The home appraisal is often seen as a major make-or-break moment in the homebuying process. But it’s not as stressful as you might think!
In this article, we’ll break down what you need to know about the appraisal when buying a home, along with a common misconception regarding the factors that impact a home’s appraised value.
- Why do lenders require property appraisals before closing?
- How much does the home appraisal cost?
- What does the appraiser look for?
- What’s a common misconception people have about the factors that affect a home’s appraised value?
- What happens if the appraisal comes back lower than expected?
Why do lenders require property appraisals before closing?
After the home inspection, your mortgage lender will request a property appraisal of your new home. The reason lenders need property appraisals is to protect the money they lend you to buy your home.
Because this home is going to be your collateral for your mortgage loan, lenders want to ensure that the loan amount does not exceed the home’s appraised value. Meaning the home’s appraised value needs to be high enough to justify the purchase price or loan amount.
How much does the home appraisal cost?
The appraisal will cost around $300 to $450 or more depending on your market. In many cases, the seller may agree to pay for the appraisal.
What’s a misconception people have about the factors that affect a home’s appraised value?
Appraisers will be looking at the overall condition of the home and checking for obvious issues that could diminish the home’s value.
However, a lot of people make the mistake of thinking that minor cosmetic details have a big impact on the appraiser’s valuation. But the reality is that appraisers aren’t as focused on home features that are easy to change.
Think of the characteristics of a home that are more long-term and difficult to change. For example:
- Neighborhood amenities
- Property age
- Square footage
- Number of bedrooms/bathrooms
These factors are more fundamental to estimating the property value, and make a bigger difference on the appraisal than features such as crown molding, paint, or even kitchen appliances.
In addition to the factors listed above, the appraiser will also likely compare similar properties that have sold in that same area within the last year to determine what your new home’s appraised value would be.
What happens if the appraisal comes back much lower than expected?
Ideally, at the very get-go, the estimated property value was accurate, the asking price was fair, and everything matches up with what comes up on the appraisal.
But a potential hiccup here is if the home’s appraised value is not high enough to justify the purchase price or loan amount.
In that case, the lender may not be able to fully approve your home loan, which could delay closing, but it’s not necessarily a deal breaker.
Keep in mind, your mortgage advisor and your realtor should be well-versed in the appraisal process.
They should be well aware of this potential hurdle, so if the appraisal does come back lower than expected, they should be able to work with you to find a solution.
You and your realtor can renegotiate with the seller. Your realtor can ask the seller to lower the purchase price, which in turn would lower the home loan amount.
Another option is to order another appraisal and contest the original appraisal.
This might happen if the lender thinks that the first appraisal missed some important details and should reconsider additional factors there. In that case, ordering a new appraisal might make sense in that situation.
But this is why you should talk to your realtor about including an Appraisal Contingency in your offer.
If this appraisal is a total deal breaker that prevents you from closing on your home, then with that Appraisal Contingency, you can back out of the deal without losing your earnest money.
Home Appraisal Summary
- The reason lenders need property appraisals is to ensure that your home’s appraised value is high enough to justify the loan amount.
- The appraisal will cost around $300 to $450 or more depending on your market. In many cases, the seller may agree to pay for the appraisal.
- Appraisers will mostly be looking at long-term characteristics that are harder to change such as: location, square footage, number of bedrooms/bathrooms, property age, neighborhood amenities. They will also compare similar properties that have sold in that same area within the last year.
- If the appraisal comes back lower than expected, you and your realtor can negotiate with the seller, or your lender may potentially order another appraisal to contest the original one.
- Worst case scenario (if the appraisal ends up being a total deal breaker), having an Appraisal Contingency in your offer protects you, so you can walk away from the deal without losing your earnest money deposit.