How Does Mortgage Appraisal Work

Fha And Usda Appraisal Process

Home appraisals vary based on the type of financing used when purchasing the home. Unlike other mortgage programs, the FHA and USDA loans must meet appraisal guidelines and Department of Housing and Urban Development property guidelines. So your appraiser will look for:

• The lot to be positioned so drainage moves away from the house, not toward it

• Handrails alongside steps and stairways

• A foundation that can withstand all normal loads imposed on it

• Proper ventilation and fully functional mechanical systems

• A roof that keeps moisture from entering the home

• Lead-based paint jobs

• Defective paint on properties built after 1978

• Evidence of termites

For a complete checklist of these and other appraisal requirements, refer to HUD Handbook 4000.1.

What If The Appraisal Is Lower Than The Purchase Price

• There are options if the appraisal comes in low
• Ask for an appraisal review
• Put more money down
• Hope the lender will allow a higher LTV
• Or attempt to renegotiate the price with the sellers

One issue that happens pretty frequently is the appraised value coming in lower than the agreed upon purchase price.

This is a common problem because home buyers will often overpay for their dream home, either because of a bidding war or because of an emotional attachment.

Whether its truly overpaying is a question for another day.

For example, if you agree to buy a home for $200,000, and apply for a loan with 20% down, youd need a loan amount of $160,000 and a $40,000 down payment.

That equates to a loan-to-value ratio of 80%, which is simply $160k divided by $200k.

Now imagine the lender comes back and tells you that the property only appraised for $190,000.

Your $160,000 loan amount based on the new $190,000 value would push the LTV to ~84%. And yes, lenders use the lower of the sales price or the current appraised value.

They dont care what youre willing to pay for it. They care what an independent appraiser says its worth in case they foreclose on you and wind up with it one day.

Anyway, this could be a problem as your loan would now require private mortgage insurance because the LTV would exceed 80%, and thats if the lender could even offer you a loan above 80% LTV. Often they cant.

Prepare An Appraisal Package

The National Association of Realtors® recommends preparing an appraisal package for the appraiser that includes:

• Recent comparable sales
• A detailed list of recent renovations and updates, along with costs
• Floor plans
• Property details, including surveys and covenants
• A list of energy-efficient features

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What Can You Learn From The Results Of A Home Appraisal

While an appraisal is just a visual inspection, it still gives a lot of excellent information about a home. Any items the appraiser sees that might need repairs will be listed, which can help you determine costs you might face after you purchase the home. The appraisal report will also give you details about the property, like square footage, number of bedrooms and bathrooms and other amenities.

The comparison to other homes in the area can also give you an idea of the potential for resale. For instance, is the home currently the highest in value in the area? Is it the lowest in value? This information can help you, the buyer, determine how much money you want to put into repairing the home or if the value is already maximized. The appraisal can help you decide if the home is priced correctly.

How Do Appraisals Work

Each appraiser may have their own way of completing the home appraisal process, but many will look at the following characteristics:

• The lot and size of the home – this means square footage and the number of proper bedrooms and bathrooms
• Health and safety considerations
• Curb appeal and exterior appearance
• Permanent additions or upgrades to the property including basements, pools, decks and garages
• The overall quality and condition of the home
• If the property conforms to the neighborhood for resale purposes
• Comparable homes in your area and what they have sold for

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What Does An Appraiser Look For

To appraise a home, the homeowner hires a third-party home appraiser to run an appraisal report of a home by inspecting and assessing the property. A property assessment is similar to a home inspection, but an appraiser will additionally take the sales prices of comparable homesor compsinto account.

To determine the value of the property against similar homes, an appraiser assesses the following:

• Square footage

The General Condition Of The Home

Before getting too granular, the appraiser will note general details in the home, such as the materials used throughout the home, the condition of the property, and any alarming physical aspects of the property that may impact its habitability. This is one of the first things appraisers look for! If anything seems structurally unsound or unsafe to live in, they will take note. They will also scan the home’s overall upkeep, such as missing door handles, leaking faucets, and other maintenance-related issues. While they wont focus on whether or not the home is clean, they will look for signs of neglect, including broken windows, damaged floors, broken appliances, cracked walls, broken doors, ripped carpeting, etc.

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Other Contingencies You Can Use

Aside from the appraisal contingency, there are others you have to consider as well. The appraisal is probably the most important as it has a direct bearing on your loan. The others are also impactful though and they include:

• Inspection contingency This gives you a specific period to secure an inspection and review the results. If something comes back as dangerous or that you just dont like, you can ask the seller to fix it or back out of the contract without issue.
• Financing contingency This gives you time to secure proper financing. If something pops up that makes the lender rescind their offer to provide you with financing, you can back out of the contract without a problem.

