Thursday, August 11, 2022 / by Margie Wright
What is a Home Appraisal?
To understand what a home appraisal is, there are two amounts you want to be familiar with: the home's price and the home's value. The price is how much you're willing to pay. The value is what the home is actually worth. These two different amounts don't always line up since a buyer will sometimes pay more or less than a house is worth. It's likely a buyer will pay more during a bidding war, or when it's a seller's market and it's not uncommon for a house to sell above the listing price.
In the case of a bidding war, you increase your offer to ensure you don't lose the house. Your offer ends up being accepted, but only after the other potential buyers have driven up the cost exponentially. When the house gets appraised, the value could be lower than the sale price. On the flip side, in a buyer's market, a seller may drop the asking price to attract more offers. You might even submit an offer well below the asking price and have it accepted, but then the house could appraise for more than the sale price.
Your house is appraised only to determine the value of the home. The home appraiser, who works for your mortgage lender, is an impartial professional who determines the fair market value of the house based on certain factors. These factors include the house's condition, features, and location. Sometimes, the home's property taxes will be based on the appraisal as well.
The Appraisal Contingency
If the house you're planning to buy is valued for less than what you're paying for it, it's possible that your mortgage lender may not approve the loan. There are three options you have from this point:
1. Ask the seller to lower the sale price.
2. Pay the difference out of your own pocket.
3. Walk away from the sale, provided you have an appraisal contingency written into your sales contract.
The appraisal contingency is essentially an escape hatch that allows you to walk away without penalty if the home appraisal is less than the sale price. It also gives you a better bargaining position for option one, asking the seller to lower the sale price. The seller will be much more likely to work with you on the price if you have an appraisal contingency that will let you out of the deal if you can't come to an agreement. If you waive the appraisal contingency, you might find yourself stuck with only option two.
How Much Does an Appraisal Cost?
Typically, the average cost for an appraisal is around $350. This can vary depending on where you're living, if you're buying a multi-family property, or if you're getting a jumbo loan.
The appraisal might be paid up front, or it might be included in your closing costs. If it is part of your closing costs, and the closing doesn't take place because of a low appraisal, you'll still have to pay for the appraisal. This applies even if the seller agreed to pay closing costs. The closing may have fallen through, but the appraisal still took place. Since the other closing costs are no longer relevant, the fee for the appraisal will likely come back to you.
When is a Home Appraisal Done?
The appraisal is typically conducted after the home inspection and roughly two weeks before closing. The appraisal is not the same as the home inspection. The home inspector is looking for any issues that need to be addressed in the home, looking at everything from the foundation to the roof to the plumbing to the electrical outlets. The inspector will provide you with a list of recommendations for repairs that you can then negotiate with the seller.
Meanwhile, the appraiser is only interested in looking at the bigger picture of the home. This includes the location and home's overall condition rather than the tiny details. The appraiser works for your mortgage lender, so at most, they will provide you with a copy of the appraisal.
How Long Does a Home Appraisal Take?
Overall, the appraisal can take up to two weeks to complete. The process involves visiting the home in person, research into area comps (comparable houses that have recently sold in the same general location), and then writing a detailed report to submit to the lender.
How long the appraiser is at the house varies. The size of the house is what it primarily depends on. The more square footage a house has, the longer the appraiser will have to be there. The housing market and city the house is in will also factor into this length of time. In a seller's market, there are many more houses being sold which means more homes the appraiser has to prepare reports for. The volume of houses being sold might also be higher in a large, busy city as compared to a small, rural town.
What Does the Appraiser Look For?
Before entering the house, the appraiser will take note of the location, the surroundings, landscaping and curb appeal, and the exterior. They want to know if the neighborhood is growing, how many homes are for sale in the area, whether the area is zoned commercial or residential. They'll also be noting the type and style of the home, materials used during construction, etc.
Inside the house, they'll be considering square footage, flooring and trim materials used, and number of bedroom and bathrooms. The conditions (or existence) of the attic, basement, and garage are all taken into consideration. The appraiser will also check out the home's features such as the appliances, HVAC system, amenities (such as fireplaces), and outdoor areas like the deck or porch.
The appraiser won't pay attention to the furniture, paint colors, or general messiness of the house. Sometimes houses are still rather lived in until the previous owners move out entirely. However, they do note the general upkeep. If a house looks neglected, such as having evidence of water damage or mold, that will impact the overall appraisal amount.
What Hurts the Home Appraisal?
Many of the things that could hurt the appraisal are things that the seller can't necessarily control, such as the location and area's real estate market. If the neighborhood is growing, that adds to the appraisal. However, if residents and businesses are moving out of the area, if it's a noisy street, or if the schools are rated poorly, then that will negatively impact the appraisal.
The livability of the home will be checked. The appraiser will check the flow from room to room, take notes of awkward or confusing spaces, how outdated spaces are, and if the house will need extensive remodeling. Signs of an infestation (such as termites or mice) will also negatively impact the home value.
What if the Appraisal Seems Too Low?
If the appraisal comes back and seems way too low, talk to your real estate agent! Look for mistakes in the appraisal. The appraiser is human too - it's possible they made a mistake in calculations or even made a typo in the final report. After reviewing it carefully, recheck the comps and see if there are any discrepancies. If your agent agrees that it seems lower than it should be, and that you have evidence to back this up, your agent can help you challenge the appraisal by filing a Reconsideration of Value. It gets submitted to the lender, and then it gets determined if it was simply a clerical error or the appraiser decides to take a second look at the property.
The process could take a few hours or several days depending on what course of action is taken. And in the end, it might not change anything at all. It can be worth the try, but be prepared for the fact that it is more likely that nothing will change.
What if the Appraisal is More than the Purchase Price?
If it comes back significantly higher, then that's great for you! That means you'll have instant equity in the home. However, it doesn't mean that you can lower your down payment. The terms of your mortgage will likely stay the same. It isn't great news for the seller, but unless they've written something into the sales contract, they can't do much after accepting the offer as it would likely lead to a breach of contract.
How Long Does It Take to Close After the Appraisal?
Normally, about two weeks after the appraisal, the closing will take place. Once the appraisal is complete, it and all the rest of the loan documents will go to the mortgage company's underwriter for evaluation. The underwriter will evaluate how much risk is involved with the loan. Several factors go into consideration from your credit score to the home appraisal.
If you were preapproved for your loan, then you probably won't be denied unless something has drastically changed since your preapproval. At this stage in the journey, your loan could hinge on the appraisal. If the appraisal is well under market value, the underwriter might determine that the loan is too risky. However, if the appraisal lines up with the purchase price, the underwriter will most likely approve the loan and everything will move forward with the closing.
The appraisal might be the final hurdle, but rest assured that most home buyers breeze right past this obstacle. It can seem big and scary, but more often than not, the appraisal matches the purchase price. You'll be able to close on your home in no time!