Understanding Your Home Appraisal

In some ways, the path to home ownership is more like an obstacle course. The first hurdle was getting your pre-approval for the loan. Then the race was on to find the right house. With that obstacle cleared, you had to get your offer accepted. Now the home appraisal is upon you, and it could trip you up. For example, if the appraisal comes back for less than you offered, it could impact your ability to close. The best way to navigate this final leg is to know exactly what you’re up against, so let’s explore the home appraisal process and get you across the finish line.

Table of Contents:

There are two different amounts you’ll want to be familiar with: the home’s price and the home’s value. The price is how much you’re willing to pay. The value is what the home is actually worth. These two amounts don’t always line up because buyers will sometimes pay more (or less) than a house is worth. For example, in a seller’s market, it isn’t uncommon for a house to sell above the listing price. However, sellers and their agents typically price the home based on market value.

Suppose there’s a bidding war. Other buyers are making offers, so you increase your offer to ensure you don’t lose the house. Ultimately, your offer is accepted, but only after the other would-be buyers drove the price well above the asking price. When the house gets appraised, the value could be lower than the sale price.

Conversely, in a buyer’s market, a seller may drop the asking price to attract more offers. You might even submit an offer well below the asking price. In this case, the house could appraise for more than the sale price.

Your house is appraised to determine the value of the home. The home appraiser, who works for your mortgage lender, is an impartial professional who determines the fair market value of the house based on certain factors such as the house’s condition, features, and location. Sometimes, the home’s property taxes will be based on the appraisal as well.

If the house you’re planning to buy is valued for less than what you are paying for it, your mortgage lender may not approve the loan. In this case, you have three options:

1. Ask the seller to lower the sale price
2. Pay the difference out of your own pocket
3. Walk away from the sale, providing you have an appraisal contingency written into your sales contract

The appraisal contingency is basically an escape hatch that allows you to walk away without penalty if the home appraisal is less than the sale price. It also gives you a better bargaining position for option one. The seller will be much more likely to work with you on the price if you have an appraisal contingency letting you out of the deal if you can’t come to an agreement. If you waive the appraisal contingency, you could find yourself stuck with only option two available to you.

The average cost for an appraisal is around $350. If you are buying a multi-family property or you’re getting a jumbo loan (a large loan that exceeds the loan limit set by Fannie Mae and Freddie Mac), your appraisal will probably cost more. Some appraisals can cost as much as $600.

The appraisal might be paid up front, or it might be included in your closing costs. However, if it is part of your closing costs and the closing doesn’t take place because of a low appraisal, you’ll still have to pay for the appraisal. This is true even if the seller agreed to pay closing costs. The closing fell through, but the appraisal took place. Since the other closing costs are no longer relevant, the fee for the appraisal will likely come back to you.

The home appraisal is typically conducted after the home inspection, roughly two weeks before closing. The appraisal is very different from the home inspection. The home inspector is looking for any issues that need to be addressed in the home. This inspection is very thorough, with the home inspector looking at everything from the foundation to the roof to the plumbing to the electrical outlets.

The home inspector works for you. They’ll provide you with a list of recommendations for repairs that you’ll then negotiate with the seller. You can even be at the home during the inspection and ask the inspector questions.

While the home inspector is looking at every detail, the appraiser is only interested in the bigger picture, such as location and the home’s overall condition. The appraiser works for your mortgage lender, not you, so they’re less likely to answer your questions or even meet with you. However, according to the Consumer Financial Protection Bureau, the lender is required to provide you with a copy of the appraisal.

Overall, the appraisal can take up to two weeks to complete. The process involves not only visiting the home in person, but also some research into the area comps (comparable houses that have recently sold in the same general location). Then, the appraiser will write a detailed report to submit to the lender.

The actual time the appraiser is at the house varies. It may take less than an hour or it could take as much as three hours. Much depends on the size of the house. For example, a five-bedroom house with more than 5,000 square feet to cover will take longer than a one-bedroom bungalow with less than 1,000 square feet.

The housing market and the city in which the house is located will also factor into how long the appraisal takes. In a seller’s market where there are many houses being sold, the appraiser might have several homes to prepare reports for, which will take more time than in a buyer’s market where few homes are being sold. The volume of houses being sold might also be higher in a large, busy city compared to a small, rural town.

The appraiser begins evaluating long before reaching the front door. They’ll take note of the location, the surroundings, the landscaping and curb appeal, and the exterior. Some of the things they want to know is whether the neighborhood is growing, how many homes are for sale in the area, and whether the area is zoned commercial or residential. When they arrive at the house, they’ll note the type and style of the home and the materials used during construction (brick, siding, etc.).

