After weeks of viewing homes for sale, finding the right one can seem like crossing the finish line of an exhausting marathon, but in reality the race is far from over. In fact, even when the buyer and seller have come to a final agreement on the price and terms, there is still critical work to be done.
Unless the home is being purchased for cash with no appraisal contingency, a qualified opinion of the home’s market value sufficient to support the amount of the mortgage being obtained will still be needed to secure the financing and complete the transaction.
Because the appraisal is such an important part of the process, it is important for buyers to fully understand it.
What is a home appraisal?
Although there are many reasons for appraising real estate and several methods of doing so, the most common reason for an appraisal when purchasing a home is simply to estimate the market value of the property and make sure that it is acceptable for use as collateral for the mortgage that will be used to purchase it
Who selects the appraiser?
When an appraisal is part of the mortgage application process, the lender will choose the licensed appraiser from a list of qualified appraisers in the area.
Under Federal Reserve Guidelines, the Home Valuation Code of Conduct was established to ensure that appraisal reports are unbiased by preventing anyone who has an actual interest in the home, such as buyers or sellers, from being involved in the appraisal process or choosing the appraiser, when it is being ordered for the purpose of obtaining a mortgage.
Buyers, sellers, or other parties can order appraisals, but the lender will only consider an appraisal that they, themselves, have ordered.
Who pays for the appraiser?
The lender orders the appraisal as part of the home mortgage process and the cost – usually ranging from $300 to $400 – is typically assessed to the buyer.
Who can view the appraisal report?
Once the appraiser has completed the site visit and their market research, they will prepare a formal appraisal report that they will then furnish to the party who ordered it.
In the case of a home purchase where a mortgage will be used, the lender is always the recipient.
The lender will then furnish a copy of the appraisal to the buyers. Lenders typically give buyers this copy as soon as possible upon receipt, but in any case, they must do so at least three days before the closing.
While the seller can request to see the appraisal, it is up to the buyer who paid for it to decide whether or not to provide them with a copy or any precise information from the appraisal. In many cases, the buyer’s removal of their appraisal contingency is the seller’s assurance that the mortgage appraisal was satisfactory.
What happens when the appraisal value is low?
Appraisals are only an opinion of current market value, based on historical data, market conditions, and the overall features, condition, and location of the home.
Different types of improvements may increase the appraised value of a home more than others. Because of this fact, buyers should always protect themselves by using either an appraisal or loan financing contingency that will offer them options, should the home’s appraisal come in well below the contract sales price.
Without the protection of these contingencies, buyers could be legally bound to proceed with the purchase of the home, even if that is significantly more than the appraised value.
As long as the buyer is protected by the proper contingency wording, an appraisal that comes in lower than the offered price can be used to withdraw the offer and recoup their earnest money.
A low appraisal may also be used to reopen negotiations with the seller in an attempt to lower the price, in some situations.
For specific questions or more information about the appraisal process, buyers should consult with their real estate professional both before making their initial offer and after it has been accepted. The agent will be able to ensure that the proper contingencies and wording are utilized to protect the buyer in case of a low appraisal or any other issues that might arise.