8 Things You Should Know About the Appraisal Process
Once you find the perfect property and enter into a contract to purchase it, a crucial step is obtaining a home appraisal. This is a significant milestone when trying to get a mortgage. Ordering the appraisal is necessary for an appraiser to provide an opinion about whether the purchase price aligns appropriately with the property's value.
It is crucial that you have a clear understanding of how the appraisal process works and why it's so important for the homebuyer. Today, we'll discuss 8 things you should know about the appraisal process.
#1 What is an appraisal?
As we mentioned, the appraisal process starts after you sign a contract to purchase a property. Put simply, an appraisal is used to assess a home's value and is conducted by an unbiased third party. These assessments are completed by certified professional or state-licensed appraisers whose job it is to provide opinions on how much a property is worth at a given moment in time.
Appraisers do not represent the seller or the buyer and are usually chosen by the lender. Since the lender loans you the money to purchase the house, they need to know that the risk they are taking is reasonable and that the house is worth at least as much money as they are loaning you to buy it.
#2 How does the appraiser determine a property's value?
Appraisers gather information from several different places to provide their best opinion as to the value of the home at that moment. Here are some of the top factors that home appraisers take into consideration to determine a property's value:
- Style, size, and number of bathrooms and bedrooms
- Additions, improvements, or renovations
- Current real estate market
- Recent sales of comps or comparable properties
#3 How can a buyer prepare for the appraisal process?
The first step you should take to prepare for an appraisal is to include an appraisal contingency in your contract offer. This is crucial because if the house you want to purchase does not appraise for your offer amount, this contingency protects you financially and allows you recourse and protections.
Another great way to prepare before ever placing an offer is to research your desired area. Knowing what homes are going for and having a REALTOR® pull home values and conduct comparisons of recent sales help you go into the home-buying process educated about the area's price point. This research is also useful to prevent difficulties with an appraisal, as the home value and area should coincide with the offer you place on the property.
#4 How much is a home appraisal?
In general, a home appraisal costs between $350 and $400 and is something you pay at closing. However, this can vary between lenders, so this is something you should always ask a lender before choosing the right one for your needs.
#5 What is the purpose of the appraisal?
The appraised value of a property impacts many important factors of the loan underwriting process. When buyers finance over 80 percent of the property's total value, they are often required to carry private mortgage insurance (PMI). Hence, a home's appraised value is not only crucial for how much the lender will offer but also determines the loan's terms.
Aside from buying a house, appraisals are also used for the home in other ways. For example, when determining replacement value, insurance value, and the assessment value for property taxes.
#6 What happens when the appraised value is lower than the contract amount, but I still want the home?
If a home's appraisal value is lower than the contracted purchase price, then your REALTOR® will need to step in and try to negotiate the home's selling price with the sellers and listing agent on your behalf.
When in a seller's market, there are more buyers searching for homes than there are homes for sale, so it's not uncommon for sellers to receive offers that are over the listing price. If you find that this is happening, then you should understand there's a possibility that the home will not appraise at a high enough value to cover the required purchase price. This means if you still want to purchase the home, you may have to arrive at the closing table with more cash for a downpayment to cover the gap between the contracted purchase price and the property's appraised value.
#7 What happens when the appraised value is higher than the contracted amount?
Congratulations! If the appraisal comes in a higher value than the contracted price, you've just earned instant equity. In other words, the house you are buying is worth more than what you are going to pay, and this is always great from an investment perspective.
In this situation, many buyers become concerned that the seller will ask to negotiate the contract to depict the higher appraisal value. However, this cannot occur for several reasons, mainly because you are already under contract at an agreed-upon price at this point. Moreover, the report is confidential and will not be shared with the listing agent or seller.
#8 Can a property's appraisal value change?
Just keep in mind that the appraisal amount is a professional's opinion of what a home is worth based on data, but it's not an exact science. You should remember that appraisals can differ depending on factors such as who is doing the appraisal and even when they are completed. The real estate market changes over time, and so does the value of your home. For this reason, if you decide to refinance or borrow money against your home, the lender will usually order a new appraisal to determine the property's current value.
The appraisal process can be stressful and is a huge hurdle in the home-buying process. To lessen the anxiety and worry that comes with not knowing, it's vital to remember that all states require appraisers to be certified or licensed to provide appraisals to lenders. The appraiser is a third-party participant in the transaction, and the person's main goal is to assure the lender that the amount they are loaning you does not exceed a property's actual worth. This assurance is also beneficial for you, as it can protect you from paying more for a home than it's worth.
Are You Looking to Buy a Home in Mid-Missouri?
The Heartland Network in Mid Missouri is a team of real estate professionals who help home buyers and sellers in Boone, Callaway, and Cole Counties. Whether you are an experienced home buyer or this is your first time, we will join your team as experts who help guide you through the entire home-buying process from start to close. We work side-by-side with many reputable lenders and will vet and recommend a trusted company. You can rest assured knowing the appraisal process will go smoothly and comprehensively. Contact us now or complete the form below with any questions or to start the home-buying process!