Tips for buyers – the appraisal
You found your dream home, made an offer, did an inspection, signed a contract and applied for your mortgage. You were just notified that it was time for the mortgage appraisal. You probably have questions like, What is an appraisal? How is it different than a home inspection? Why is this important? Following are the answers.
What’s the difference between a home inspection and a mortgage appraisal?
You already conducted a home inspection. So why do you have to pay for an appraisal? What’s the difference? Why can’t your bank just use the home inspection report?
A home inspector is hired by you to go over the home with a fine tooth comb. He is expected to find any and all issues that either are or may be a problem in the future. An inspector usually spends about 2-3 hours in the home. He or she runs water to check for leaks, climbs up in the attic and out on the roof, may perform water tests, radon tests and pest inspections, checks landscape grading and siding and … well, he basically checks everything. The results are used by you to determine whether to move forward with the purchase or whether to ask the seller to fix safety or structural issues. The inspector is not hired to tell you what to do, but to point out pertinent facts.
The mortgage appraiser is paid for by you as part of the mortgage process. The appraiser works for the bank, and he is responsible to do two major things. He must determine the bank’s opinion of market value for the home, and determine whether the specific mortgage company/mortgage type will “approve” the purchase of the home. The appraiser usually spends no more than 1/2 hour at the home and takes a lot of pictures. They focus only on a certain set of issues the bank has determined to be critical.
When is a mortgage appraisal done?
After a contract for sale is signed and submitted to the mortgage company, the mortgage application process gets underway. Usually between one to two weeks after formal mortgage application, your agent will receive a call from the mortgage appraiser asking to set up an appointment. Your agent will contact the listing agent to ensure the time is good, and then the appointment is set and mortgage appraisal completed.
What happens after the mortgage appraisal is completed?
The appraiser will submit his or her report to the bank. There are about four huge stepping stones in any home purchase. They are the negotiation/offer process, the inspection, the contract signing, the mortgage approval and as part of that, the appraisal. When the appraisal is submitted, the bank will then have information they require regarding the market value of the home, and the viability of the property condition. The underwriting department will share that information with you and decisions will need to be made about next steps.
Why is the appraisal important?
If the appraisal indicates the market value of the home is less than the accepted offer price of the home, the mortgage company will only provide a mortgage based on the appraisal price, not the accepted price. For example, let’s say the negotiated price was $250K. The appraised market value is only $240K, and you were looking for 90% financing. You were originally expecting a mortgage in the amount of $225K ($250K times 90%), but after the appraisal, the bank will only provide a mortage of $216K ($240K times 90%). The difference of $9K needs to be made up somewhere. Either the seller will reduce the price they will accept, you will come up with additional funding, you and the seller will both contribute to the shortfall, or the deal falls apart. A low appraisal value will impact the deal in some way.
Another aspect of the mortgage appraisal is the condition of the home. Some types of mortgages have different requirements regarding the condition of a home. For example, an FHA mortgage is dependent on there being no chipping paint of any kind. If there IS chipping paint on the outside or inside of the home, the appraiser will indicate this on their report to the underwriting department. The underwriting department will then make the mortgage contingent upon getting the paint chip issue fixed. Again, these issues could be show-stoppers if the buyer and seller cannot come to agreement on who/how items will be fixed. Assuming the issue is fixed, the bank will need to send the appraiser out again to ensure the work was done to their satisfaction. This could add weeks to the process.
What if the appraisal seems wrong?
Is there anything that can be done if the appraisal value or conditions don’t seem correct? Possibly, but because the report was paid for by you, any efforts to request further review would have to be started by you. Once the appraisal report is in hand, you can provide to their agent who can review the document for any missing data. For example, appraisal reports analyze recent sales. The appraiser may have missed an appropriate recent sale, or perhaps did not adjust the sales prices for specific amenities of the home you are buying. Perhaps the appraiser was not an expert on the neighborhood where the home is located.
If there are errors in the appraisal report, the concerns would have to be addressed with the mortgage professional to see how that particular appraisal could be challenged. The underwriting department could contact the appraiser for clarification, and/or possible changes. The result of that review might be that no changes will be made, or that indeed there was an issue and it will be addressed. Alternatively a new appraisal could be ordered, although this is an additional cost that would have to be covered by the buyer or seller (or both).
The important point is that if the appraisal value comes in lower than the contracted sales price, there may still be ways to address the shortfall, if indeed there were mistakes in the analysis.
The mortgage appraisal is one of the most important steps required prior to getting to the closing table. Buyers, sellers, and their real estate professionals wait with baited breath for the results. And they all sigh in relief when the appraisal comes back with both thumbs up.
If you have any questions about any part of the home buying process, feel free to contact me on 914-419-0270 or email me at email@example.com!
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