Home financing or refinancing requires a clear and reliable home appraisal. Even if all the home-buying steps have been completed, you will not be able to close your deal and may have to experience delays if there are some complications in the home appraisal process.
Due to this direct relation between mortgage and appraisal, it is important to understand the details of home appraisals and the connection between these two.
What is Home Appraisal all about?
A home appraisal is an evaluation of the home’s value. The purpose of a home appraisal is to determine whether the home’s value (‘fair market value’) matches the selling price. If it does, you are paying what you should and the lender would lend likewise.
Who Asks for a Home Appraisal?
Your mortgage lender would require you to get your home appraised to confirm the current market worth of your home. The lender needs assurance through a home appraisal to protect himself, as the home serves to be his collateral.
Usually, even if you are extending a mortgage, your lender would require a home appraisal to ensure the current worth of your home before refinancing your mortgage.
Who Conducts a Home Appraisal?
A certified appraiser determines the value of your home during the home appraisal process. The home appraisal needs to be clear and objective, with limited bias. When making assessments, the assessor would consider a number of variables, including the property's location, condition, and features as well as the most recent sales of homes in the neighborhood similar to your potential home. Based on these, the appraiser would figure out a fair market value using techniques like cost, sales comparison, or income approach. The maximum amount lenders are willing to loan you is then calculated using the fair market value. Property owners also use it to choose the right listing price to sell their homes.
Do you have to Pay for a Home appraisal? How much?
Although a home appraisal is the requirement of your lender, you are the one who actually covers this cost. However, sometimes, sellers are ready to incorporate this cost into their expenses and pay for it.
Usually, as a home buyer, you would have to make this payment of home appraisal, which on average is between $500 and $700. The size of your property, its location, the kind of evaluation needed, and the complexity of the appraisal and home are some of the variables that can affect the cost of your home appraisal. Further, the experience and credentials of the appraiser and the demand for appraisal services in a specific area are additional factors that may impact this expense amount. Additionally, appraisal rush or appraisals requiring much research could be more expensive.
This explains why the amount you have to pay for a home appraisal could be different. A normal single-family home appraisal, for example, may be less expensive than a multi-unit property evaluation or a specialized appraisal of a unique property.
Can a Home Appraisal or Low Appraised Value Impact your Mortgage?
The National Association of Realtors reports that home appraisal issues are a common reason for delays in closing property deals. This is often caused by a lower appraisal value than the agreed purchase price, which may lead to renegotiation or additional out-of-pocket expenses for the borrower, and hence a delay or issues in the mortgage loan allotment.
When the lender requests a home appraisal, the appraiser confirms whether the property is worth the amount of money you are borrowing.
If the appraisal comes in lower than the amount you are borrowing, it can affect your mortgage loan. The lender might require a bigger down payment or offer a smaller loan amount, which might create a problem for you. A low appraisal may occasionally lead to a higher interest rate as well. This is because lenders typically charge higher interest rates for loans with higher loan-to-value ratios, which are calculated by dividing the loan amount by the property's appraised value.
What is the Appraisal Process? What is the Factor Checklist?
When a lender is considering a buyer’s mortgage application, he would request a home appraisal from a professional after the buyer has negotiated the final offer with the seller and has signed the agreement. However, if your refinancing loan application is being reviewed, the lender will ask for a home appraisal when you will submit a refinancing request.
After receiving this request from the lender, a licensed appraiser contacts the homeowner to make an assessment of the home either by visiting physically or virtually. Depending on the size and condition of the home, the appraisal duration can vary.
The COVID-19 pandemic has shifted the appraisal approach toward virtual assessment and/or exterior-only evaluation. However, it seems that this new trend would continue and sustain.
Although the physical condition of the home is a major determining factor of the home’s value, a market analysis of the ‘comps’ is equally important for the assessors as well. By reviewing public records and selling prices of similar homes in the locality, the appraiser would give a final assessment value.
Here’s a list of variables your appraiser would be assessing your home on:
- Age of the house.
- Size and condition (both interior and exterior) of your home.
- Design and architecture of your home.
- Facilities, appliances, and amenities of the home and their condition.
- Location of your home.
- Rental income or unpaid bills of the house.
- Selling prices and market trends in the locality.
- The estimated construction cost of a similar house.
- Neighborhood status, growth rate, nearby schools, commercial opportunities, and jobs.
- Risk of natural hazards and the relevant history.
This assessment and value determination are presented as a report to the lender. It is often in the form of a ‘Uniform Residential Appraisal Report’. The buyer can get a free copy as well and can highlight any issues to the lender.
How can you Improve your Chances of a Better-Appraised Value? And how to Deal with a Low Value?
As discussed above, various factors are considered by appraisers before a final evaluation. Some of these factors are under our control while some are not. You can certainly be in the driver’s seat for the ones under your control and prepare yourself to attain a better value.
If you are a homebuyer, you may have a contingency clause in your agreement that would make it possible for you to call off the deal in case of a low-valued appraisal. This highlights the importance of going through the terms and conditions rather than simply signing ‘I agree’. Additionally, never go against your budget irrespective of the difference between the appraised value and offered price. Being a buyer, you can’t control your appraisal to a great extent, and hence you need to either end the deal or see if the seller is willing to negotiate in case of a low appraisal value.
On the other hand, if you are a refinancer, you can do your research, and even seek help from your agent, to provide a number of comps to the appraiser and minimize the chances of a low appraisal value. You can also mention and provide evidence of the renovation or maintenance of your home to indicate improvements. Another way to decrease your probability of a low appraisal is to make your home neat and decluttered. Simple cleaning up from inside and outside would make a good impression on the professional assessor.
It is always advisable to check for any errors or issues in the appraisal report to see if the appraiser has ignored any necessary details or exaggerated any issues. If there are any misrepresentations that need rectification, it would put you in a better position in the eyes of your lender for your loan financing.
What Comes After Home Appraisal?
A successful home appraisal leads to loan approval, and the lender determines the amount based on the application and appraisal report. You will receive a closing disclosure with finalized loan details and closing costs, which must be carefully reviewed for discrepancies. On the closing day, you are required to bring identification and funds to complete the transaction.
Home appraisals provide essential information for informed decision-making in buying or refinancing a home. Understanding the home appraisal process is important to avoid delays and ensure a fair deal for the buyers as well as the lenders.
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