Any type of contingency can protect you in a very costly purchase. If something doesnt go right, you can back out of the contract, keeping your money in your pocket. Talk to an attorney about the contingencies that suit your situation the most, including the appraisal contingency. This way you have your self-protected no matter what happens moving forward.

What Happens If An Appraisal Comes In Low

Unfortunately sometimes bank appraisals do not go as smoothly as one would hope, and the appraiser does not think a home is worth what the Buyer agreed to pay the seller.

If an appraisal comes in for less than the amount that youve agreed to pay, then the bank will only fund a mortgage based on the appraised value.

For example, if you agreed to pay $900,000 for a home but the appraisal value comes in low at $850,000, then the bank will only fund up to $850,000. This means that if you want to proceed with the purchase that you will have to find a way to fund the difference of $50,000 or come up with a larger down payment.

So what options if your appraisal comes in lower than the purchase prices? In these circumstances, a Buyer has 3 options:

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How Does An Appraisal Work

As we mentioned at the beginning of the article, there are a few things you need to do before youll be approved for refinancing. One of the first steps youll need to undertake is to have a professional appraiser assess your home to calculate its fair market value. For most lenders, an accurate appraisal is a required document during the refinancing approval procedure. Using an appraisal report, your lender will be able to determine whether or not the remaining balance of your mortgage loan outweighs the propertys value. While you, as the homeowner, will have to pay for the appraisal itself, your mortgage lender will retain the rights to the original version of the appraisal report. They do so because they will be organizing the appraisal process for you. However, you will have access to a copy of the report to keep for your records. A standard appraisal usually costs between $300-400, depending on the location of your home and the type of property it is.

How Do I Prepare For A Refinance Appraisal

Preparing your home for an appraisers visit is different from preparing it for a prospective buyer. When you are opening your home to a prospective buyer, you want to trigger emotional responses, says Parsons. As a seller, you want that buyer to be able to imagine how happy and comfortable they will be there. No such subjective considerations apply to an appraisal.

Vaccari adds that a homeowner wouldnt make a changesuch as ripping up old carpet to reveal hardwood floorsfor an appraisal as they might for a seller. Still, freshening up the homes paint, both inside and out, can help, as can clearing away clutter to allow full access and viewing of all areas of the home, including the basement. Be sure that everything works , and make plans for the children and pets to be somewhere else so that they arent a distraction. Finally, says Ailion, if the tax records are incorrect, point that out.

Otherwise, Vaccari says, it is the appraisers responsibility to discover problems and ask questions where warranted.

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When Is An Appraisal Required

An appraisal is typically required for purchasers that are low-ratio that have uninsured mortgages, or in other words, putting 20% or more down payment towards their home purchase.

Another common question is when is an appraisal not required. This is often the case when your down payment exceeds your loan amount, or for buyers that are already insured by CMHC.

However, when the value of the property is in question and the lender has reason to question the purchase price with relation to the actual value then an appraisal will likely be required.

Who Performs Real Estate Appraisals In Massachusetts

Appraisers in Massachusetts are licensed. Licensed appraisers are governed by statutes and regulations, and they must take approved courses and a test to obtain their license and continuing education to maintain their license. The role of the appraiser is to provide an objective, impartial and unbiased opinion about the value of the home he or she has appraised.

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Appraisal Gap Coverage Vs Appraisal Contingency

When youre buying a home, youll likely hear two words thrown around before you sign the contract – appraisal gap coverage and appraisal contingency.

They sound similar but have different meanings.

Appraisal gap coverage isnt an insurance policy, even though it sounds like one. Instead, its wording in the contract that binds you to buy the home even if the appraisal comes in lower. Pay attention to this area of the contract and either ask for it to be removed or put a cap on how much youre willing to pay to cover an appraisal gap.

An appraisal contingency gives you a legal way out of the contract if the appraised value doesnt match your agreed-upon sales price. The contingency allows you to back out of the contract and keep your earnest money. If you backed out of the contract without the contingency, the seller could keep your earnest money, which could be between 1% – 3% of the sales price.

What Do Home Appraisers Look For

Appraisals are not performed by your mortgage company. Most state laws require that only an independent third party may perform a property appraisal, though your mortgage lender may help schedule or arrange the appraisal.

During the actual inspection, an appraiser looks at a number of factors in the home to determine its value. Some of the things that appraisers consider when they determine a homes value include:

After the appraiser finishes their research, they make a final valuation of the property in a formal report. The appraiser then delivers the report to your mortgage lender.

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Point Out Major Improvements

If you recently replaced the roof or installed a new patio, mention it to the appraiser, Coyle says.

But dont make major improvements now in hopes of increasing your homes appraisal or resale value. Few such projects ever recoup 100% of their cost.

