The road to becoming a homeowner can be tortuous.
While mortgage borrowers may adjust relatively quickly to common issues relating to their income, credit, or assets; one aspect of the mortgage process can be a potential upheaval.
The home appraisal.
It locks down the mortgage process for quite some time, can make you have butterflies in your stomach, and can literally make or mar your mortgage application.
Therefore, if you are a prospective homebuyer and do not have a comprehensive knowledge about appraisals, now is a good time to soak up valuable information about home appraisals.
What is an Appraisal?
Starting with the basics:
The dictionary meaning of appraisal is “an expert estimate of the value of something.”
A home appraisal is the current fair market value of a property estimated by a certified appraiser. Mortgage lenders use home appraisals to determine the loan-to-value amount. Lenders will not issue mortgage loans higher than the appraised value.
But a home appraisal isn’t just a monetary figure on a piece of paper. It is a detailed document that describes what makes a house valuable as well as the value of the house relative to other properties in the neighborhood.
Home Appraisal Cost
According to recent data, the average home appraisal cost for a residential property is $309. The cost isn’t uniform, but it is included amongst closing costs. Thus, the homebuyer foots the bill eventually. Expect to pay between $300 – $500 for an appraisal on a home.
Factors that affect the appraisal cost
- Home square footage
- Type of Property
- Property location
- Land square footage
- Extensive damage or repairs
- Company doing the home appraisal
Importance of Home Appraisals
Lenders want to be sure that they aren’t offering mortgage solely based on a seller’s subjective opinion. An independent assessment is more objective and acceptable.
On one hand, a home appraisal protects you and your lender from paying too much for a home. And on the other hand, it protects the bank from getting stuck with dead weight whose value doesn’t match their investment. The URAR, or Uniform Residential Appraisal Report, is the most popular type of appraisal.
What to do When a Home Appraisal is Lower Than the Agreed Sales Price
Let’s say there’s a home on the market for $275,000. You and seller agree to a purchase price of $260,000. You move forward with the loan process and halfway though the process the home appraisal comes back with a value of $245,000.
If the appraised value is considerably less than the purchase price this creates be big problem. A lender will not process a loan for an amount that exceeds the appraised value of the home. lenders treat an appraiser report as the final word on the value of a home. If that value is less than the amount in your purchase mortgage application (called an under-or short appraisal), the lender can’t process the loan.
You would either have to cover the difference (an unforeseen glitch you may not have prepared for), or impress on the seller to reduce the price. Sellers don’t have many other options because the appraisal amount will be relatively the same with any appraiser, and buyers will not be able to obtain loans for more than the appraised value of the home.
There are only three things you can do when the appraisal is less than the purchase price
- You and the seller would have to agree to a purchase price equal to the appraised value
- Pay an extra down payment to make up the difference
- Cancel the contract
Tips for sellers to increase the home appraisal value
- Repair and paint interior walls
- Trim bushes and mow lawn
- Touch up exterior paint
- Replace broken or outdated fixtures, lights, fans, and door handles
- Leave the blinds open to allow more natural light in
- Remove clutter
- Paint colored walls a neutral color
- Clean the home from top to bottom
- Polish floors and steam clean carpets
Tips to Avoid Wildly Inaccurate Home Appraisals
Inform your lender of your preference for a home appraiser who comes from the same county, or from a neighboring county. You are the footing the bill after all.
Also inform your lender of your preference of an appraiser with a residential appraiser certification and a professional designation.
Meet up with the home appraiser during inspection to share any knowledge you may have of recent foreclosures and short sales that may skew the comps.
This is important because many appraisers pull data off the deed at the courthouse or the MLS without checking it out. Most appraisers worth their salt will appreciate this information.
Methodology used to valuate the property
- House features and amenities, including any improvements and materials used
- Reference to any serious structural problems
- Overview of the immediate market area, including recent market trend
- Comparative market analysis; and
- Supporting sketches, photographs, and maps
- Turnaround Time
The appraisal process should take seven business days. It may be longer if the market is busy.
Lenders are required to show the appraisal report to homebuyers. Therefore, you should make certain that you obtain a copy of the report for recordkeeping.
The appraisal process involves three stages:
The home appraisal process is conducted by an independent professional/expert, which reinforces the validity of the estimate in the appraisal report.
Usually walk-in (interior appraisal), although a drive-by (exterior appraisal) is an available option. Mortgage lenders require both types, especially interior appraisal. The objective of an inspection is for the licensed appraiser to get a first-hand feel of the house, noting its size, function, condition, and quality.
Refers to properties very similar to the appraised home that the appraiser check to come up with a fair market value of the appraised home.
Final Appraisal Report
Compilation of relevant data and house estimate.
Challenge the appraisal
You can challenge an appraisal if any part of the appraisal report or supporting documents seems off, inaccurate, or not comprehensive enough.
Most lenders have a strict system in place to review appraisals that compares multiple appraisals on all known sales in the immediate neighborhood.
You may even order a second appraisal. Especially if the first appraiser doesn’t have rooted experience or familiarity with the market area in which the house is located.
In any case, make sure that the lender recognizes the second appraiser.
And there’s a third option. File a complaint with the appropriate state’s appraiser licensing agency if you believe the appraisal is inaccurate and the appraisal is being adamant regarding your concerns.
Appraisals vs Inspections
The first stage of an appraisal is an inspection by the certified home appraiser. But this is a very different process from a home inspection. A property inspection is specifically for examining a home to ensure that everything is in working order. And if not identify existing defects.
A home appraisal as explained above is specifically for telling the fair market price of the home.
As a result, different professionals carry out home appraisals and home inspections. An appraiser carries out an appraisal, while an inspector carries out an inspection.
Both are important. You certainly don’t want a rude shock after buying your home, which is why you should have an inspector check everything, from the chimney to your plumbing and more.
The Process of a Home Appraisal
On a basic level, an appraiser valuates a house after two broad steps:
After checking the key characteristics of the house; and comparing with homes similar to it in the immediate market area
In detail, the appraiser typically starts with researching the age, type, style, and location of the house. Additionally, s/he will peruse data about the home’s neighborhood, recent sales, and several other factors.
Then the appraiser goes for the physical inspection, where s/he notes home features such as size (square footage), condition of the home, number of bedrooms and bathrooms. The appraiser would also note amenities like an extra-large garage, a pool, screened-in porch, et cetera.
After this, the appraiser will then check through recently sold houses that are similar to the one you intend to buy in the area, called comparables or comps. S/he gleans valuable information to make this comparison from different sources including local real estate MLS (multiple listing service) and county courthouse records.
Finally, the appraiser files the home appraisal report using all of these information and making adjustments were necessary. Information in the report typically includes:
How Long is a Home Appraisal Good for?
Home appraisals are only valid for a set period, regardless of loan type. However, this set period aptly called, “term of validity,” differs between loan types.
The term of validity varies wildly. It could be as low as 60 days (2 months) or as high as 180 days (6 months). For example, while FHA appraisals are good for 120 days (4 months), VA appraisals are valid for 180 days (6 months).
These limits aren’t set in stone. When market conditions fluctuate rapidly, validity typically drops. And there are very special circumstances when the FHA allows validity of up to 240 days (8 months).
After expiry, some loan types do not require a brand new appraisal. For example, FHA guidelines stipulate that an appraisal update, also called “re-certification of value,” may be done if no recent renovating or remodeling work had been done.
This is important, especially if a home appraisal had been done for the home in recent past.