What To Know About The Home Appraisal Process When Buying A Home
Miranda CraceJune 18, 2019
Buying a home is an exciting time. However, there are a lot of steps involved in the purchase of a new home. If you’re buying a house with a mortgage, refinancing your current mortgage or selling your home to a non-cash buyer, you’ll need to get an appraisal on your property.
The home appraisal process is a crucial component of the sale of a home. In order to have a comprehensive understanding of this process, let’s take a closer look at what it entails.
What Is A Home Appraisal?
A home appraisal is an impartial evaluation of your home’s fair market value. Lenders hire a third-party service to conduct this evaluation during the mortgage lending process so they can determine if the buyer is requesting the appropriate mortgage amount. The appraisal value will help lenders avoid the risk of lending more than they can recover if the borrower defaults on the loan.
To assess your home’s value, an appraiser, the person actually assessing the home, will compare recent sales data of similar properties in the area. They use factors such as location and condition of the home to complete this assessment.
Why A Home Appraisal Is Important For A Buyer
An appraisal provides the home buyer with assurance that they’re paying a fair price for the home. It’s unlikely that your home’s appraisal will result in an assessment that the value is the exact same amount as the offer price. There are typically two outcomes of an appraisal. Buyers should prepare for either result when waiting for the completed evaluation.
The first possible outcome is that the appraisal value comes back close to the offer amount. For example, let’s say a buyer accepts an offer to sell the home for $200,000. Upon a completed appraisal, the assessed value of the home is $203,000. This is great news for the buyer. If everything else is in order, the buyer can proceed with closing on the home with an additional $3,000 in equity.
On the other hand, if the appraisal comes back a significant amount below the accepted offer amount, it could halt the buying process. This situation results in a big inconvenience for both the buyer and the seller.
Revisiting the above example, if the returned appraisal amount is $170,000, the buyer has offered to pay more than the home’s value. Since the appraisal protects the interest of the lender, the lender will not be able to lend more than the home is worth. This result can complicate the situation.
However, there are a few solutions to assist in a resolution. The buyer has the option to renegotiate with the seller for a lower price, put more money down on the home or request a review of the appraisal.
As a buyer, the appraisal prevents accidental overpayment on a home. Often sellers may feel like a low appraisal value is inaccurate, so it’s worth double checking all the information recorded. Appraisers can make mistakes or have less than perfect information. Providing the appraiser with a factual evaluation of the property may result in a higher appraisal outcome.
What To Expect During The Appraisal Process
A home appraisal generally happens once an offer is accepted and a home inspection is completed. Since the home appraisal process safeguards the financial institution’s best interests, the lender orders the appraisal. However, the borrower is responsible for the expenses that are a result of the appraisal. The financial institution will select an appraiser who has no direct or indirect interest in the property or transaction, per federal regulations.
Lenders can use an appraisal management company (AMC) to help them select an appropriate appraiser. The AMC will choose an appraiser who is familiar with your type of property and knowledgeable about the surrounding community. It’s important to hire an appraiser who has experience and expertise with similar properties and locale so they can produce an accurate evaluation.
Once the scheduling of the appraisal is complete, the appraiser will come to the property and gather all available data. This process will include taking photos and measurements of the interior and exterior living space. Each appraiser will have their own way of completing the appraisal process, but many look at the following:
- Lot size, curb appeal and exterior appearance
- Extra features that may add value to the property or upgrades/additions
- Overall quality of the home and construction
- Structural elements (not as detailed as a home inspector)
- If the property conforms to the neighborhood (for resale purposes)
- Other factors that may deter or subtract from the value of the home
After the collection of data, the appraiser will research the housing market and find comparable homes that recently sold.
Aside from paying the bill, involvement of the buyer and seller is unnecessary. A home appraisal is a hands-off process.
Should You Skip A Home Appraisal?
Completing a home appraisal is almost always required. It’s also a great method to determine the value of the home. Whether you’re applying for a conventional loan or a government-backed loan, the lender generally requires a home appraisal for lending a mortgage.
Appraisals do have pros and cons for the borrower. On the one hand, it can prevent borrowers from overpaying for a property. This protects the buyer and maintains their best interest as well. But, home appraisals can cost $300 to $400, according to Angie’s List. With the other expenses involved in buying a home, this could tighten your budget.
If given the option, should you skip a home appraisal? It depends on your individual situation. It’s important to understand the pros and cons of completing a formal appraisal and determine what’s right for you. Keep in mind, depending on your lender, you may not have the option to forgo a home appraisal.
The Bottom Line
A home appraisal is an important benchmark in the sale of a home. For all parties involved, it provides financial protection. It creates transparency in the home’s value for the buyer and reaffirms the price of the home for the seller.
Finally, it provides the lender with the security that the money the buyer is requesting will result in a loan that is low risk. When purchasing a home, an appraisal is a huge step toward completing the sale of the home. Exercising due diligence in understanding the value of the property will ensure that the process is as seamless as possible.