When you buy a home, the seller asks a certain price, you agree – or negotiate. You sign a contract and that’s that, right? Not exactly. If you are taking out a home loan to buy your property, the lender will require an independent appraisal. Similarly, if you are refinancing your home, the lender usually requires an independent appraisal. Why? If you wonder why home appraisals matter, read on.
What An Appraisal Is Not. It’s not a home inspection and it’s not a comparative market analysis (CMA). The home inspection is something the buyer arranges for, usually with their Realtor’s® advice, to find out if there are any issues with the home, such as roof leaks, cracks in the foundation, or non-functional appliances. A Realtor® prepares a CMA from available data for clients (buyers and sellers) so they can make a reasonable offer or set a competitive listing price. The lender (or wise buyer in a cash deal) orders an appraisal to establish the value of the property.
The Price Is The Value. Maybe, maybe not. Think like a lender. You have clients who want to borrow money to buy a home. They have the credit scores, income and assets to qualify for a home loan. They bring you a signed purchase agreement. How do you know the property is worth the amount agreed upon in the contract? Time for an independent valuation (appraisal) by a qualified appraiser.
What’s A Comp? If you are hoping that this means the appraisal is free, sorry but no. Comp stands for comparable, as in comparable properties. As one part of the appraisal process, the appraiser researches similar properties that have sold recently in the same area. The appraiser will make adjustments for differences in the properties to arrive at the comparable value for the home you are purchasing or refinancing.
What Else Does The Appraiser Consider? Square footage. Number of bedrooms and bathrooms. Age. Condition. Home improvements. While the appraiser isn’t specifically looking for defects, health or safety issues will show up on the appraisal. The appraiser takes photographs, too. A lot of them. This is all part of documenting the home.
Independence Matters. You may have noticed that I’ve used the word “independent” several times. It’s important to the accuracy and fairness of the appraisal that the appraiser be independent. That means that no one involved in a financed transaction – borrower, seller, Realtors®, lender – can choose the appraiser. At First Choice Loan Services Inc., we have an in-house appraisal desk to facilitate a smooth appraisal process, but we do not employ appraisers and we do not choose a particular appraiser for an appraisal.
What If You Don’t Agree With The Appraisal? If the appraisal comes in at or above the sale price, all is well. If it’s lower, you have to decide what you want to do. Your lender will use the lower of the contract price or appraised value for your loan calculation. Start by talking to your Realtor®. Find out if there are enough sales of similar properties in the same area at higher prices to warrant a challenge, then work with your mortgage loan originator on how to dispute the appraisal. Ask if your Realtor® will talk to the seller’s Realtor® about re-opening the price negotiations. If there’s not enough evidence to support a challenge and the seller won’t budge, there may be 2 more options: Once you know how much you can borrow, you may be able to make a larger down payment, or pay for private mortgage insurance (PMI) to protect the lender’s investment. Think hard before you take either of these steps. The house may be overpriced.
Peace Of Mind. Buying a home is the biggest financial transaction most of us will ever make. While it’s common to feel some stress and even a touch of buyer’s remorse, an independent appraisal will give you the confidence that your dream home is worth the investment of your hard-earned dollars, now and for years to come.