Real Estate Appraisal: The Basics
We know that when it comes to buying and selling a home, there are many questions involved. One question that is often asked regarding buying and selling real estate is, “what is a real estate appraisal and how do you get one?” At Corcoran Classic Living, we understand your concerns and are here to guide you through every step of the process.
What is an appraisal?
It is essential to know what an appraisal is. A real estate appraisal is a property or land valuation to determine the value of the property. An authorized appraiser is necessary when completing the valuation. In addition, there must be a designation from a regulatory body governing the jurisdiction of the appraiser.
Appraisals are necessary for many different types of transactions, such as real estate. For example, if a home appraisal is less than the purchase price, it becomes less likely for mortgage lenders to fund the arrangement. Unless the prospective buyer is willing and able to cover the difference between the appraisal value and the lender’s financing offer, the transaction is unlikely to go forward.
The appraiser can use any valuation method to determine the appropriate value of the property. It can also mean comparing your home or property to other similar properties on the market.
When buying and selling a home, an appraisal is a necessary step when a lender is involved. It may also be required when you refinance your mortgage. A home appraisal is a process through which a real estate appraiser determines the fair market value of your home.
An appraisal determines the home’s value to make sure the price reflects the condition of the home. It also helps banks and lenders avoid loaning more money to the borrower than what the house is worth. If there is a situation of default, which is when the borrower cannot make the payments, the bank uses the appraisal as a valuation for the home. If the home is in foreclosure, the lender can take possession of the house. In this case, the lender must sell the house to help recoup any losses from agreeing to the mortgage loan. It is worth noting that when the bank lends money for a mortgage, it gives the total amount of the home’s value to the seller on the date it is sold. Because of these events it makes sense that an appraisal is an essential part of the buying and lending process.
What is an appraisal gap?
An appraisal gap is when your lender’s appraiser says a home is worth less than what you offered to pay. An appraisal gap can cause delays, complicate financing, or even cancel the deal. Options for coming back from a low appraisal include paying the difference or renegotiating with the seller and a few others. What you choose to do is up to you and what will have the best result in your favor.
When you are facing an appraisal gap, your options include:
- Paying the difference in cash between the appraised value and the amount that you offered.
- Walking away if you have an appraisal contingency in your purchase contract.
- Renegotiating with the seller.
- Requesting a review, if there are inaccuracies, they will appear in the appraisal write-up.
- Applying with another lender that will hire an appraiser who is in your favor
What is the difference between a real estate appraisal and a home inspection? Do I need both?
One of the main differences between a real estate appraisal and an inspection is that appraisals deal with the property’s overall value. In contrast, an inspection leans more towards the condition of the property.
An appraisal is a general walk-through assessment of the home that an appraiser will analyze compared to similar homes on the market. The ultimate goal of the evaluation is to determine the fair market value property. An appraisal is conducted by a licensed appraiser who visits the home and later conducts their analysis by comparing your home’s features with similar ones.
An inspection dives deeper into the assessment of the home. A licensed home inspector will spend time reviewing the home’s condition, both visually and by testing several major systems for functionality. Upon completing their assessment, they will make recommendations to the buyer on items that should be repaired or replaced in the home before closing.
Do lenders require real estate appraisals?
Yes, most lenders will require an appraisal. The purpose is to secure financing for your home. Ultimately, lenders want to protect their investments to ensure they are not financing a loan for more than the value of the property.
Do lenders require inspections?
Inspections depend on the type of financing that your lenders provide. Lenders providing conventional financing do not typically require a home inspection. However, they are strongly recommended if not required. Specific loans, such as FHA or VA loans, usually require an inspection.
Who is responsible for ordering the appraisal?
The mortgage lender is responsible for ordering the appraisal and, therefore, is the appraiser’s client. Sometimes a lender will elect to use an appraisal management company that will help manage the appraisal process. They will often order an appraisal on behalf of the lender. However, some lenders elect to collect the appraisal directly from the appraiser.
While the lender will typically order the appraisal, the buyer is ultimately responsible for covering the cost. Usually, general appraisal fees range between $400-$750, depending on the size of your home.
Is an appraisal required?
Yes, most lenders will require a real estate appraisal to gain approval for financing or before you refinance a mortgage, and an appraisal assures the lender that they are not loaning too much money.
The process of achieving an appraisal goes like this:
- Assessment of property
- Review comparable properties
- Final reports
However, if a buyer is paying cash for a house, an appraisal is not acquired, but it is still recommended that the buyer obtain one.
How does the appraisal impact the loan?
An appraisal directly impacts the mortgage loan. The amount you receive from your mortgage lender for a home loan relies on the appraisal’s estimate of the property’s fair market value. The estimated appraisal amount keeps the lender from lending you too much money. It also keeps you from borrowing more than is required for a specific home.
Can you still get the loan if the appraisal comes in low?
Yes, you will still receive the loan if the appraisal comes in low. Lenders always use the appraised value to calculate your loan – not the purchase price. If the appraisal is estimated to be lower than the home’s purchase price, your lender will more than likely decrease the amount of money you will be able to borrow.
As always, if you have questions regarding appraisals or any other part of the home buying or home selling process, please talk to an experienced real estate professional. At Corcoran Classic Living Real Estate, our agents are highly skilled REALTORS® and ready to provide clients with unsurpassed local knowledge, exceptional marketing and outstanding overall service. If you are ready to discuss your next real estate move, please CONTACT US.