What You Should Know about Home Appraisals During the Home Purchase and Mortgage Process
If you are in the process of a home loan, you know the appraisal process is one of the most stressful parts of the entire transaction. Lately, the team at Capital Lending Network, Inc. has received numerous calls and inquiries surrounding appraisal requirements and appraisal transfer policies. In this blog, we will detail the process to transfer an appraisal as well as specific appraisal requirements. There are many moving parts of a mortgage loan and the appraisal process is a major part of the process.
What Is A Home Appraisal?
What is an appraisal? The practice of having an item appraised goes back thousands of years, many historians have seen literature showing valuables being appraised during the Roman empire. Precious stones and metals were often appraised to determine if they were of value and if so, how much. In recent history, many appraisals are conducted on artwork and even bottles of wine as there are many near-perfect counterfeits on the market. An appraisal on your home is a very similar practice. An appraisal is a professional opinion of the value of a property.
How Does A Lender Order A Home Appraisal?
In order to complete an appraisal inspection, a qualified appraiser must accept the order from an Appraisal Management Company or AMC. A qualified appraiser must have a license or certificate depending on your area. Their job is to create a thorough report of the value of the property based on a firsthand inspection of the property, and then compute market trends as well as recent sales in the area to come up with a realistic value of the property. An appraiser will take many items into account when calculating the value of a property. Examples could be square footage, bedroom count, bathroom count, remodeling projects, floor plan, and amenities such as a swimming pool or other luxury items. An appraiser has a lot of responsibility for the overall transaction. If an appraised value comes in lower than expected, the entire transaction could be canceled.
The Role of the Appraiser
In today’s crazy housing market, the price of a home and the value of a home can be two different things. The appraiser’s main job is to protect the lender from overextending credit on an asset that may not be of value. The property’s value can be less than the price paid in today’s market. In fact, many real estate transactions utilize appraisal gap coverage in order to have their offer accepted.
What Is An Appraisal Gap Coverage
Appraisal gap coverage is a specified dollar amount the buyer is willing to pay over the appraiser’s value of the property. A quick example is if a sale has a purchase price of $400,000, and the buyer adds a $10,000 appraisal gap coverage. In this example, the appraisal comes back with a value of $390,000, since the buyer put in an offer with $10,000 of appraisal gap coverage, the buyer must bring in an additional $10,000 out-of-pocket to purchase this home. Their lender can only lend them funds based on the appraised value.
Purchase Price Versus Appraised Value
n any real estate transaction, your loan amount will be based on the purchase price or the appraised value, the lower of the two. Many times, the purchase price and appraised value are the same numbers. And even if the home appraises for more than the purchase price, the lender may not extend extra money to you through the mortgage process. The loan to value will always be calculated off the lower of the two numbers.
The Home Appraisal Process
The appraisal process is used in most purchase and refinance transactions. The appraiser must verify the value of a property so the lender can properly extend credit on a real estate asset. There are numerous protections put in place by the major agencies such as the U.S. Department of Housing and Urban Development, Fannie Mae, Freddie Mac, and even the Consumer Financial Protection Bureau. It is very important that there is no discrimination during the appraisal process.
The Importance of Home Appraisal For Mortgage Lenders
The lender must verify the value of a property in case the borrower defaults. If a lender allows you to borrow too much money against a property, and you fall behind on payments, the lender could be at a loss. This is why most mortgage programs have a down payment requirement and will have mortgage insurance if you do not put down 20%. As you can tell, there are plenty of protections for the lender and the appraisal process is one of the key protections.
Qualification of a Home Appraiser
How to become an appraiser? In order to become an appraiser, you must be licensed or certified in your area. This is a requirement in all 50 states. You must also be familiar with the local area. As part of the federal regulations of mortgage lending, an appraiser must remain impartial and have no direct interest in the transaction. Means you cannot know who your appraiser is and if you are an appraiser, you may not appraise your own property. After the real estate crash of
2008, the appraisal process became more regulated and there are many different safeguards.
Data in a Home Appraisal
Fannie Mae and Freddie Mac have hundreds of thousands of data points for the values of homes across the nation. There is even an automated database that will alert a lender with a potential red flag or inflated appraisal. An appraiser must be able to complete a report that has the following. A street map, exterior building sketch, explanation of square footage calculated, numerous photographs including the front of the home, back of the home, and street scene, front exterior photographs for every comparable property used. As for the interior, photos of each room. In many states, the appraiser will need to verify carbon monoxide detectors as well as other safety requirements.
How Does An Appraiser Determine Value of Property
If you are a homeowner selling a property or a homeowner refinancing your current property, here are a few tips for the appraisal process. An appraiser is a human being meaning they will have an opinion on your home the second they walk in. Technically, an appraiser cannot change the value based on your home being a mess but walking into a clean home can be greatly appreciated.
Make The Home Presentable For Appraiser
If you have ever gone to an open house, you will notice that the realtor will turn on all the lights on the property. This helps brighten the home and makes it feel more welcoming. May not be the worst idea to do this before your appraiser arrives. If you have completed recent upgrades to the property, you can share this information with the appraiser. Having receipts for the work completed is a good idea.
