Home Appraisals: What You Need to Know
One of the many steps you’ll have to go through when buying a home is to get a home appraisal. This is an assessment of the home’s value by an independent, unbiased professional. It may look like just one more obstacle standing between you and your dream of becoming a homeowner, but it’s actually an important tool that protects both you and your mortgage lender from a home loan that might be too large.
Why a Home Appraisal is Important
When you buy a home, the house serves as the collateral for your loan. If you ever have to default on your mortgage loan, the lender will need to sell the house to get back the money it loaned you. Therefore, the lender wants to make sure that the house is really worth at least as much as you’re borrowing to buy it.
However, an appraisal is useful for you as well. It tells you the true value of the home you’re buying, so you won’t pay more for it than it’s worth. If the appraised value of the home turns out to be less than you offered for it, you can use the appraisal to negotiate with the seller for a lower price.
Who Does Home Appraisals
The person who does your home appraisal will have a license to conduct appraisals in your state. Appraisers are highly trained professionals who have passed a series of tests, have gone through years of on-the-job training, and continue to study to stay up-to-date. They know how to examine a home and compare it to other homes in the area to figure out its market value.
By law, neither you nor the lender is allowed to talk directly with the person who does your home appraisal. Instead, the lender contacts an appraisal management company – an independent third party that has no interest in the outcome. That company then selects a licensed appraiser for you.
The Home Appraisal Process
A home appraisal has three stages:
- The appraiser comes to the home and examines it carefully. They look at all the physical features of the home, including its age, condition, square footage, layout, number of bedrooms and bathrooms, and any special features, such as a large garage or a fireplace. They also evaluate the site the house stands on, considering its location, the size of the lot, and the view. All these factors can affect the value of the home.
- Once the appraiser has all the details about the home, they compare it to other homes that have recently sold in the area. They look at each recent home sale and compare that house to yours in size, location, and so on. Based on this data, they figure out what would be a reasonable price to pay for the property you’re buying.
- After crunching the numbers, the appraiser puts it all together in a final appraisal report. This report describes the property and the neighborhood, shows how this home stacks up against recent nearby sales, and explains how the final value was estimated. The report must include such supporting documents as a map of the neighborhood, a sketch of the building, photos of the house and its comparable homes, and any other information the appraiser used in calculating the home’s value.
An appraisal is a big job that typically costs somewhere between $200 and $600. This money comes out of the deposit you paid to the lender when you agreed to buy the house.
Special Rules for FHA Appraisals
If you are getting a conventional loan – that is, a mortgage that isn’t backed by any federal government agency – all your appraisal has to cover is the features and value of the home. However, if you are getting an FHA loan, which is insured by the Federal Housing Administration, the guidelines are stricter. FHA appraisers must also make sure that the home meets certain basic standards for health and safety.
Here are some examples of problems that need to be fixed before you can get an FHA loan:
- A broken furnace
- Loose stair railings
- Peeling paint in an older home (which could contain lead)
- Frayed or exposed electrical wires
- A leaking roof
- Termite damage
- Missing bathroom fixtures
Requiring the house to meet safety standards protects your lender, because a house in livable condition will be easier to sell in case of foreclosure. It also helps you by proving that you won’t need to make any expensive repairs just to make your new house safe to live in.
What Happens After Your Appraisal
If your appraiser finds any serious safety problems with the home, such as water intrusion or a missing handrail on the stairs, they may say that the appraisal is “contingent on repairs.” This means that the seller has to complete the repairs before closing. Your home appraisal will remain valid for 120 days, so if the seller can’t complete the repairs in that time, you may need to get an updated appraisal before you can close on the home.
Another problem can come up if that the seller thinks the appraiser has set the value of the house too low. If you ask the seller to come down on the price and they refuse to budge, your mortgage deal could fall through. You can break this impasse by getting a second opinion from a different appraiser. If the second appraisal gives the house a higher value, you can get approved for a bigger loan. If not, seeing the second appraisal could convince the seller to drop the price.
Ethos Lending is a new type of mortgage lender. We use technology to keep our operational costs as low as possible. From closing costs to interest rates, we have made it our mission to make the process of buying a home more affordable. Get in touch with one of our mortgage specialists to learn more.