There are many factors that can lead to a mortgage denial when you‚Äôre trying to buy a home. One of the most common things that can stand between you and an approval is an issue with the property‚Äôs appraisal.
But what is an appraisal? And why do home appraisals matter so much during the home buying process? This guide answers those questions and more.
An appraisal is a written estimate that details a professional appraiser‚Äôs opinion of a home‚Äôs value. When you buy a home, your mortgage lender will more than likely require a home appraisal before approving the loan.
‚ÄúAppraisers are reporters of the market,‚ÄĚ said Stephen Wagner, 2019 president of the Appraisal Institute in Chicago. ‚ÄúThey interpret the actions of buyers and sellers in the marketplace.‚ÄĚ
All 50 states require appraisers to be certified or licensed to provide appraisals to mortgage lenders who are federally regulated, according to the Appraisal Institute. Appraisers receive their credentials after passing an examination administered by their state‚Äôs appraisal board.
When choosing an appraiser, government-sponsored enterprise Fannie Mae has specific requirements for mortgage lenders. They need to select from professionals who not only meet the certification or licensing requirements, but also have experience in and knowledge of the local real estate market and the specific property type being appraised.
Many appraisers use the Uniform Residential Appraisal Report, the most common form used in real estate appraisals.
Before visiting a property, an appraiser gathers upfront information related to the property. Once they begin the appraisal assignment, they typically review the property‚Äôs:
But not all appraisal assignments look the same, said John Brenan, vice president of appraisal issues with The Appraisal Foundation in Washington, D.C.: ‚ÄúSome require an appraiser to personally inspect the interior of a home. Some only require an appraiser to personally inspect the exterior of the home.‚ÄĚ
The homebuyer doesn‚Äôt have to be present for the appraisal. In many cases, a real estate agent will provide access to the home if necessary, he added.
The U.S. Department of Housing and Urban Development (HUD) requires appraisals for FHA loans to be more in-depth than those for conventional loans. Appraisers hired by FHA lenders must establish an unbiased opinion of a home‚Äôs value and determine whether it meets the FHA‚Äôs minimum property standards ‚ÄĒ by inspecting the home‚Äôs foundation and major systems, for example.
The U.S. Department of Veterans Affairs follows a similar process for VA home appraisals. The appraiser must determine the value of the home and review the property‚Äôs condition to assess whether it meets the VA‚Äôs minimum property requirements.
Appraisers typically determine a home‚Äôs value by using one of three common methods:
The most commonly used method for real estate transactions is the sales comparison approach. When using this approach, appraisers consider several factors, according to the Appraisal Institute, which include:
Homebuyers usually pay for an appraisal as part of their closing costs. An appraisal fee can run about $300 to $400, but it can vary depending on the state, property type, loan type and the complexity of the appraisal assignment. For example, the VA has a state-by-state fee schedule for home appraisals. The appraisal fee is $450 in Georgia and $525 in New York.
There isn‚Äôt a ‚Äúshelf life‚ÄĚ on appraisals, Brenan said. However, each lender has guidelines it follows that dictate how old an appraisal report can be for mortgage lending purposes.
An appraisal establishes a home‚Äôs value. This number is important to your mortgage lender because it affects the loan you need to purchase the home.
Lenders rely on a house appraisal to determine whether the sales price makes sense and to calculate the homebuyer‚Äôs loan-to-value ratio.
[An appraisal], as described by Wagner, ‚Äúis a risk mitigation tool at that point, to make sure that somebody‚Äôs not paying too much for a property or that the lender isn‚Äôt going to lend too much against the property.
Put another way, a home appraisal is designed to ensure that the collateral for a mortgage ‚ÄĒ the house ‚ÄĒ is adequate enough to justify the loan amount, Brenan said. The appraisal also helps establish value in the event of a foreclosure sale, should the lender need to take the property back because the borrower defaulted on the mortgage.
Aside from mortgage approval, other reasons you might need an appraisal include:
In certain circumstances, you may be able to sidestep the home appraisal requirement when getting a mortgage to purchase a home.
Conventional mortgage borrowers may be able to get what‚Äôs called a property inspection waiver (PIW) mortgage, which is a loan that goes through the underwriting process without an appraisal. It‚Äôs also known as an appraisal waiver mortgage.
With a PIW mortgage, the lender can use existing information about the property‚Äôs estimated value to originate a loan, rather than ordering a new appraisal. However, the homebuyer would need to supply a 20% down payment in most cases.
An appraiser‚Äôs opinion of value isn‚Äôt necessarily the end of the line, Brenan said.
If you‚Äôre not happy with your appraisal ‚ÄĒ for example, the home value comes in lower than expected ‚ÄĒ you have the option to dispute the appraiser‚Äôs findings.
Let‚Äôs say you‚Äôre looking to buy a home priced at $300,000 but the appraisal comes in at $250,000. After your lender has given you a copy of the appraisal report to review, you can request another appraisal if you‚Äôre not satisfied with the results. It‚Äôs helpful to provide any evidence you may have that disputes the appraiser‚Äôs findings, such as a recent comparable sale or missing square footage.
Keep in mind that your lender isn‚Äôt obligated to honor your request. But if it does, you‚Äôll be responsible for the additional appraisal fee.
‚ÄúIf the borrower or a real estate agent or whoever wants the appraiser to consider additional information, go through the lender, share that information,‚ÄĚ Brenan said. ‚ÄúThe appraiser will review it and notify the lender if it warrants any type of change.‚ÄĚ
If your lender decides to stick with the original appraisal or no changes occur after it‚Äôs reviewed, a few things can happen. Using the example above of an appraisal coming in lower than the sales price, you would either need to come up with the difference in cash or renegotiate with the seller on a lower price. Otherwise, the loan could be denied.
It‚Äôs also important to remember that although a house appraisal is part of your homebuying process and you‚Äôre responsible for paying the fee, you aren‚Äôt the appraiser‚Äôs client. In terms of a home purchase or refinance, the lender is required to order the appraisal and can‚Äôt accept an appraisal ordered by a borrower ‚ÄĒ ‚Äúthat is to avoid any possible bias or undue influence,‚ÄĚ Brenan said.
While they both involve taking a critical look at a home, an appraisal and inspection aren‚Äôt the same.
An appraisal examines the elements and features that help determine the value of a home. But an inspection evaluates the home‚Äôs structure, interior and exterior to assess its condition and recommend any necessary repairs. Unlike appraisals in most cases, home inspections can be optional. Inspection fees range from about $300 to $500, though it can change based on a number of factors, such as the size and age of the home.
An appraiser is generally looking for things that impact value, such as the quality, design and floor plan, Wagner said.
‚ÄúAppraisers do not inspect properties to the depth and level that a home inspector might, wherein as a home inspector is ‚Ä¶ testing plumbing and electrical and kind of almost seeing behind the walls, if you will,‚ÄĚ he explained.
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