You might be pre-approved for a home loan. But the final approval depends on the home appraisal report, which is presented by a certified appraiser appointed by your lender. What does a home appraiser do and how the appraised value of your home can affect a mortgage underwriting process? Let us understand the basics of home appraisal.
What is home appraisal?
No lender is willing to offer more than a property is worth. It is understandable as the property is pledged for the payment of a mortgage. Your home serves as collateral and gives your lender a right to sell it in case you fail to make payments.
A professional’s opinion is needed to know the current value of a property being sold or bought. A home appraiser is a certified, state-licensed professional who knows well how to calculate a property’s fair market value based on the sales of comparable homes in the area and the location and features of the property.
What does a home appraiser do?
A number of things are considered while estimating the value of your home. It can take several hours to come up with a figure that can make or mar your mortgage approval. The following are some of the things that an appraiser must do to calculate home value.
- Find comparable properties that have been sold recently in the neighborhood. Such properties must be similar in size, location and other features. Their sale prices are an indicative of how your home should be priced.
- Take a look at the general condition and age of the property. Note that you still need the services of a home inspector as the appraiser doesn’t necessarily look for potential defects in the home.
- Consider the neighborhood and accessibility to general amenities, such as schools, transportation hub and super markets.
- Count the number of beds and baths, and note their size and features.
- Consider structural improvements and extra features, such as swimming pools and wood flooring.
Who Pays for the Appraisal?
The appraisal is ordered by a lender once you find a home and provide its details on the mortgage application. However, it is the borrower who pays the appraisal fee, which appears on the HUD-1 settlement statement and must be paid at the closing. You may have to pay anything between $300 and $500 for appraisal.
The Appraised Value and Mortgage Underwriting
Collateral is the third C’s of mortgage underwriting, the other two being Capacity and Credit. Final approval largely depends on the appraisal report, a copy of which must be given to the home buyer. The appraised value must not be less than the sales price. On the other hand, a higher appraised value can be beneficial as you can instantly gain in home equity.
Let us consider an example. Suppose you are buying a home for $200,000 with 20% down payment. The amount you put down is $40,000 and the remaining $160,000 will be financed by your lender. If you calculate the loan to value ratio (LTV), which is a percentage calculated by dividing the amount borrowed by the price or appraised value of the home, it would come out as 80%.
Now suppose, the appraiser says that the home can be valued at no more than $180,000. In this case, the loan to value ratio would become 88.8%, which entails you now have to put down more to get approval for your mortgage. This is because the lender can only finance 80% of the appraised value, which comes out to be $144,000. You are $16,000 short of the sales price, which you must put down out of your pocket.
A way out of the problem would be to renegotiate with the seller and get the price that correctly reflects the appraised value. Another way would be to order a review of the appraisal. You, of course, have the final option to walk away from the deal and look for another home.