September 15, 2022
Whether you’re buying a new home or refinancing your existing mortgage, an appraisal is a key component of the process.
An appraisal is an unbiased professional opinion of a home’s value. Appraisals are almost always required for new purchases and commonly for refinances. An appraisal is used to determine whether the home’s contract price is appropriate given the home’s condition, location, and features. In a refinance transaction, the lender is assessing the value to make sure they aren’t financing more than what the home is worth.
Lenders need to make sure the homeowners are not overborrowing for a property because the home serves as the collateral for the mortgage. If the borrower defaults and goes into foreclosure, the lender will sell the home to recoup the money it lent. The appraisal helps the lender protect itself against lending more than it might sell for.
Since the appraisal is primarily to protect the lender’s interest, the lender will order the appraisal. An appraisal costs several hundred dollars, and the borrower generally pays the fee. Home appraisals typically cost between $300 and $450.
A property’s appraised value is influenced by recent sales of similar properties and by current market trends. The home’s amenities, the number of bedrooms and bathrooms, the floor plan’s functionality, and the square footage are also key factors in assessing value. The appraiser must perform a complete visual inspection of the interior and exterior and note any conditions which might adversely affect the property’s value, such as needed repairs.
When buying a home under contract, the appraisal is one of the first steps toward closing. If the appraisal comes in at or above the contracted price, the transaction proceeds. If the appraisal comes in below contract price, it can delay or derail the transaction.
Chances are neither the buyer nor the seller want the transaction to fall though. As buyer, you have an advantage, in that the low appraisal can serve as a negotiating tool to lower the contracted sales price; however, if the seller doesn’t lower the price either the borrower must provide more down payment to cover the difference or pull out of the contract. The lender will not lend more money than the home is worth.