Congratulations! You’ve done almost ALL the things… you’ve planned, you’ve saved, you’ve negotiated. Your dream home is coming closer and closer to becoming a reality. There are only a few more i’s to dot and t’s to cross and one of those items is going through the appraisal process. If you’re a first time home buyer (or even if you’re not!) this can be daunting. Here are some tips to help you get through it!
Truly Knowing a Home’s Value
You’ve made an offer and the seller has accepted. It should be a done deal, right? Not so fast. It doesn’t quite work that way. A lender still has to essentially back the value of the home… this is their investment, too, after all. Part of securing a mortgage involves getting an appraisal so the bank knows the full value of the home (to use it as collateral).
Pulling those Comps
Oftentimes, when figuring an appropriate offer your Realtor will compare this listing with recently sold homes in the immediate area. (Or “comps,” for ‘comparable listings’.) Likewise, an appraiser will look at these comps during the appraisal, but they’ll dig much, much deeper. They look at location, square footage, and do a cursory once-over of the home for its condition, additions, and renovations. They make their impartial, unbiased assessment from there. They are generally hired by the lender but this doesn’t make them biased. It’s in the lender’s best interest to pick a reputable appraiser for a fair and balanced report.
Keep in mind, the appraisal is usually paid for by the buyer and will generally be wrapped up in the closing costs. A motivated or proactive buyer may offer to cover the cost of the appraisal to incentivize buyers.
Even though a number has been agreed upon, an appraiser is really making sure that you the buyer don’t end up underwater. If the appraisal comes in over the asking price, that’s generally fine and usually isn’t a huge sum. It’s when the appraisal comes in below the asking price that things get dicey. A lender simply will not lend more money than the home is worth. If you agreed upon $215,000 and the appraisal comes in at $205,000, there are options. If your contract with the seller is contingent upon appraisal, you can walk away and get your earnest money back. You can request that the seller simply agree to the lower price. You could challenge the appraisal and pay out-of-pocket for a second opinion (knowing it very well could be identical). Or, you could pony up the cash yourself. A low appraisal is not a death sentence.
Bottom line: appraisals are meant to keep the buyer from paying too much for their home. They can be tricky but are important!