How Home Value Is Measured
A homes value is based on its features. These include square footage, location, age, quality and number of bedrooms and bathrooms.
A propertys value isnt fixed. Its a snapshot of what its worth in the current market in relation to what similar properties are selling for. Renovations will affect a homes value. So will changes to the neighbourhood and in the housing market.
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.
Low Appraisal Value For New Construction
Home appraisals for renovation loans or new construction loans work a little differently. The appraiser will need to measure the market value of a home that doesnt yet exist.
To do this, the appraiser will study your building plans along with your local housing market to determine the homes eventual value.
Many lenders call this a subjectto appraisal since it is subject to your planned projects completion.
Once the builder finishes the job and the home receives its Certificate of Occupancy, youll need a new loan to pay off the construction loans balance. This new loan is called permanent or takeout financing.
If, for some reason, your newlybuilt house did not appraise for a loan large enough to pay off construction costs, youd have some of the same options as any homebuyer:
- Try a new lender
- Get a new appraisal
- Ask the builder to take less money
If the low appraisal is the builders fault say, the quality of construction or materials were not as described in the loan application documents you may be able to sue your builder to recoup some of the losses.
A lot of builderowners get constructiontopermanent loans which combine the construction loan and the permanent mortgage into one loan. This option has both advantages and disadvantages. One advantage: Youd likely need only one appraisal instead of two.
New construction that is not custom
You have the same options if an appraisal comes in low back out, renegotiate, make a bigger down payment, etc.
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When Borrowers Dont Need An Appraisal
Mainstream mortgage lenders will always require an appraisal when youre buying a home. But they sometimes wont insist on one when youre refinancing.
The choice is with the lender. However, the general rule is that appraisals arent always needed when the total amount of the loan when refinanced is $250,000 or less.
Lenders are least likely to require an appraisal when you want a rate-and-term refinance. That means you pay your closing costs out of pocket and improving on your mortgage terms without increasing the balance. if you wrap the refinance costs into a new loan, its called a limited cash-out home loan.
Lenders are most likely to require an appraisal when your loan-to-value exceeds 80 percent or when you apply for a cash-out refinance. They are least likely to require one when you have a lot of equity or do a streamlined refinance, which means refinancing with the same program and mortgage insurance.
What Refinancing Homeowners Need To Know About Appraisals
If you’re refinancing a conventional mortgage, a low appraisal can prevent you from doing so. The home needs to appraise at or above the amount you want to refinance for your loan to be approved. However, if your existing mortgage is an FHA mortgage, you can refinance without an appraisal through the FHA streamline programa great option for underwater homeowners.
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Home Appraisal Tips For Refinancers
When youre refinancing, you want to get the highest appraisal value possible. A low appraisal value could keep you from refinancing, but a high appraisal value means more equity for you which could mean more cash out or better loan terms. Here are some ways to up your chances of a high appraisal value.
Online Home Appraisal: Accuracy Vs Convenience
Online home appraisals, which use statistically-based automated valuation models to determine a homes market value, are sometimes ordered by lenders who dont want to pay for a full appraisal, but theyre not very accurate, Crumpler notes.
Theyre looking at sales prices in the area and square footage, but there is no personalized tweaking of it, Crumpler says. In other words, if the home next door sold and it wasnt updated and yours was updated, its not going to reflect a comparable value.
An online home appraisal might be suitable for a low-risk loan, Crumpler says, but most lenders and borrowers are better served with a full professional home appraisal.
You get better information if you are viewing a property, Crumpler says. Would you buy a home without seeing it or going inside of it? All the appraiser is doing is trying to reflect the market and what a typical buyer and seller would do.
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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:
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The lot to be positioned so drainage moves away from the house, not toward it
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Handrails alongside steps and stairways
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A foundation that can withstand all normal loads imposed on it
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Proper ventilation and fully functional mechanical systems
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A roof that keeps moisture from entering the home
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Lead-based paint jobs
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Defective paint on properties built after 1978
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Evidence of termites
For a complete checklist of these and other appraisal requirements, refer to HUD Handbook 4000.1.
What Happens After The Appraisal
After the home appraisal is completed, the next step is mortgage underwriting. The underwriter reviews the loan file to make sure everything is in order and that all the required documents have been submitted. The underwriter then assesses the risk associated with the loan and either denies or approves the loan based on all the information.
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When Is A Home Appraisal Required
If you are applying for a loan to purchase or refinance a home, most lenders will require an appraisal. After you have been approved for a mortgage and you have made an accepted offer on a home, the lender must approve the property before the transaction can move forward. Lenders do this to ensure they dont loan money for a property well below the value of the accepted offer. That way, if the borrower defaults on the loan, the lender can repossess the property and sell it to recoup their money.
The lender or mortgage broker will be the one to select and hire a home appraiser. While a borrower is within their rights to request a second appraisal of the property they wish to purchase, you should note that it is the appraisal ordered by the lender that will count in a mortgage transaction.
Even when a lender orders an appraisal, the borrower is usually the one to pay for it.
