An Overview of Home Appraisals For Home Buyers!

When embarking on the journey of buying a home, there are various essential steps and processes that one must navigate.  One such crucial step is the home appraisal, especially for those seeking a loan to finance their dream home.  In this blog post, we'll delve into what a home appraisal is, why it is important, and the role it plays in the homebuying process.

WHAT IS A HOME APPRAISAL?

A home appraisal is a neutral assessment of a property's fair market value carried out by a licensed or certified appraiser.  It's important to note that the appraisal value may vary from both the seller's asking price and the buyer's purchase price.  Lenders typically mandate an appraisal to gain insights into a home's market value and overall condition.  Why?  This information influences the amount the lender is willing to extend as a loan, as the property serves as collateral for the loan they are making.  This ensures the lender's security in case of any future non-payment of the mortgage.

HOW DOES THE APPRAISER COME UP WITH A VALUE?

When conducting an appraisal, the appraiser typically initiates the process by reviewing the tax record to gather information provided by the city or county regarding the property you are purchasing.  Ideally, your Buyer Agent would have already accessed this information when guiding you through your offer strategy.  Additionally, the appraiser will examine recently sold homes in the area that share similarities with the property being appraised.  

For example, if the house you are purchasing is a 3 bedroom, 1-bath brick rancher built in 1955 with no garage, the appraiser will focus on comparable homes that align with these characteristics.  It's crucial to compare similar properties within a specific timeframe (usually 3 to 6 months) to ensure an accurate assessment. 

While homes within the same category may still have differences, the appraiser takes these variations into account.  Adjustments are made for factors such as size, condition, recent upgrades or renovations, amenities and overall appearance.  Well-maintained homes or those with recent kitchen or bath updates tend to have higher values.  Similarly, a home with peeling paint or hardboard siding may be valued lower than one that has been freshly painted or features vinyl or brick siding.

WHAT HAPPENS IF THE HOUSE APPRAISES HIGHER THAN THE PURCHASE PRICE?

A favorable scenario occurs when the appraised value surpasses the purchase price, as that indicates you have equity in the house - a positive financial aspect.  It's noteworthy that the seller is unaware of the appraiser's valuation, alleviating concerns about the seller potentially increasing the house price to align with the appraised value!

WHAT HAPPENS IF THE HOUSE APPRAISES LOWER THAN THE PURCHASE PRICE?

In this scenario, a potential problem arises.  Many purchasers in this area are currently opting to waive the appraisal or agreeing to bridge an appraisal gap.  What does this entail?  When buyers choose to waive the appraisal, they are indicating to the sellers that, regardless of the appraised value, even if it falls below the mutually agreed to purchase price, the buyer is committed to covering the difference between the lower appraised value and the purchase price.  On the other hand, if the buyers include an appraisal contingency in their offer but agree to cover an appraisal gap, such as $5,000, it signifies their willingness to contribute $5,000 if the appraisal comes in below the agreed to purchase price.  Additionally, if the contract is contingent upon the property appraising for purchase price, the buyer has the right to request a price reduction to the appraised value.  If the seller refuses to reduce the price, the buyers retain the right to terminate the contract.  It's important to note that the contract stipulates the lender will grant a loan based on on the lower value between the appraised value and the purchase price.

WHY IS IT IMPORTANT FOR THE BUYERS TO GET AN APPRAISAL?

1. Lender's Risk Mitigation:  Lenders want to ensure that the amount they lend aligns with the property's actual value.  An appraisal helps in assessing the risk associated with the loan by confirming that the property's value is sufficient collateral for the loan amount.
2. Protecting The Buyers From Overpaying:  Appraisals act as safeguards for buyers, preventing them from paying more for a property than its current market value.  
3. Loan Approval and Terms:  Lenders use the appraised value to determine the loan to value ratio.  This ratio influences the loan approval process and the terms of the loan.  A higher loan to value may result in higher interest rates or the requirement of private mortgage insurance.
4. Compliance with Regulations:  Many lenders and loan programs, especially those backed by government entities, require a home appraisal to comply with regulations.  It requires transparency and fairness in the lending process.
5. Realistic Property Valuation:  An appraisal provides a realistic and impartial assessment of the property's value, considering factors such as location, size, condition and recent comparable sales in the area.  This helps both the buyer and the lender make informed decisions.

CONCLUSION

In the complex landscaping of home buying, a home appraisal emerges as a pivotal step for those seeking financing through a loan.  It not only safeguards buyers from overpaying but also serves as a crucial risk management tool for lenders.  Understanding the significance of a home appraisal empowers buyers to navigate the process with confidence, ensuring a fair and transparent transaction.

If you are thinking of buying a home, and have questions about the appraisal process or real estate in general, don't hesitate to contact me and let's chat!