WHAT IS AN APPRAISAL
There are some non-negotiables when it comes to the homebuying process. If you’re taking out a mortgage, getting an appraisal is one of them.
What is an appraisal? It’s a key part of your loan application, during which a real estate appraiser will assess the condition and value of the home. Lenders require the appraisal before they will approve your loan and let you close on the home.
We’ll explain why appraisals are important - and how they benefit you.
What Exactly Is a Home Appraisal?
A home appraisal is an assessment of the fair market value and condition of a property.
Appraisals are performed by professional appraisers who look at several factors to determine the property value:
Overall condition of the home
Square footage
Curb appeal
Whether there are any hazards or liabilities
Location
Local amenities
Comparable properties (known as “comps”) – meaning similar homes that sold in the area within the past year
The property itself will be evaluated by using certain appraisal requirements such as the size and functionality of the land where the house stands, the number of bedrooms and bathrooms, the overall condition of the home, and upgrades if there are any. Other factors will be considered as well, such as the quality of schools in the area, the public transportation available, and how close the property is to commercial and public areas.
The appraiser will issue an appraisal report that includes details and commentary on the condition of the home, along with their estimate of the fair market value of the property.
The comparable sales are critical to determining the home’s valuation. The licensed appraiser looks at recent sales in the neighborhood to gauge how much the property should sell for.
Mortgage lenders require a home appraisal because your loan amount cannot exceed the home’s actual value. They need to ensure that they could recoup the cost of your loan if you fell behind on payments and they foreclosed and needed to resell the home.
How Long Does an Appraisal Take?
The on-site portion of the appraisal can typically be completed in a few hours or even less, whether the appraiser plans to physically assess the property or do a drive-by appraisal, in which they do not look inside the house.
The part that could take the longest is getting the appraiser to the property. However, purchased-focused lenders can get timely appraisals done for short closings.
Once the appraiser views the property, he or she must analyze property records and information about the surrounding areas and comparable properties.
Typically, it takes about two weeks to receive an appraisal report, again, depending on the appraiser’s schedule and workload.
How Much Does an Appraisal Cost?
Appraisal costs vary based on where you live and the size and condition of the home.
But you should expect to pay at least $500 for the appraisal. The cost could be higher if there are complex appraisal requirements or you need the report completed urgently.
Who Orders the Appraisal?
After you’ve gone under contract to buy a home and have applied for a mortgage, your lender will request an appraisal for the property. You do not need to arrange the appraisal, though you will pay for it as part of your closing costs.
Typically, a mortgage company won’t accept an appraisal that is not directly ordered by them .
How the Appraisal Affects Your Home Purchase
The home appraisal process can be anxiety inducing for homebuyers, since a low appraisal can be a deal-breaker for purchasing the home.
Let’s say you put in an offer on a home with a sales price of $300,000. You plan to put down 3%, or $9,000. That means you’ll need a loan for the remaining $291,000.
But the appraiser determines that the home is only worth $285,000 based on its condition and comps. Your lender will not let you borrow more than the home’s value, so you can only get approved for 3% down based on the $285,000 value.
Now you have to decide whether to pay the difference between the appraised price and the sales price out of your own pocket (in addition to your down payment and closing costs).
In this case, you would have to come up with over $23,000 to cover the appraisal shortage and the 3% down payment instead of the original $9,000.
*The above is for informational purposes only. It is not intended to be financial, legal, or tax advice. Consult the appropriate professionals for advice regarding your individual needs.
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