Congratulations, you have finally found the house you wanted! But you should ask yourself one question before signing all the paper work, is the house you are planning to buy really worth the money you will invest? Can’t decide?
The asking price on the house is an amount which your lender has already approved, so you probably won’t have any issues with the mortgage. Actually, this is not always true, and there are instances in which you can have an issue getting a mortgage if the investment is not worth the approved amount. In such a case, the lender will provide you with a lower loan amount or none at all.
The situation may seem a bit complex, but this is exactly why you need a mortgage appraisal. Once you go through this process, you will find out the true worth of your house to be, and accordingly you can make a decision on whether the purchase is a smart decision or not.
A home appraisal is a process in which an expert evaluates the house, performs a thorough analysis and then determines the worth of the home. The appraiser is hired by the lender through an Appraisal Management Company or the AMC, but you will have to bear the costs. Once the results have been prepared, they are reviewed, and accordingly the deal is finalized.
The lender orders an appraisal when you have a house ‘under contract’. Your Realtor will establish a value of the house by performing a Comparative Market Analysis or CMA. Negotiation is carried out on the offer and a written contract is prepared. If this is accepted, it is sent to your lender, who then gets in touch with an AMC and appoints an appraiser.
The main purpose of a mortgage appraisal is to determine the value of the house which you plan to buy. The process does incur fees, and you will have to pay them, but you should still get a home appraisal conducted considering the magnitude of the overall investment. By doing so, you will know that you are not paying an unfair amount for the property. Your lender will also be sure that they are not lending you excessive amounts, which may eventually lead to a foreclosure should you default on the mortgage.
In other words, a mortgage appraisal protects both you and the lender by ensuring that the deal you are about to finalize is indeed, worth the invested amount.
A mortgage appraisal can be conducted by many methods, but two of them are popular. One is the sales comparison approach and the other is the cost approach.
The Sales Comparison Approach
In this method, the appraiser will compare the home with a number of other homes that are of the same size and located in the same locality. These are referred to as the comps or the comparables. While comparing, many factors are considered such as the area, amounts of finished and unfinished space, age of the house, designs features, kitchen styles, garages, fireplaces, and so on.
The Cost Approach
The Cost Approach method is primarily used to appraise new property. The appraiser will figure out an amount which will be required for reconstructing the home if it was completely destroyed. The analysis is also based on other things such as depreciation and land value. Accordingly, an appraiser determines the true worth of the house.
When you decide the house which you want to buy, you get it under contract. This means that your Realtor performs a Market Comparative Analysis or CMA, and determines the value of the property. Using this, an offer is made and negotiated, and then a written contract is prepared. Once accepted, this is sent to your lender who then orders an appraisal through an AMC.
The appraiser will then visit the home to initiate the process. During that time, your presence is not mandatory, but is still recommended so that you can get better insight.
Here are the main steps of the process.
The appraiser will perform a visual inspection of the home and assess its condition. He will note down details such as the construction quality, number of rooms, floor plan and the design. If there is any need of repairs or improvements, you will be notified and also provided with an estimate of the costs involved. The appraiser will take photos of the property for record purposes, and conduct necessary measurements of the floors.
The appraiser will analyze the neighboring area and if any amenities are located nearby such as a park, shopping mall or hospital, they will determine their influence on the home’s worth.
The appraiser will get in touch with the local planning department or another governmental body, and determine the zoning rules and taxes for the property. This information can be used for figuring out the highest and best use, which serves as critical data in the home mortgage appraisal process.
All appraisers have access to a lot of data, which they get from agents and brokers. Using these resources, an appraiser will determine the average value of homes in the locality and go through recent sales report. In this step, the MLS and legal data of your hosen home is also reviewed.
The appraiser will then use any of the above methods to determine the worth of the home, and will prepare a report. This will include a summary of the method, a review of the house’s conditions and the improvements that were carried out. The report will also contain details of problems such as cracked foundations and wet basements, a summary of market trends and their effect on the property and a complete analysis that will support the results. Maps, sketches and photographs are also included for reference.
A copy of the report is sent to the lender.
A home appraisal can have two results; the asking price is equal to or less than the appraised value or the asking price is more than the appraised value.
In the former case, the sale can proceed as per the plan. But what if the appraised value is lower than the amount which the seller demands? Should this be the case, the lender will not provide you with a big enough loan.
There are a number of options which you can take to deal with such a situation.
Negotiate with the seller and convince him to drop the price.
Pay the difference in amount yourself.
Have another appraiser go through the process one more time.
Forget about that home and search for another one.