A home appraisal plays a vital role in the financing process of a Real Estate transaction. As a seller or homeowner looking to refinance your mortgage, it’s prudent to understand exactly what an appraisal is, how it’s used and what your options are if your home doesn’t appraise for the value you anticipated.
What is an appraisal?
An appraisal is an evaluation of a homes value performed by a professional. Appraisers must be certified and trained within the state they operate. They use a combination of factual information and experience to offer their unbiased opinion as to the homes value.
The appraiser considers three factors when reaching their appraised value:
Recent sales of similar properties
The condition of the property
The properties location
A summation of this information helps the appraiser reach a value known as ‘appraised value’.
When is an appraisal used?
The appraised value helps certain individuals make decisions about a property. There are three common uses for appraised value:
As a buyer moves through the loan approval process, their lender will require an appraisal of the home they’re purchasing to determine if it’s worth the amount they are issuing in the mortgage.
A homeowner looking to refinance their current mortgage for a lower rate will need to have their home appraised to determine its current value. The updated appraised value will affect the rate the homeowner pays.
The county you live in will used the appraised value of your home to determine the amount you will be paying in property taxes. A change in the properties ownership will update the appraised value and therefore influence the taxes you will be paying.
What if a home appraises for less than anticipated?
When deciding to value your home, a Real Estate professional, such as a Realtor, may have arrived at a preliminary number based primarily off their experience and comparable properties. But sometimes, even the most informed Real Estate professionals provide slightly inaccurate estimates. If your home doesn’t appraise ‘at-value’ (the amount you were expecting), you could experience a roadblock in either the financing or sale process. How exactly does a low appraisal affect each process?
Homeowner trying to Refinance
A low appraisal affects the Loan-to-Value Ratio of your mortgage. The LTV ratio compares the loan amount with the down payment amount being payed by the borrower. It provides the lender with a percentage that is then used to assess the loan.
When refinancing, a low appraisal can cause your LTV to rise above 80%; meaning, you will now be responsible for paying Private Mortgage Insurance (PMI) in addition to your monthly mortgage payment.
Buyer is financing the offer on your home
If the buyer submitting the offer on your home is applying for a mortgage, the lender will require an appraisal to confirm the value of the home justifies the amount being provided.
An appraisal reporting a value less than the current purchase price gives a lender the right to provide only up to the appraised value.
What can I do?
Here are your options if you find yourself in this position:
Homeowner trying to Refinance
If you feel the appraisal was performed improperly or with bias, you can appeal it. You may also change lenders and order a separate appraisal that will return you the value you need to refinance.
Your final option would be to wait to refinance your loan until you gain more equity in your home.
A low appraisal during the financing process of a home will mean different things for either side of the transaction.
Seller: Despite your agents best efforts to price appropriately, it is possible your home was listed too high. While it’s not very common, it does occur; especially in very competitive markets where homes can be priced well above appraised value because the demand is high. In the case of a low appraisal, you can either agree to lower the price of your home or suggest the buyer increase their down payment.
Buyer: If the seller refuses to lower the purchase price of their property, and you are not willing or able to increase your down payment, you may leave the transaction and the contract is cancelled. The option to leave the contract without penalty is known as the ‘appraisal contingency’.
When refinancing, try not to make assumptions about what your property is worth without consulting the most qualified person. Have the same consideration when pricing your home for sale. Make sure your agent is considering not only the current market but the actual structural condition of your home. You’ll avoid a cancelled contract or a higher mortgage payment if you anticipate the common difficulties owners face when ordering appraisals on their home.