Updated by Richard Barrington
For a first-time home buyer, the mortgage appraisal process is likely to be a new experience. It is worth understanding this process before you make an offer on a property as your ability to get a mortgage depends on it.
A home appraisal is a thorough assessment of a property's value by a qualified professional. Its purpose is to assure your mortgage lender that the collateral on your loan is worth enough to back up that loan. So, if the home you want to buy is appraised for less than your proposed purchase price, it may interfere with your ability to get a mortgage on that property.
Home appraisal checklist
To anticipate the outcome of a mortgage appraisal process, it is important to think of it from the appraiser's point of view. What do they look for in a home appraisal? If you go through the following checklist, you should not only get a feel for how things look through the eyes of an appraiser, but better understand the property you are trying to buy.
- Review recent nearby home sale prices. The recent sales prices of nearby, comparable properties is a foundation of the appraisal process. This background not only helps you assess your chances of a favorable appraisal, but it is all information you should know before you even place an offer on a home.
- Evaluate your desired home's condition. Critically assess what kind of shape the house you want to buy is in. How sound are the plumbing, climate control and electrical systems? Is there wear-and-tear or damage that will require repair? These conditions affect the appraisal, but they are also things you should be aware of before buying a house.
- Consider both the property's assets and its liabilities. While there are positives such as square footage and lot size that can add to a property's value, there are also potential negatives such as structural problems or health risks. FHA mortgages are especially stringent when it comes to potential hazards such as lead paint, and even consider factors external to the property itself such as traffic volume and airport noise.
- Include an appraisal contingency in the offer. When you put a purchase offer in on a house, you may have to put up good-faith money which could be forfeited if you withdraw the offer. Therefore, your offer should state that it is contingent upon the appraisal meeting the sales price. This way, if the appraisal comes up short, you are able to withdraw your offer without forfeiting that money.
How much does a house have to appraise for to get a mortgage?
Even when you are making a down payment it is best if the appraised value is at least as much as the total purchase price, and not just the amount of the mortgage. The reason is that lenders base their risk underwriting on loan-to-value (LTV) ratio, which is the amount borrowed relative to the value of the property.
For example, if you are applying for a loan that requires an LTV of 90 percent or less, it means the remaining 10 percent of the purchase price must come from your down payment. However, if the house is appraised for less than the purchase price, it means you would have to make a larger down payment to get the LTV down below 90 percent. FHA loans can be particularly conservative when it comes to LTV.
When a low appraisal prevents you from getting a mortgage loan
If the appraisal comes in substantially less than you expected, review the report for errors. You can appeal these items and ask for a reappraisal - though this means another appraisal fee with no guarantee the result will be any better. In some markets with limited homes for sale, supply and demand can drive up purchase offers, but because few other comparable homes have sold for the prices offered, appraisals can lag actual market conditions.
A low appraisal puts you in a position to renegotiate with the seller. That low appraisal may force them to recognize that any buyer would have trouble getting a mortgage based on their asking price.
Finally, if a second appraisal comes in lower than your offer price and the seller won't reduce the price, you may have to walk away from the house. Don't be too disappointed. This process may have saved you from buying a property for more than it is worth.
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