Inside the house, they’ll consider the square footage, the flooring and trim materials used, and the number of bedrooms and bathrooms. They’ll also look at the condition (or existence) of the attic, basement, and garage. The appraiser will check out the home’s features such as the appliances and HVAC system, amenities like fireplaces, and outdoor areas like the deck or porch.

While the appraiser won’t pay attention to the furniture, paint colors, or general messiness of the house, they do note the general upkeep. If a house looks neglected (for example, there’s evidence of water damage or mold), that will impact the overall appraisal amount.

Many of the things that could negatively impact the appraisal are things the seller can’t control, such as the location and the area’s real estate market. For example, if the neighborhood is growing, that adds to the appraisal. However, if residents and businesses are moving out of the area, that will harm the appraised value of the home. If the home is located on a noisy street or if the schools are rated poorly, that will also impact the appraisal.

The appraiser will consider the livability of the home, which includes things like general layout. They might check the flow from room to room and take note of spaces that are awkward or confusing. If the spaces are seriously outdated or the house will need extensive remodeling, those things are also considered.

Even though the appraiser isn’t looking for pests (that will fall to the home inspector), clear signs of an infestation will hurt the appraisal. For example, wood damaged by termites or obvious mice droppings point to a larger problem and will impact the home value.

If you get an appraisal back that seems way too low, talk to your real estate agent. Look for mistakes in the appraisal. It’s possible the appraiser made a mistake in the calculations or even made a typo in the final report. After reviewing the appraisal carefully, recheck the comps and see if there are any discrepancies.

If your agent agrees that the appraisal seems lower than it should be and you have evidence that backs up your claim, your agent can help you challenge the appraisal by filing a Reconsideration of Value. A Reconsideration of Value is a change request that you’ll submit to the lender along with relevant sales data.

This will take either a few hours if it’s a clerical error to several days if the appraiser decides to take a second look at the property. In the end, it might not change anything, so be prepared. Only about 24 percent of appraisals are altered based on a Reconsideration of Value claim, but it’s worth a try.

What if the appraisal is significantly higher than the purchase price? Well, this is great news for you since you’ll have instant equity in the home. However, it doesn’t mean you can lower your down payment. The terms of your mortgage will likely stay the same.

A higher than anticipated appraisal isn’t great news for the seller, but unless they’ve written something into the sales contract, there’s not a lot they can do after they’ve accepted the offer. If they back out, they would be in breach of contract.

Yes, in most cases, the appraiser will know the selling price. This is because they’ll be given a copy of the purchase contract to fill out their report. The purchase contract contains vital information the appraiser needs, such as the date of the contract, concessions, and the list of repairs from the home inspection. If there are offers and counter offers, it gives the inspector an idea of how the price came to be.

Ideally, the appraiser won’t let the sale price influence the appraisal since they are supposed to remain objective. However, the price of the home and the offers submitted let the appraiser know how buyers perceive the house’s value.  If the sale price lines up with the appraised value, the appraiser may state this in the report.

Until very recently, there hasn’t been much regulation or scrutiny of the appraisal industry, according to a study conducted by the National Fair Housing Alliance. This led to some unfair practices, including appraisal bias. Appraisal bias is the undervaluing of homes in communities with a large minority population. In June 2021, the Department of Housing and Urban Development (HUD) took steps to address inequity in home appraisals. The agency organized the Property Appraisal and Valuation Equity (PAVE) task force, which in March 2022 released a five-year action plan to increase oversight and accountability.

According to an article published by NAR, “Appraisals for home purchases in majority Black and majority Latino neighborhoods were about twice as likely to result in a value below the actual contract price compared to appraisals in predominantly white neighborhoods.”

Even though this issue is finally getting some attention, change will likely take time. Until then, appraisal bias still occurs. If you believe you’ve encountered appraisal bias, you can get help by visiting the PAVE website.

Usually, the closing will take place about two weeks after the appraisal. Once the appraisal is complete, it, along with the rest of the loan documents, will go to the mortgage company’s underwriter for evaluation. The underwriter will evaluate how much risk is involved with the loan. Several factors go into consideration, from your credit score to the home appraisal.

If you were preapproved for your loan, then you probably won’t be denied based on your credit unless something drastically changed since your preapproval. At this stage of the home buying journey, the approval or denial of the loan could hinge on the appraisal. For example, if the appraisal is well under market value, the underwriter might determine that the loan is too risky. If you were to default on your loan and the house went into foreclosure, the bank or mortgage lender wouldn’t be able to recoup their losses. However, if the appraisal lines up with the purchase price, the underwriter will most likely approve the loan and the closing will move forward.

The appraisal might be the final hurdle in the race toward your new home, but rest assured that most home buyers breeze right past this final obstacle. In fact, the appraisal matches the purchase price more than 80 percent of the time. You’ll be crossing that finish line in no time!

Original Post – Homes.com