What Buyers Need to Know about Home Appraisals
Date: May 24, 2018
One of the key components of buying a West Chester or Liberty Township home for sale is the home appraisal. But what exactly is a home appraisal? Let’s break it down.
A home appraisal is an estimate of value by a professional, licensed appraiser. Your lender will require you to get an appraisal before committing to your loan. Essentially, the bank wants to be sure they aren’t lending more than your home is worth. You don’t need to worry about ordering the appraisal, though. This is something the bank takes care of for you. Remember: the appraisal is for your lender – not you.
The appraisal will then go visit the West Chester or Liberty Township home you want to purchase. They will evaluate the property and will compare its features to other similar homes in the area. Appraisers have access to MLS and will find comps in the area. Usually, they’ll look at four to five comparable homes like yours that have sold within the past six months within a mile radius, as well as one or two current listings. There are exceptions to this rule—sometimes no good comps exist!—but just know that the appraiser is looking to compare apples to apples, not apples to oranges.
Now, on the rare occasion that there are no comps that meet those criteria, an appraiser may have to go farther back in time. Older comps may not be indicative of current market conditions, which means that an appraiser may need to make more adjustments to what is available by comparing big to small, or older to new. These methods can raise red flags to a lender but it doesn’t necessarily mean there’s an issue; it just means there will be greater scrutiny on the appraisal.
Keep in mind: an appraisal is NOT a home inspection. An appraiser is looking at the marketability and value of the West Chester or Liberty Township home you want to purchase. A home inspector inspects the condition of the property with an eye out for any defects. That said, an appraiser is the lender’s eyes and may call out obvious concerns such as cracks in the foundation or a roof in need of repair.
Lenders will then give you a mortgage based on the lower of the purchase price or the appraised value. If the home appraises for, say, $20,000 more than the purchase price, buyers will often ask if they can borrow that amount for renovations o closing costs. Unfortunately, the answer is no.
Conversely, if your appraisal comes in lower than the purchase price, you may be expected to make up the difference. For example, if you wanted to purchase the home for $300,000 and planned to put 20% down, you would have been taking out a mortgage for $240,000. If the home only appraises for $250,000 and the bank will only give you a loan for 80% of the value of the home, you’d only be able to get a mortgage for $200,000.
This is where you start negotiating with the seller. You should start by trying to renegotiate the purchase price. Clearly, you’re overpaying for the home at $300,000. If the seller won’t budge, then you’ll have to come up with $100,000 as a down payment on the home to purchase it at $300,000. A third option is to renegotiate with the bank. Instead of putting 20% down, you might be able to put 10% or less down – but then you could be subject to paying private mortgage insurance and your monthly payments will be higher.
Some people ask whether they should get their own appraisal, or if the appraisal seems unfairly low, whether they can challenge the appraisal. The answer is yes.
Lenders must comply with industry regulations and order appraisals through a third party company called an Appraisal Management Company. This regulation came about during the housing crisis a few years back and is intended to prevent lenders from influencing appraisers. So you can order your own appraisal (which costs about $400 to $500), but the lender cannot just accept your appraisal. Your appraisal can be used to fact check the lender’s, but cannot replace the lender’s.
If it seems like there’s a big discrepancy between the two appraisals, you can ask the lender to order another appraisal. They will charge you to do so but then, they’ll take the mid-priced appraisal as an average and that one will rule the day.
When you’re shopping around for West Chester and Liberty Township homes for sale, we encourage you to include an “appraisal contingency” in any offer you make. This contingency essentially serves as an “out” if the home doesn’t appraise for what you think it’s worth. This allows you to walk away unscathed in the event of a low appraisal (or to reopen the door for further negotiation).
Do you have questions about your appraisal? Give us a call today! As one of the top real estate agencies serving West Chester and Liberty Township, we have seen hundreds of appraisals and can give you our take on your appraisal if you have questions.