Whether you are considering buying a home, refinancing, or selling, a key component to your transaction is knowing the value of your home and understanding what is a home appraisal. Anytime you are dealing with a mortgage, knowing a few key things will help you get the most of your experience. An understanding of home appraisals and how the price of a home is determined is an essential component of a mortgage transaction.
What is a home appraisal?
So, what is a home appraisal? Not to be confused with a home inspection, a home appraisal is a professional opinion from an unbiased source of a home’s value. The assessment gives the actual, fair market value of the house. Appraisals are nearly always used in home buying or selling transactions where there is a lender and frequently during refinancing.
Factors that go into determining the property value include:
These evaluations ensure that any contracts negotiated are appropriate. In the case of a sale or purchase, an appraisal can confirm that the contract price is fair, and in a financing situation; it protects the bank from giving the homeowner more money than the home is worth.
The process begins when the lender orders an appraisal. Then the appraiser:
- Physically inspects the property.
- Compares the subject property to recently sold and listed properties.
- Assigns a value to the house.
Since appraisals are primarily used to protect the lender, the lender usually orders the appraisal. A qualified appraiser is licensed or certified and is familiar with the local area. All 50 States require certification, according to the Appraisal Institute, an association of real estate appraisers.
After the appraiser physically inspects the property, he or she compares market trends and recent sales of similar properties to the subject property. Key factors are the number of bedrooms and bathrooms, amenities, square footage, and floor plan functionality.
Finally, the appraiser assigns an appropriate value to the property in question and submits the report to the lender. If the appraisal is in line with, or above the purchase price, you are all set!
However, if the appraised property value comes in significantly less than the agreed-upon purchase price, the lender may not offer as much money in a mortgage as initially discussed. In the event of a lower than the expected appraisal, you will likely need to renegotiate with the seller or offer a higher down payment. In any case, it is essential to permit enough time in your purchase agreement to allow for a completed appraisal before your financing contingency expires. Neglecting to leave enough time may cause you to lose your entire earnest money deposit if the purchase falls through due to a lack of financing.