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What happens during a home appraisal

Buying your home is a process with numerous steps. For many people who have not bought a house before, they may not have a clear understanding of what a Home Appraisal is. Many new buyers also confuse home inspections and home appraisals.

Although Inspections are a must when purchasing a house, Home inspections are not the same as home appraisals. A home appraisal is an unbiased estimate of the true (or fair market) value of what a home is worth. A home inspection is a report on the overall condition of a home.

Home Inspection vs. Home Appraisal

Although the home appraisal may seem similar to the home inspection, the goals of these two processes are very different.

  • The appraiser determines the value of the house.
  • The inspector determines any repairs needed, and their potential cost.

Home Appraisal

If you are purchasing a house using a bank loan, than you will be required to get an appraisal on the house. You probably signed a purchasing contract stating your offer for the property, but it likely contains a loan contingency. The home appraisal will only occur after your offer has been accepted by the seller and you have begun to work with a lender to finance your new home. You do not need to have appraisals completed on every house you choose to put an offer in on.

An appraisal is done by a neutral third party who has been trained and is licensed in home appraisals. Banks and Lenders will require a home appraisal prior to funding a loan to ensure that the value of the house matches the amount of the loan they will be giving. A home appraisal protects the bank from getting stuck with property that’s worth less than they’ve invested. Lenders want to make sure that homeowners are not over-borrowing for a property because the home serves as collateral for the mortgage.

Even though the home appraisal is the lender’s requirement, it’s the borrower’s responsibility. You usually pay for it as part of the mortgage costs at the time of closing.  Appraisers will consider specific components, such as lot size, square footage style and age of house, as well as other features such as garages and fireplaces. They will also use recent sales of similar homes  in the area.

The appraisal report generally includes:

  • an explanation of how the appraiser determined the value of the property
  • the size and condition of the house and other permanent fixtures, along with a description of any improvements that have been made and the materials used
  • statements regarding serious structural problems, such as wet basements and cracked foundations
  • notes about the surrounding area, such as new or established development, rural acreage, and so on
  • an evaluation of recent market trends of the area that may affect the value
  • a comparative market analysis that supports the appraisal
  • maps, photographs and sketches

Appraisals also factor in the total value of the home and any other permanent structures, along with the land that the house is built on. A common myth about the home appraisal is that curb appeal and general tidiness of the home will help bring a higher appraisal amount. While overall maintenance of the home and surrounding property is certainly a factor, details such as a lawn that needs to be mowed does not affect the appraisal.

The appraiser also will check the status of the major systems and structure of the house. During a the appraisal viewing, appraisals usually answer questions such as,

  • Is there water, termite or mold damage?
  • Is the furnace in good shape?
  • Does the plumbing leak?
  • Will any major systems or structures need replacement, such as the roof?

What if my home appraisal comes in low?

If you appraisal comes in below value or with conditions to be met, before the loan can be funded, don’t freak out. As with most things in life, you can find a solution to the problem. You should review the appraisal and see what may have caused the low appraisal.  If there are portions of it that you don’t agree with, such as findings that differ from your inspection report, or inaccurate comps, be sure to speak up. It might be due to factors that the homeowner could correct, such as repairs or maintenance. If that’s the case, the appraiser may be willing to take a second look and adjust the appraisal accordingly.

Some options you have when addressing a low appraisal may be:

Buyer can make up the difference in cash. The lender cares about the appraisal only to the extent it affects the loan-to-value ratio. A low appraisal does not mean the lender won’t lend. It means the lender will make a loan based on the ratio agreed to in the contract at the appraised value. Sometimes the buyer’s lender will not allow the buyer to give cash for the difference and, in that event, have the buyer pay instead some of the seller’s closing costs.

The seller can lower the price. If the home was overpriced or the value was inflated, often this is the best solution. It makes the buyer happy and the lender is satisfied. There is no guarantee that if the buyer walks away, the seller won’t receive a low appraisal from the second buyer’s lender.

Ask your agent  to call the listing agents of pending sales to try to find out the actual sales price of those properties. Listing agents do not have to disclose the sales price, but many are happy to help out because they could find themselves in the same situation.

Appraisals are needed to ensure the homebuyer, the home seller and the mortgage lender receive the accurate and true value of the real estate in question