The Home Appraisal Contingency

Now that you have put your dream home under contract and you have made formal loan application, the lender will now go ahead and order the appraisal to be done.  You may be wondering why you would need an appraisal to be done - after all, you and your Buyer Agent have looked at a lot of houses and know that you are not overpaying for the house!  And your Buyer Agent ran a market analysis for you so you know how the price you are paying for the house compares with the prices that other houses have sold for!  So why does the lender need to do an appraisal on the house?

A home appraisal is like a report card for your home's value. Whether you're buying or selling, it's a crucial step in the process. Here's how it works:

Lenders hire licensed appraisers to assess a home's value. This helps them determine if the property is worth the loan amount.  During an appraisal, the appraiser will visit your home, take notes, and look at recent comparable sales in your area to gauge your home's value.

WHAT DO APPRAISERS LOOK AT?

When an appraiser evaluates a house for purchase, they aim to compare similar properties to determine its value. They consider factors such as the style, age, condition, and location of the house to find comparable properties. For example, if you are buying a 2-story Colonial with vinyl siding and a garage in Short Pump, Richmond, the appraiser will not compare it to brick ranchers built in 1950 with fewer bedrooms and no garage in the city of Richmond. The appraiser will also consider the condition of the house you are purchasing and seek out comparable homes in similar condition. Additionally, the appraiser takes into account the house's location within the neighborhood, lot size, and outdoor space usage. The appraiser focuses on essential aspects like square footage, comparable properties, location, and condition, rather than superficial features like granite color. Once the appraiser completes their visit, they prepare a report for the lender, which includes the assessed value, the approach used to determine value, the assessment date, detailed information about the property with pictures, neighborhood information, flood zone status, comparable homes used in the valuation, and any safety or longevity-related defects that need attention.

WHAT HAPPENS WHEN THE LENDER RECEIVES THE APPRAISAL?

Once the appraisal is completed, the appraiser will send the report to the lender for review. The lender's underwriter will carefully review the appraisal to ensure all necessary details are covered and any potential repair issues are identified. It is required by law that once the lender receives and reviews the report, the buyer must be provided a copy. This process typically takes around three weeks or so to complete.

WHAT HAPPENS IF THE APPRAISED VALUE COMES IN BELOW THE PURCHASE PRICE?

When faced with a low appraisal, there are ways to address the issue. According to the contract, the lender will provide a loan based on the lower value between the purchase price and the appraisal. For instance, if the agreed price for a house is $400,000 but the appraisal values it at $398,000, the seller still expects the full $400,000. However, the lender will only offer a loan based on the $398,000 value. To resolve this, the $2,000 difference needs to be resolved, possibly through negotiations between the buyer and seller or by seeking a second appraisal for reconsideration.  Assuming that you have not waived the appraisal - or you are not agreeing to make up any appraisal gap -then you have 3 options available to you ---

1. You can proceed to closing and make up the difference to the seller at closing!
2. You can ask the seller to reduce the price to the appraised value - the seller does not have to agree to this!
3. If the seller will not reduce the price to the appraised value, then you have the right to terminate the contract!

And if you have questions and would like to chat, feel free to send me a message!  We can grab a cup of coffee and sit down to discuss the homebuying journey!