In the process of buying a home, one key component that often comes into play is the home appraisal. This is an essential step in the mortgage lending process, acting as a safeguard for both the buyer and the lender. The main objective of a home appraisal is to ascertain the market value of a property, taking into account its present state, location and recent transactions involving comparable properties. Through this assessment, the lender, buyer and seller can gain a better understanding of the property's worth, which can significantly influence the mortgage loan's approval, terms and rate.
Why is a home appraisal necessary?
It helps protect the mortgage lender. Before approving substantial loans, mortgage lenders need to confirm that the value of the property justifies the amount being sought. In the event that the borrower fails to repay the loan, the lender will need to sell the property to recover their losses. If the house is appraised at lower than the loan amount, the lender could potentially lose money in such circumstances.
On the other hand, home appraisals also benefit the buyer. By offering an impartial assessment of the home's value, it safeguards them from paying excessively for a property. If an appraisal comes in low, it may give the buyer leverage to negotiate a lower price or opt out of the deal if the seller refuses to lower the price.
How appraisers determine the fair market value of a home
Appraisers determine a home's value through a meticulous process that involves several key factors. They start the appraisal process by examining comparable sales or "comps" – properties similar to yours in terms of size, location and features that have recently been sold in your local real estate market. The value of a property is greatly influenced by the size of the land and the dimensions of the home on it. The age and condition of your home also play a crucial role; newer and well-maintained homes tend to be valued higher. Home improvements and upgrades can increase the value, especially if they are high-quality and relevant to current market trends. The location of your home, the desirability of your neighborhood, and current market conditions are also considered. In essence, an appraiser's evaluation is a comprehensive assessment that takes into account both the intrinsic qualities of your home and external market factors.
How is a mortgage affected by the results from a home appraisal?
The outcome of a home appraisal can significantly impact the dynamics of a mortgage agreement. Should the appraisal value exceed the purchase price, it may prove beneficial for the buyer as they could immediately gain more equity in the home. Nonetheless, if the appraised value of the home is less than the mutually agreed purchase price, it can lead to potential issues.
The appraisal is lower than the offered price, now what?
Usually, the mortgage loan amount is the lower value of either the appraised value or the purchase price. If the property's appraised value is the lower of the two values, the buyer will need to find a way to resolve the monetary difference. Here are a few options to resolve a low appraisal.
Review the appraisal report
The initial step involves both parties meticulously examining the appraisal report. Sometimes a low appraisal is due to errors in the report, such as incorrect property details or overlooked comparable sales. Should there be any inconsistencies discovered, they can be challenged.
Rebut or appeal your appraisal
If an appraisal is inaccurate, you can rebut or appeal it. Start by thoroughly reviewing the appraisal report for any errors or discrepancies such as incorrect property details or inappropriate comparable sales. If you find any, gather evidence to support your case, such as documents showing the correct square footage or information about more suitable comparable sales in your area. Then, write a formal, detailed letter to your lender outlining the issues and providing your supporting evidence. Upon review, if your lender agrees with your points, they will forward them to the appraisal company for reevaluation. If your rebuttal is unsuccessful and you still believe the appraisal is incorrect, consider getting a second appraisal. Bear in mind that this procedure demands patience and professionalism, and may incur extra expenses.
Get a second appraisal
If there are no errors in the report. but the buyer and seller still disagree with the valuation, they might consider getting a second appraisal. A second appraisal is essentially a repeat of the initial appraisal process with a different appraiser. The aim is to confirm or challenge the results of the first appraisal. This can be costly and time-consuming.
It's important to note that the second appraisal might not necessarily result in a higher valuation. In fact, it could be lower, the same, or higher than the first, depending on the appraiser's assessment and the comps used.
Buyer and seller renegotiate the purchase price
If the appraisal is accurate and the value of the property remains lower than the offer, renegotiation becomes necessary. Ideally, the seller would agree to lowering the sales price to align with the appraised value. But, the seller may not favor this approach.
Split the difference
In case the seller is not open to reducing the price to the appraised value, an alternative solution could be for both the buyer and seller to compromise and meet in the middle. They can choose to divide the discrepancy between the appraised value and the agreed selling price equally.
Increase down payment
If the buyer is financially capable and keen on securing the property, they could opt to cover the difference between the appraised value and purchase price by increasing their down payment.
Buyer exercises their appraisal contingency
In most real estate agreements, a real estate agent usually incorporates an appraisal contingency. This allows the buyer to nullify the contract without any penalties if the appraisal turns out to be lower than expected. If all the aforementioned alternatives fail, the buyer has the choice to implement this clause.
The importance of a home appraisal cannot be overstated. It assures the lender that the property is a sound investment and ensures the buyer does not overpay. A clear understanding of this process can help buyers navigate the complexities of home buying and secure a mortgage that aligns with both their financial capabilities and the home's true value.
If you have any questions on this process or are interested in loan options that are available to you, contact us today.