Buyers who are purchasing a home with cash will not be required to obtain an appraisal. However, if you wish to use personal funds to buy a home, it would still be wise to get an appraisal to ensure you do not overpay. If you are selling your home and want to ensure you list it at the right price, you may order an appraisal then as well.
Who Pays For A Home Appraisal
When a mortgage is involved, the lender selects and hires the appraiser, and the mortgage applicant pays for the home appraisal.
That means the buyer pays for the appraisal for a home purchase, and the homeowner pays for the appraisal when refinancing a mortgage.
No lender is involved when you’re buying a home with cash, so no appraisal is required. But you might want to get an appraisal anyway to ensure you don’t pay more than the property is worth. In that case, you’d hire the appraiser and pay the fee.
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Home Appraisals: What It Is Process And How Much It Costs
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Before you can buy or refinance a house, the lender will likely ask for a home appraisal. Most people groan when they hear the word, assuming it will crash their sale or make them pay more cash for the home to make up the difference.
What if, instead, you looked at an appraisal as a tool to ensure you dont over-invest in a home thats not worth it? An appraisal is a tool that helps lenders and buyers ensure the transaction is smart.
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Home Appraisal Process Details
The home appraisal process is coordinated by our operations staff. The compliance laws of the mortgage industry do not permit a Mortgage Loan Officer to be involved in the home appraisal process.
You have three action items when ordering an appraisal. First, pay for the appraisal. Second, email us any off-market comps. Lastly, provide any insider information about comps.
Provide Information to Appraiser
Action is required by you if there are off-market comps or if there is insider information about a recent sale. In these instances, you would need to forward any pertinent information to us so we can forward it to the Appraiser . Check out how to avoid appraisal pitfalls for more details.
Appraisers have access to the Multiple Listing Service and can view recent sales and current homes listed. What they dont have access to is hip pocket sales and homes sold that were not listed in MLS. A copy of the sales Closing Disclosure will be required by the Appraiser in order to use it as a comp for the report.
Likewise, the Appraiser does not have insider information about recent sales. For example, you may know that the home across the street was sold at a steep discount because the homeowner lost his job and needed to move. That insider intel should be considered. The Appraiser can look for other comparable homes to use for the valuation and notate why that house isnt indicative of the market.
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.
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Appraisals For Mortgage Refinancing
If you are getting your mortgage refinanced, an appraisal lower than the outstanding mortgage amount can prevent you from getting the new mortgage. The reason is that lenders use the home as collateral If the home is valued at less than the outstanding balance, the risk for the lender is too high. You may also need a home appraisal if you are receiving areverse mortgagein Canada.
What If A Property Appraisal Comes In Higher Or Lower Than Expected
The appraised value of a house can be higher or lower than its sale price. When this happens, it can change your loan-to-value ratio and may affect your eligibility to be approved for a loan.
Your eligibility is typically not affected when the appraised value of a home is higher than its sale price. Your eligibility may change when the appraised value is lower than the sale price, however. That’s because most mortgage programs have a maximum loan-to-value ratio, and this ratio can increase beyond the maximum allowed when the appraised value of a house is lower than expected. In these cases, you may need to increase your down payment or negotiate with the seller to lower the home’s sale price.
The appraised value of a home can also affect your eligibility for refinancing a mortgage. Different lenders have different standards for the loans they offer, and Freedom Mortgage considers factors besides a home’s value when we make our lending decisions.
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How Does The Appraisal Process Work
An appraisal can cost anywhere between $300 – $600 and is usually part of theclosing costsof the transaction. There are several factors that can impact the value of your home:
Now What Happens In The Home Appraisal Process
Your mortgage lender , the one who is giving you a mortgage isnt in the business of home appraisals. So, their process is to hire a 3rd party company. They specializes in these to go out and appraise the house.
The third party goes to the house, assesses the lot and interior and then pulls recent comparable homes sales. They determine what fair market value is and give that report to the lender . The appraiser has access to the public records and can access comparable sales on their own.
And lets also assume that the home appraisal comes back at what we already knew market value was: $900,000.
RBC comes to you, the buyer and says they have a problem. You paid $1 million for the home but the appraisal says its worth $900K. That low appraisal results in a $100,000 gap.
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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.
Other Types Of Appraisals
Depending on the type of financing you are using for the purchase of the house, your lender may require certain criteria for the home appraisal.
For example, if youre looking to get an FHA loan, some repairs must be completed prior to closing. This impacts both the buyer and the seller because the home loan process absolutely cannot progress until a few repair items are completed.
FHA home appraisals require repairs to peeling paint, water damage, holes in the roof, foundation issues and more to be completed before you can move forward with the loan process.
Like an FHA loan, home assessments for properties purchased with VA loans have their own standards for acceptable home conditions.
In addition to the standard, conditional loan requirements, VA home appraisals will require clean drinking water, a working sewage system, functioning electrical and water systems, pest inspection and appropriate living areas.
Any repairs, safety or health concerns will slow down and possibly put a halt to the home buying process until they are addressed by either the buyer or seller. The VA loan appraisal must be completed by a VA-certified appraiser, assigned by the Department of Veterans Affairs.
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