For example, a major kitchen renovation costs more than $75,000 on average but returns only about 57% of that, or roughly $43,000, according to Remodeling Magazines “2021 Cost vs. Value Report.”

How Often Do Home Appraisals Come In Low

Low home appraisals do not occur often. According to Fannie Mae, appraisals come in low less than 8 percent of the time, and many of these low appraisals are renegotiated higher after an appeal, Graham says.

How often a home appraisal comes in low generally depends on the neighborhood and market conditions. The majority of appraisals tend to come in at the right value, Sklar says.

Those that come in low in todays market are often a result of other properties or units that have not been upgraded, causing low comparables that are in turn used by the appraiser, Sklar says. Always check your appraisal over and make sure that the comparable uses are fair and just.

To head off a low appraisal, Sklar recommends that the real estate agent meet the appraiser at the property to point out any upgrades the homeowner made, with recent receipts as evidence.

It is also a good idea to try and get an appraiser who is familiar with your area,Sklar says.

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What Do Appraisers Look For During A Home Appraisal

When comparing your home to other homes in the area, they will primarily take the size and overall condition of your home into strong consideration when conducting their analysis. If you own a 3-bedroom home in Raleigh, North Carolina, they will compare the amount of similar 3-bedroom homes have sold in the Raleigh area when determining the value of your home. In addition to conducting an analysis of comparable homes in the neighborhood, they will also review your home’s physical condition and qualities that cant be changed, such as square footage, zoning, and other factors.

What Is An Appraisal Contingency

The contingency clause in your purchase agreement means that you can walk away from a low appraisal on a home without losing money. Be sure that you can walk away from the get-go, so make sure your purchase agreement contains an appraisal contingency to be absolutely safe. If the home doesnt appraise for the amount youve agreed to pay, sometimes walking away is the smartest and safest thing you can do.

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Signs Of Water Damage

Water damage brings a host of issues in a home, including mold, mildew, rotting, and more. The appraiser will look for water in the basement, plumbing problems, roof leaks, and any stains on the ceilings, floors, or walls. If there is minor water damage in your home, you may be able to take care of the problem on your own to keep your buyer from walking away from the deal.

Water damage is an important aspect of the appraisal process because mold can cost thousands of dollars to remove. Not only that, mold is also extremely toxic and dangerous to those who are exposed. Mold poisoning can bring on considerable respiratory issues along with a host of other health complications.

A Homes Appearance Matters

A dirty or ugly home will usually affect your appraisal negatively, Graham says.

How to avoid: Before you list your property, consider having it professionally cleaned both inside and out and staged not only for prospective buyers, but for appraisers as well, he says. Dont forget areas such as the attic, basement and garage, especially if they are unused. Clean up and mow the yard, touch up the paint and pack up your tchotchkes.

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Should I Guide The Appraiser Through My Home

You do not need to be physically present during the home appraisal process, but be accessible via phone in the event the appraiser has questions while assessing your home. If you are selling your home through a real estate agent, your agent can accompany the appraiser and tour them through the home. If you do not feel comfortable leaving your home during the appraisal process, you can be present during the appraisal process, but try to give them some space as they assess the home no need to follow the appraiser room to room. If they have questions regarding upgrades or if they need to know where something is located in the home, they will be sure to ask. If you have questions for the appraiser, they may not be legally allowed to share all of the information with you. This is because the mortgage lender is technically considered their client, so they may only be allowed to share certain information with the lender. Appraisers are regulated on both the state and federal levels, so if there is any information they cannot provide to you as the homeowner or to your real estate agent, they will give it to the mortgage lender.

How An Appraisal Works

The appraisal happens after an offer to purchase has been accepted, but before the mortgage is advanced and the Buyer takes possession. Pre-pandemic, appraisers had to visit a property in person in order to determine its value. During COVID, however, appraisers can view a property either virtually or in-person.

Appraisers are mandated to use very recent comparables usually properties that have sold in the last 60 days. Appraisers do not judge a homes value based on what happened before that, nor do they make predictions of what can happen.

Who pays for an appraisal? This really depends on a few factors, most notably if the appraisal was done by a bank, prime lender, or alternative prime lender. Banks can pick up the cost of appraisals or they can hide this cost in the advance of the mortgage. If a bank gets an auto valued appraisal i.e. no appraiser had to visit the property, thats usually hidden deep in the mortgage commitment and costs $99. If youre working with a mortgage broker, the good ones always pay for the appraisal .

Good to know: The goal of a bank appraisal is to justify how much a Buyer has agreed to pay for a home, not determine the true value of a home. Appraisals will never come in over the agreed-to price. If you got a deal, dont expect the bank appraisal to come in higher than what you offered.

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