Value of Home Appraisal Below Purchase Price
What happens when an appraisal comes in below value? This can be a very frustrating part of a real estate transaction. A low appraisal is not fun for any party involved in the transaction. When a refinance appraisal comes in lower than expected, the homeowner has two options.
Does Appraisal Rebuttal Work?
Homebuyers can attempt to rebuttal the appraised value directly with the appraisal management company and appraiser. This is an uphill battle that is rarely one. But you must provide the appraiser with comparable homes in the area that you feel should have been used to calculate the value of your home. The information will be sent back to the appraiser, and they will keep the value the same or possibly re-analyze and increase the year’s opinion of the value of your property.
How Tough Are Appraisal Rebuttals?
Once again, I would like to reiterate, this is an uphill battle, and most of the time the appraiser does not change the value. The other option is to restructure the loan itself. This could be the difference between taking cash out or completing a rate and term refinance. A low appraisal could even kill your refinance transaction. When an appraisal comes in low for a purchase transaction, there are a few options.
Home Appraisal Rebuttal To Contest Low Appraised Value
First, you could also rebuttal the appraisal as discussed above. However, there could be time constraints on the contract, or the seller could be purchasing another home and does not have time to complete the rebuttal. At this point, the buyer and seller can negotiate to keep the transaction moving forward. The seller can stand their ground and require the buyer to purchase the home at the agreed price (contract price), meaning the buyer will need to come out of pocket with the difference between the purchase price and low appraised value. The opposite could happen as well, the seller could reduce the price to the lower appraised value and continue forward with the transaction.
Negotiation With New Price In Case of Low Appraised Value
The most common way a low appraisal is rectified would be a compromise between the buyer and seller. Meeting somewhere in the middle of the agreed-upon purchase price and lower appraised value to get the transaction completed. There are many variables that go into this, and your real estate agent or real estate attorney will help you with specifics if you come across a low appraised value. The good news is with the housing market being as hot as it has been, low appraisals are not as common as they have been in the past. Many homes are entering bidding wars and are appraising at the higher values.
Transferring a Home Appraisal From One Lender To Another
Can you transfer an appraisal? The team at Capital Lending Network, Inc. have received numerous phone calls about transferring appraisals and how that process works. While it is true you can transfer in the appraisal, you may not transfer an appraisal for every mortgage program. For example, conventional appraisals do not transfer from lender to lender.
What Is An Appraisal Waiver?
Appraisal waiver process. Earlier in this article, we mentioned the data sets that Fannie Mae and Freddie Mac have on homes across the nation. All of this data can actually get you an appraisal waiver. Meaning you can purchase or refinance a property without going through the appraisal process. Typically, this happens with mortgages that have a low loan to value and/ or high credit score borrowers. Assuming Fannie Mae and Freddie Mac have enough data to support the value of your home, you may not be going through the appraisal process. The best part of an appraisal waiver is it saves you the cost of the appraisal as well as the stress of an issue during the appraisal inspection.
How To Eliminate Stress During The Home Appraisal Process
The appraisal process can be very stressful if you are the seller of a home, the buyer of a home, or refinancing your current home. The value of your property can make or break the transaction. Many refinance programs require you to keep at least 20% equity in your home, which can add stress to the appraisal scenario. If you have any questions on the appraisal process, please reach out to our team today. It is important to know the value of a long-term asset you are buying. The majority of mortgage loans are a 30-year note, which is a long-term investment. Even though the appraisal process may be stressful, it is put in place to protect homeowners as well as the lender.
What Is The Difference Between An Appraisal versus a Home Inspection?
The team at Capital Lending Network, Inc. would like to update our readers on the difference between an appraisal and an inspection. A lender does require an appraisal but does not require a home inspection. A home inspection is an examination of a property’s current condition. A home buyer will pay for an inspection and then may ask the seller to fix issues based on that report. Since the lender does not require the inspection, we recommend you do not send the inspection to your lender.
What Is A Home Inspection?
A home inspector will go to the property and address any repairs needed, maintenance issues, or any costly issues. They will go over the physical structure of the home including the roof and the foundation. An inspector should also verify the property is up to the local building code. Depending on the inspection report, issues may arise where you do not want to purchase a home. Most real estate transactions have an inspection window where the buyer can back out of the deal for any
How Much Does A Home Inspection Cost?
Most home inspection reports cost a few hundred dollars and could save you thousands down the road. With the average home currently around $375,000 nationwide, and way more expensive in certain areas, spending a few hundred dollars on a professional inspection is usually a good investment. It will help give you peace of mind or prepare you for what items may need to be fixed in the near future. Many times, your real estate agent will have a referral for a trusted home inspector in your area.
Mortgage Lenders Licensed In Multiple States With National Reputation of Being Able to do Loans Other Lenders Cannot Do
The team at Capital Lending Network, Inc. are experts in the appraisal process and have come across numerous different appraisal issues in the past. Our team of experts is here to answer any questions you may have, seven days a week. Since the appraisal is part of most mortgage transactions, we want to make sure our readers understand the process from start to finish. Our team is able to lend without lender overlays in most states across the nation. We are growing in states we are licensed in as well as expanding our operations staff. We would love the opportunity to help you and your family achieve your homeownership goals. Please reach out today with any mortgage questions.