450-$600 for an appraisal, depending on your property type and location. More expensive homes or homes that have more than 1 unit cost higher to get appraised.
The appraisal process usually takes anything between 3-10 business days. The appraiser sends the report to the mortgage lender, but you have a right to receive a copy of the appraisal report if you have paid for it.
How Does the Appraiser Arrive at the Property Value?
The most important component in arriving at the value is what is called comparable sales (or comps in short).
These are similar properties usually located within a mile and have sold in last 90 days. The appraiser compares mainly the below features of the property against the comparables to arrive at the value
- Square footage
A large 4 bedroom home in an area where mostly 3 bedroom homes have recently sold will have a higher value, and a house with peeling paint and a patchy lawn in a well-manicured suburb will appraise at a lower amount than otherwise similar properties.
What If the Property Appraises for Less Than the Sales Price?
While deciding your loan amount as a percentage of the property price, the lender will pick the lower of the Sales Price or Appraised Value. So if the property appraises at same or higher than the sales price, you could still get the same loan amount you applied for, but if it appraises for less, the lender will reduce the loan amount to match the value of the home according to the appraisal.
Though it can cause everyone involved in the transaction to panic; note that there are several options for the deal to happen still. If you wrote your offer contract to include a contingency requiring the property to be valued at the selling price or higher, you can:
- Walk away from the deal
- Negotiate with the seller to reduce the selling price
- Put more money down to cover the difference between appraised value and the selling price
- Dispute the appraisal: find out what comparable sales were used and ask your agent if they are appropriate, often your agent will be more familiar with the area than the appraiser and can find additional comps to support a higher valuation.