One of the great mysteries of the home-buying adventure is the appraisal process. First-time buyers are especially caught off guard by the fact that their lenders may not value the finished basement or the backyard pool as highly as they do.
There is a harsh reality when it comes to mortgage lending. Your house isn’t a home. To your bank, it’s an asset. It’s collateral for your loan and nothing more. And from their perspective, their only concern is that the house is worth the amount they are loaning you.
The bank is taking a risk in loaning you money, and the appraisal tells them, among other things (like your credit score, debt/income ratio, etc.), whether or not the risk is worth it.
If, for whatever reason, you are not able to make your mortgage payments in the future, they want to know that they can foreclose on your home and get back most of their costs. Consequently, the appraised value of your home must equal or exceed the purchase price you agreed to in your purchase contract.
Note: You may have heard in the news recently that federal regulators have exempted homes under $400,000 from appraisal requirements. This only applies to conventional loans, and not loans backed by federal agencies (such as FHA or HUD). Plus, many lenders may still require an appraisal, even though they are not mandated to do so. You can find out more in this HousingWire article.
Here is what you should know about the appraisal process.
A Home Appraiser Does Not Take Sides
The personal who conducts the appraisal does not represent you or the seller. Their goal is to provide an unbiased assessment of your home’s value, so that your lender has accurate information. The appraisal will take place after you sign the purchase agreement, but before you get final approval for the loan.
The appraiser is a 3rd-party contracted by your lender, and will be state certified to conduct appraisals. They are independent and neutral. However, they are still human. It is in your best interest to ensure that your agent provides them with details on any major additions or upgrades.
An appraiser will evaluate the home you are purchasing in person. It is unnecessary but you and/or your agent may choose to attend the appraisal. There are five main areas the appraiser will evaluate when determining a home’s value:
- Additions, upgrades, or renovations
- Comps in the area
The Buyer Usually Pays
Typically, the cost of an appraisal is usually paid by the buyer, and the cost will be included in the closing costs when you close on the home purchase. In real estate, nearly everything is negotiable, so it can’t hurt to ask for the seller to pay for the appraisal. However, follow your agent’s advice on this. In the competitive NoVA market, asking the seller to pay for a lot of the closing costs may weaken your offer – especially if there are multiple offers on the home.
The cost of the appraisal will vary, depending on the square footage. Expect to pay around $300-$400. Historic homes or homes with unique features may cost a little more, because they are more difficult to appraise.
Patience is a Virtue
We know you are sitting on pins and needles waiting for your loan to be approved. However, appraisals do take some time. Your lender will order the appraisal as soon as you have a signed contract. Most contracts include a contingency for home appraisals (unless you waived the contingency), so the appraisal needs to be completed within 14 days of the completed contract.
Once the appraiser completes the in-person review of the home, they will write a report and submit it to your lender. How long this takes may vary, depending on how busy your local market is.
What Happens After Your Appraisal?
You and your lender will both get a copy of the appraiser’s report. The report is the appraiser’s opinion on the value of the home, based on available comp data, their walk-through of the home, etc. There are three possible outcomes:
- The valuation of the appraiser supports the purchase price you and the seller agreed to. You can stop worrying at this point, because your loan will continue through the underwriting process.
- The valuation is higher than your agreed price with the seller. This doesn’t happen often, if the seller’s agent has done a good job pricing the home. However, if it does happen, your loan moves forward, and you have instant equity in your home. Pat yourself on the back!
- The valuation is lower than your agreed price with the seller. Unfortunately, your lender is not going to approve a loan for more than the appraised value. You will have some decisions to make if this happens, and your real estate agent will help you navigate the best next steps.
How can an Appraisal Come in Low?
There are numerous reasons that an appraisal could come in lower than anticipated.
Finding good comps – there are few comparable homes in the area that have sold recently. The appraiser may look to comps outside the neighborhood, which can dramatically impact the value.
Pricing mistakes – the seller overpriced the home.
Appraiser methodology – if the appraiser wasn’t familiar with the area or rushed the job, this can impact the appraisal. Or, the appraiser may not have considered pending sales in addition to closed comps.
Fluctuating markets – if neighborhood is subject to frequent price fluctuations, then the price of the home may be stale based on newer listings.
If your appraisal comes back low, it’s not the end of the road. There are some things your agent can recommend to keep the deal on track.
Strategies for Dealing with a Low Appraisal
You have a few options for dealing with a low appraisal. The best option for you, the buyer, is to get the seller to lower the price. Your agent’s negotiating skills are going to be extremely important in this process, so make sure you choose wisely!
If the seller won’t lower the price to the appraised value, you may be able to get them to split the difference with you. It may mean you need to come up with a little more for your down payment, but it’s better than having to cover the difference yourself.
If you truly think your appraisal is flawed, you can file an appeal with your lender. You and your agent will need to work together to gather the necessary evidence to support your appeal, including a deep dive into high-quality comps near the home. You will present the evidence to your lender, who will then forward it to the appraiser for a re-evaluation. Your lender will have the final say on the results of your appeal, though. You may achieve more success if you are appealing the appraisal for a conventional loan than a government-backed loan.
You can ask for a second appraisal, but know that you will have to foot the bill. There is no guarantee that the new appraisal will come in high enough to reach the agreed sales price.
Finally, if you have the resources, and you just can’t live without the home, you can decide to pay the difference yourself. Barring that, if you have the appraisal contingency on your purchase contract, you will be able to walk away from the deal and get your earnest money back.
Naturally, we all hope that you never have to deal with the issue of your dream home appraising for less than your agreed price. However, know that your agent is with you every step of the way, regardless of the outcome.
When it comes to buying or selling your home, we are here to help answer any questions and guide you through a better understanding. Please do not hesitate to contact us at firstname.lastname@example.org or phone us at 202.800.0800.