8 Things You Should Know About the Appraisal Process
Once you are under contract to purchase a home, a critical step in the home-buying process is the home appraisal. A milestone of obtaining a mortgage is ordering an appraisal to have an appraiser make an opinion of value analyzing if the purchase price is in line with the property’s value.
It is important to understand the appraisal process and what the appraisal really means to you as the homebuyer. Here are 8 things you should know about the appraisal process.
1. What is an appraisal?
As mentioned above, the appraisal process begins after you have signed a contract to purchase a home. To put it simply, an appraisal is an assessment of a property’s value by an unbiased third party. Appraisals are completed by state-licensed or certified professional appraisers whose job is to give an opinion of how much a house is worth at the given moment. They do not represent either the buyer or the seller, and are typically chosen by your lender. Since your lender is loaning money to purchase the home, they need assurance that the risk they are taking is appropriate and that the home is worth at least as much as they are lending to you to purchase it.
2. What does the appraiser use to determine a home’s value?
Appraisers will use several pieces of information to give their best value to a home at the given time. Below are some of the things appraisers will take into consideration to determine its value:
- Size, style, and number of bedrooms and bathrooms
- Updates, additions, or renovations
- The current real estate market
- Recent sales of comparable properties (frequently called “comps”)
3. As a buyer, how can I prepare for the appraisal process?
The most important step you can take to prepare for an appraisal is to include an appraisal contingency in the contract offer so if the home you are purchasing does not appraise for the contract offered amount, you are financially protected and you can withdraw your offer on the home.
Another way you can prepare comes before putting an offer on a home. Research the area in which you are interested in purchasing and have your REALTOR® pull home values and comparisons of recent sales so that you can go into the purchase process educated about the price point for the area in which you are shopping. Doing this research can help eliminate difficulties with the appraisal, as the area and the home value should coincide with the offer you make.
4. How much does an appraisal cost?
Typically, an appraisal can cost between $350-$500 and is paid at closing. This can vary from one lender to another. This is a question that you should ask lenders when you are considering which lender to use.
5. What is an appraisal used for?
The appraised value of a home drives many important parts of the loan underwriting process. When a buyer finances more than 80% of the home’s total value, they will often be required to purchase private mortgage insurance (PMI). This means that a home’s appraised value will not only partly determine how much a lender will offer, it will also determine the terms of the loan.
Outside of purchasing a home, appraisals are used in other ways related to the home, such as determining insurance value, replacement value, and the assessed value for property taxes.
6. What happens if the appraisal value comes in lower than the contract amount and I still want the home?
If the appraised value is lower than the contracted purchase price, your REALTOR® will step in and try to renegotiate the selling price of the home with the listing agent and the sellers on your behalf.
In a sellers’ market, where there are more buyers looking for homes than homes available for sale, it is not uncommon for buyers to make offers that are above the listed price. If you are in this situation, make sure you understand that there is a possibility that the house will not appraise at a high enough value to cover your entire purchase price. It may be necessary to come to the closing table with additional down payment to cover the shortfall between the home’s appraised value and the contracted purchase price, if you still choose to purchase the home.
7. What happens if the appraisal comes in higher than the contract amount?
If the appraised value is higher than the contracted purchase price, you have instant equity. That means that the home you are purchasing is worth more than the offered amount, and that is always great news from an investment point of view.
When this happens, buyers can become concerned that a seller will want to renegotiate the contract to the higher appraised price. However, that cannot happen for several reasons. You are already under contract at this point for an agreed-upon purchase price, and the appraisal report is considered confidential, so it will not be shared with the seller or their listing agent.
8. Can a home’s appraised amount change?
The appraised value is a professional's opinion, based on data, of the value of a home at a point in time, but it is not an exact science. You should keep in mind that appraisals can differ depending on when they are completed and even who is completing them. Due to the nature of the real estate market, a home’s value will change over time. If you choose to refinance or take any loans out against your home, your lender will likely order a new appraisal to determine your home’s current value.
The appraisal step can often be a nerve-wracking time frame and one of the biggest hurdles of the home buying process. In order to lessen some of the stress and unknown for yourself, it is imperative to keep in mind that all states require appraisers to be licensed or certified in order to provide an appraisal to a lender. An appraiser is a third-party participant in a real estate transaction and an appraiser's main goal is to assure the mortgage company that the amount they are lending you as the buyer does not exceed a home’s true value. With that assurance, they are also providing you the peace of mind and protection that you are not purchasing a home for more than the property is worth.
Looking to purchase a home in the St. Louis area?
The Chad Wilson Group is a team of real estate professionals helping home buyers like you in the Greater St. Louis Area (St. Charles, St. Louis, Warren, and Lincoln Counties). Whether you are a first-time or an experienced homebuyer, we will work on your behalf as experts in your corner throughout the entire process to help make everything easier and more manageable. We work closely with many reputable lenders and can vet and recommend a trusted company to you, so you can be assured that the appraisal process is completed thoroughly and smoothly. Contact us or fill out the form below with any questions you may have or to get the process started!