If you’re buying a home, you know it can be quite a process. When you want to purchase a house, it takes more than a down payment, a decent credit score and patience. It helps to become a near expert in your market and develop strong negotiating skills.
Think this sounds a bit intense? Yes, maybe a little. But you don’t have to do it on your own. Finding the right lender and a good real estate agent can make the process a lot easier.
You could find a house, make the best offer, execute a purchase agreement and have a perfect home inspection – and still, your house must pass an appraisal and receive a value. Let’s go over how the appraisal process works, along with a few of its finer points, and then discuss what to do in the event of a low appraisal.
How Does an Appraisal Work?
An appraisal has two purposes. The first basic fact established in any appraisal is whether the house is safe to live in. Secondly, it’s the appraiser’s duty to determine a value for the property by comparing it to similar properties in the area.
Making Sure the House Can Be Occupied
The appraiser is required to make sure the house is ready for whoever’s moving in to be able to use and enjoy the property fully. They’re looking for these red flags, among others:
- Anything that affects the health and safety of occupants: There are some fundamentals, like making sure the water and electricity are on and there is no exposure to hazardous materials. For FHA loans, homes built before January 1, 1979, must fix any chipped or peeling paint due to the potential for lead exposure.
- Structural defects: These could include exposed floorboards or studs as well as holes in the roof and missing handrails on porches or decks. In short, any construction has to be finished.
- Anything limiting use and enjoyment of the property: The appraiser has a wide latitude to order any inspections they feel are necessary to ascertain if there may be issues for the person moving into the property. They may call for a roof inspection if there are signs that the roof is nearing the end of its life. Other examples include pest and water quality inspections.
If any conditions from the mortgage investor backing the loan are not met during the appraisal or subsequent inspections, they’ll have to be corrected before you can move in.
Understanding Appraisal Values
Safety is one thing, but when most people think of appraisals, they rightly associate them with placing a monetary value on a home. This is done to protect both the buyer and the lender or other investor in the mortgage.
Ideally, a buyer shouldn’t pay more than the fair market value of the home. From the perspective of the lender or mortgage investor, they can’t lend you anymore than the property is worth. If you were unable to continue making your payments and defaulted on the loan, the lender would then have to try to recover as much as they can by taking possession and selling the property. Consequently, market value is very important for the lender.
An appraiser most commonly assigns a value to your property by doing a walk-through, which involves taking pictures and making notes on the condition and distinctive features of the home. They then evaluate the property against recent sales of comparable properties in the area. For example, three-bedroom ranches are compared with other three-bedroom ranches, usually within no more than a mile or two of the property being assessed. This distance may be extended in rural areas where there are fewer houses. Based on these factors, the appraiser comes up with a value.
There are other approaches to assigning value that may be offered in certain cases, depending on the mortgage investor, the property and the circumstances of the transaction. For example, Fannie Mae and Freddie Mac may offer appraisal waivers if they feel confident enough in the data they keep on your area and the particulars of your loan. In instances where no walk-through is required, your closing costs will be lower and you may be able to close on your mortgage faster.
Common Appraisal Issues
Why might a home appraisal come back lower than the purchase price? What are your options if that happens? Let’s go over these questions next.
Why Does a Home Appraisal Come Back Lower Than Expected?
The easiest answer to this question is that the home you’re purchasing isn’t actually worth what the sellers are asking – but let’s dig a little deeper into the why.
As we’ve discussed, in an appraisal, your future home is compared with recent sales of similar area properties. As a result, sometimes there isn’t really a first-mover advantage in real estate. In other words, if you put in a brand-new pool, and no other three-bedroom houses around have brand-new pools, you won’t necessarily end up with as high a value because there’s nothing to compare to.
Certain features and improvements tend to add more value than others. That’s not to say you shouldn’t make a renovation, particularly if it adds to your enjoyment of the home. Some just add more monetary value.
There’s also the simple fact that we don’t sell our houses every day, so we don’t know what they’re worth. Sometimes a seller may be taking a shot in the dark. This is where it can help to have an experienced real estate agent on your side, regardless of whether you’re the buyer or the seller.
How Do I Deal with a Low Appraisal?
If your appraisal comes back low, here are a few options for what you can do:
- Negotiate with the sellers: Whether you choose to appeal the appraisal or not, you can always try to negotiate with the sellers. If the gap between the offer price and the appraised value isn’t too large, you may be able to meet somewhere in the middle and secure your dream home.
- Move on: Sometimes deals just fall through. Even if you really love the home, you shouldn’t have to take more money out of your pocket to buy a property that’s overpriced. So be prepared to walk away from the deal and continue your search. There will always be another home …
- Keep your eye on the house: Often, if a deal falls through because of appraisal issues, the homeowners have a hard time getting higher offers from other buyers. They may come back to you to negotiate again. Keep looking, but also keep an eye on the home just in case the sellers don’t receive any more offers.
How Long Does a Home Appraisal Last?
An appraiser may only physically be at the house for a couple of hours, but that’s an important couple of hours for the home-buying transaction because they establish the property’s value.
Additionally, with an FHA loan, once an appraisal is done, it sticks with the property for the equivalent of four months, during which time the original appraisal will be used even if a new buyer comes along with an FHA loan. With all other loan types, a new appraisal is ordered for each potential buyer if the first transaction falls through.
We hope we’ve helped answer some of your appraisal questions. If you’d like to move forward with a mortgage approval, you can get started online or give us a call at (800) 785-4788 to speak with one of our Home Loan Experts. If you still have questions, you can leave them for us in the comments below.
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