Why Do I Need an Appraisal? Most home buyers in today’s world don’t have enough cash at the ready to buy without some sort of financing. And this requires going to a bank or credit union or someplace that does have enough cash to buy a home. In this case, the lender is allowing you to borrow their money, with the promise that you will pay it back over the next 15 to 30 years in installments.
When the lender has examined your credit-worthiness (income tax statements, credit history, pay stubs and other assets), they give you an initial approval for a loan up to a certain amount. This becomes your target price when house hunting. Once you have found that property, the bank needs to confirm that this house is actually worth the amount that they are lending you, based on the comparable sold properties in the area. To do this, they hire an Appraiser. This is someone who does not work for the lender, but is hired as an independent contractor to give a valuation.
The Appraiser then assesses the property -usually outside and inside – and determines what the value is. The bank uses this value to determine whether the loan is a good risk in the event that there is a default and they end up owning the home themselves.
What Happens if the Appraisal Comes in Low? Once the Appraiser has completed their job and presented their findings to the bank, the underwriting department approves the loan for that amount. Sometimes, the Appraisal comes in at an amount that is higher than the offer price. Often, the Appraisal will come in at nearly the same number as the offer price. If it comes in too low, however, what can you do?
This is the FHA verbiage, but the VA paragraph is much the same. The main difference between VA and FHA versus a Conventional Loan when it comes to appraisals is that with a Conventional Loan, the buyer is held to a specific Appraisal Deadline Date.
There are 3 Main Courses of Action. If the Appraisal is low, usually one of 3 things will happen:
- The Seller may lower the asking price to meet the Appraisal amount. If the Seller feels that it is reasonable to do so, the Seller may chose to lower the sales price to meet the Appraisal number.
- The Buyer can bring more cash to the closing. If the Buyer is able to do so, they may opt to make up the difference between the Offer amount and the Appraisal amount in cash.
- The Buyer can walk away. If no other arrangement can be reached, the Buyer may decide that it is best to walk away from the purchase.
Be sure that you and your Realtor thoroughly discuss the sold comps in the area prior to making an offer on a home to determine the best price to offer. Keep in mind that the Appraisal is one of the last steps in the process and requires payment up front. If you decide to walk away from a property due to the Appraisal, you have already spent money on both the Inspection and the Appraisal!
Questions about home values and Appraisals? Call me today! 720-341-5235