How The Home Appraisal Process Can Impact Your Mortgage Payment
The home appraisal process is just a formality when buying real estate, right? You’ve found the house you love and put in a good offer, and it was accepted! It’s time to break out the Dom Pérignon White Gold? Sorry, not yet.
If you’ve applied for a mortgage, your home-to-be still has to undergo a comprehensive appraisal of its worth—and an unfavorable home appraisal can kill a real estate deal. Yikes! It can be a nerve-racking ordeal, but it’s actually good for you. Allow us to demystify the process.
Appraisals: Estimating a home’s value with fresh eyes
Just because you and the sellers have agreed on a price doesn’t mean it’s a done deal—your lender needs to be on board, too. After all, it’s the lender’s real estate investment as well. To get a mortgage, you’ll need a home appraisal because the home serves as collateral for your lender. If for some reason you end up unable to make your mortgage payments, the lender will have to foreclose on your home, then sell the property to recoup its costs. So your mortgage lender will have to know the value of your home before handing over that large chunk of change.
While the home appraisal process is somewhat similar to getting comps—as you did to determine a fair price—the appraiser delves in deeper to determine the home’s exact value.
An appraiser will investigate the condition, the square footage, location, and any additions or renovations. From there, he or she will appraise the home and determine its value.
An appraiser is trained to be unbiased, says Adam Wiener, founder of Aladdin Appraisal in Auburndale, MA.
“I don’t care what anybody wants the home to be worth,” he says. “As an appraiser, I’ll give you the answer. You may not like it, but it’s the answer.”
Off-site, the appraiser may also evaluate the current real estate market in the neighborhood to help determine the value of the property.
Usually, the lender or financing organization will hire the appraiser. Because it’s in the best interest of the lender to get a good home appraisal, the lender will have a list of reputable pros to appraise the home.
Whoever takes out the mortgage pays for the home appraisal, unless the contract specifies otherwise. Then the buyer pays the fee in the closing costs. If a seller is motivated, he may pay for the home appraisal himself to back his asking price, which benefits the buyer by reducing closing costs.
You’ll get a copy of the home appraisal, too
An appraiser sets out to determine if the home is actually worth what you’re planning to pay. You might be surprised by how little time that takes; the appraiser could be in and out of a home in 30 minutes, and that’s not a reason to panic.
An appraiser doesn’t have the same job as a home inspector, who examines every little detail. While they’ll pay particular attention to problems with the foundation and roof, the home appraisal process includes noting the quality and condition of the appliances, plumbing, flooring, and electrical system. With data in hand, they make their final assessment and give their report to the lender. The mortgage company is then required by law to give a copy of the appraisal to you.
Appraisers work for your lender—not you
As the buyer, you’ll be paying for the home appraisal. In most cases, the fee is wrapped into your closing costs and will set you back $300 to $400. However, just because you pay doesn’t mean you’re the client.
“My client is the lender, not the buyer,” Wiener says. This ensures that appraisers remain ethical—in fact, it’s a crime to coerce or put any pressure on an appraiser to hit a certain value. Appraisers must remain independent.
“Anything less, and public trust in the appraisal is lost,” says Wiener.
They protect buyers from a bad deal
In essence, the home appraisal process is meant to protect you (and the lender) from a bad purchase. For instance: If the appraisal comes in higher than your asking price, it’s generally fine. Sure, the sellers could decide they want more money and would rather put their home back on the market; but in most cases, the deal will go through as expected.
If your appraisal comes in lower than what you offered, this is where things get tricky: Your lender won’t pony up more money than the appraised price. So if you and the sellers agree on $125,000 but the appraisal comes in at $105,000, it creates a $20,000 shortfall. What’s a buyer to do? Read on.
A curveball appraisal isn’t necessarily the end
If the appraisal process happens, your appraisal comes in low, and your contract with the seller was contingent on an appraisal, you could walk away and have your earnest money returned.
If you prefer to buy the home anyway (or waived your appraisal contingency), there are some other paths you can pursue:
- Come up with the cash to cover the difference between the appraisal and offer price.
- Ask the seller to cover the difference.
- Challenge the appraisal, and pay for a second opinion.
Keep in mind, though, that your new report could come out identical. Also keep in mind that if you do choose to walk away, that’s actually good news, although it may not seem like it at the time. Why? Because the appraisal kept you from paying too much for your home.
Once your appraisal is done, you’re still not ready to close without another nerve-racking step called a home inspection.