Understanding the appraisal process when buying a home
Buying a home is a process. It doesn’t just happen overnight. Very seldom do you find a home, make an offer and move in the next day – it only happens that way on television. Why is it this way? Because there are steps that need to be completed to protect both the buyer and the seller – one of those steps is getting a home appraisal.
What is a home appraisal?
To put it simply, a home appraisal is an estimate of the fair market value of a home, i.e. the true value at one particular point in time. It’s completed by a third-party and can be more or less than the asking/listing price and the purchase price.
According to Realtor.com, “A home's appraised value is based on such factors as square feet, number of bedrooms, number of bathrooms, the location and age of the property, and interior improvements. These facts about your home will be compared with other homes that the appraiser considers comparable to come up with your home's value.”
How does the process work?
When buying a home, the appraisal is usually one of the conditions of the mortgage offer – along with other factors, such as being approved for financing and completing a home inspection (as long as there are no major problems).
Since the appraisal is an unbiased evaluation of the property, it also lets the buyer know if they’re getting a good deal (or if they’re overpaying) and lets the seller know if they priced the property competitively a.k.a. to sell as quickly as possible. A home appraisal is also handy when purchasing home insurance. Homeowners will need to provide the value of the home because it is a factor used to calculate the cost of your annual insurance premiums.
Why do lenders need a home appraisal?
Lenders need a home appraisal when buying a home to approve a mortgage loan application. The lender will send the request to their appraiser of choice – but the fee is charged to the buyer. Don’t worry, very often you can negotiate a refund with your mortgage broker.
Banks and other lenders use appraisals to determine if the purchase price (a.k.a. your offer) is a reasonable amount and in turn the mortgage loan amount is appropriate for the property value.
When you apply for a mortgage loan, the property serves as a collateral asset for the loan. If homeowners end up in financial trouble and can’t afford the mortgage payments, the loan will go into default and the home will go into foreclosure. If that happens the lender will need to sell the property to repay the loan. That’s why knowing the true market value of a property versus the amount of the mortgage loan is so important.
After the appraisal is completed, ask the lender for a copy. It’s important to keep the information in your files, and of course, check its accuracy. If there are any errors or omissions it is a good idea to address them before the appraisal is accepted by the lender and the mortgage loan is approved.