What is an Appraisal?

At this point in the process, the lender has trusted that you have the finances to carry the loan once you successfully complete the home purchase. That means, with your pre-approval letter, you were given the green light to look for homes within that budget.

Now that you have found the special home within that budget, and got your offer accepted, they want to know that the loan they will provide will actually amount to the true value of the home.

It would be a big no-no for a lender to provide a loan for thousands of dollars over the home value! 

WHY WOULD THAT BE AN ISSUE?

If you were to default on your loan, the lender would not be able to make back that money lost. For example, say your offer of $400,000 was accepted on your dream home. You successfully make it through the home buying process and move in. A few months down the road you encounter financial hardship and can no longer make your payments.

In this case, if problem-solving solutions were unsuccessful, the lender would need to repossess the home. They would most likely not want to keep the home but would want to sell it to make that money back. If the home were to actually be worth $350,000 versus the $400,000 they cashed out for the loan, the lender would lose out on $50,000! That is not good for business.

That is why the lender wants to determine the value of the home before the transaction closes.

Another reason that the home needs to appraise for the purchase price is because most loan guidelines are determined by Fannie Mae or Freddie Mac, the primary government lending authorities. It gets a bit technical so I won’t go into the details, but basically the lender needs to make sure they aren’t going outside the rules for the loan program you’re using.

HOW DO I GET AN APPRAISAL?

Thankfully, because the lender needs this job completed, they will handle getting an appraisal for the home. They are technically not allowed to be in contact with the appraiser, so they will go through an appraisal company that will choose the specific appraiser for the job.

The appraiser will work with the listing agent to schedule a time to do the appraisal.

Typically, the buyers will not attend because legally the appraiser cannot divulge information. Sometimes the seller will be present to answer questions the appraiser may have. 

WHEN DOES THE APPRAISAL TAKE PLACE?

The lender wants to know the home's value as soon as possible to avoid issues further into the process. However, they only want to get an appraiser if the home purchase is likely to go through so that you aren’t having to pay the unnecessary cost. That is why a lender will often wait until negotiations are completed, and the inspection period is closed, before requesting an appraisal.

In a situation where the home is set to close early, for example, a three-week close, the appraisal may be scheduled earlier. This is not a very common situation and most often it is after inspections.

HOW DOES THE APPRAISER DETERMINE VALUE?

There are several factors that go into determining the appraised value of a home. The appraiser will look at other similar homes that recently sold in the area and compare them to the home you are purchasing. They will also do a visual inspection of the home to see what condition it’s in. Appraisers take multiple other factors into consideration such as the market trends, other offers on the property, property features, and floorplan functionality.

Once the appraiser determines the value of the home, they will write an appraisal report showing their analysis and how they determined the home’s value. As long as the home appraises at or above the offer price, the transaction is ready to move forward!  

WHAT HAPPENS IF IT DOES NOT APPRAISE TO THE SAME VALUE?

If the home appraises for less than the value you offered on the home you will need to renegotiate with the seller to match that new price or the transaction will not go through.

As long as your agent has done a thorough Comparative Market Analysis on the home by comparing other similar homes, and you didn’t offer astronomically higher than the listing price, you should be good to go. An exception to this can be during multiple offer situations.

An appraisal coming out lower does not happen very often, but it does happen occasionally. That is why it is good to be prepared with this knowledge ahead of time.

WHAT HAPPENS NEXT?

Once the appraiser lets you, the seller and the lender know that the home appraised for the price you offered you can move forward with your home purchase!

This is another step completed on your checklist. At this point, there is a bit of a pause as you wait for repairs to be completed, for the time to come for reinspections to be scheduled (if needed), and the lender to complete their work.

Take a deep breath and look at all that has been accomplished in such a short amount of time since your offer was accepted!

If you need support buying or selling your home give us a call at (503) 583-2581 and we can get all your questions answered personally!