So, you’ve bought a house. It’s your dream home…at least, for now, it’s the perfect home for you and/or your family. The seller loved your offer, and you were pre-approved for the mortgage, so the deal’s in the bag, right?
Not so fast!
Even if you’ve gotten over the hurdles of financing and perhaps even the home inspection, a tricky little thing known as the home appraisal still potentially stands in the way of your happiness.
What is a home appraisal?
Simply put, an appraisal is an estimate of the value of your home, including all the fixtures on it and all the property on which it sits.
You cannot get financing – a mortgage – on your home until a licensed appraiser has seen the property and determines its value. Why? Because, like any loan, your mortgage needs collateral, and the home serves as that collateral. The appraiser needs to identify that your potential new home is worth at least the full sale price agreed upon by you and the seller.
This is because if you default on the loan because you can’t pay your mortgage payments, the bank or mortgage company will assume ownership of the property and will need to sell it to repay the loan. Hence, if you are purchasing your home for $300,000, but the appraiser thinks it’s only worth $250,000, you likely won’t get the mortgage money you seek.
An appraisal is determined by many factors, including:
- Square footage of the dwelling
- Amount of acreage
- Number of bedrooms
- Number of bathrooms
- (Some) interior improvements
The appraiser will inspect the home, compile these facts, and then compare your house to others like it in your neighborhood (or nearby) to determine its value.
Who chooses an appraiser?
Buyers and sellers have no say as to who appraises their home. Realtors have no input, either. Instead, the lender will select the appraiser.
Most lenders have particular appraisal companies with whom they’ve established a business relationship. They’ve come to trust these appraisers and believe that they will do an excellent job in determining the CORRECT value of the home you’re hoping to buy.
Of course, not just anyone can appraise a home. Certified, licensed appraisers usually begin as apprentices to already licensed individuals (most states require this) and must also pass 75 hours of basic appraisal education before applying for the Licensed Residential Appraiser certification. As a result, they are well-trained before they begin and are dedicated to their profession. Most do an excellent job of estimating the real value of the nation’s homes.
Who pays for the appraisal?
Since an appraisal is associated with the acquiring of a mortgage, the cost of the appraisal falls upon the buyer. (If you are paying cash for your home, you won’t need an appraisal as there will be no legal reason for one.)
Costs of appraisals vary from location to location and sometimes with the size of the property as large properties may require significantly more work on the part of the appraiser. The average cost of a home appraisal in 2016, says HomeAdvisor, was between $287 and $373.
What happens if the appraisal comes in high?
If your appraisal says that your home is worth more than you paid, then you’re at an immediate advantage! You’ve got instant equity, and you should have no problem getting the financing you need…so long as everything else is in order.
What happens if the appraisal comes in low?
If the appraiser determines that the home is not worth what you are paying, then the mortgage company/bank will not loan you the amount you are requesting. As such, you need to go back and refer to your real estate purchase agreement. If the agreement is contingent on the appraisal, you have the right to pull out of the deal.
However, if you still wish to buy the home, there are several options. Firstly, you can challenge the appraisal (you have the right to see a copy) with documentation from your realtor that proves the appraisal is faulty; you can order a “second opinion” by bringing in another appraiser and hoping he/she comes back with the right numbers; you can renegotiate the contract at a lower price, or you can try to come up with the cash needed to make up the difference between the selling price and the appraised value.
Sound complicated? Remember that your realtor is there to help you navigate this process should a problem occur. No doubt they’re “been there, done that” and can help you determine the steps to take that are right for you and your financial situation.