In order for the purchase to go through, you may need to supply extra cash. A home appraisal is an analysis that ascertains a home's market value. It is conducted by a professional appraiser who is chosen by the lender, but typically paid by you, the buyer.
An appraisal considers the attributes and condition of the property and the sale prices of comparable properties, or "comps," recently sold in the local housing market. Mortgage lenders require appraisals as part of the approval process on all loans they issue. This protects lenders in case the borrower fails to repay the loan by providing reassurance that the loan amount can be recouped by foreclosing on the property—taking it back from the borrower and reselling it at market price.
The appraised price is also used to determine the amount of equity you have in your home if you seek a home equity loan or home equity line of credit : You calculate your equity by subtracting the outstanding balance on your mortgage from the home's appraised value.
The maximum amount a lender will issue on a mortgage is typically the appraised value of the home minus your down payment. Neighborhood housing prices may be on the decline, for instance, or the appraiser might determine that the home needs major repairs that aren't reflected in the asking price.
Rising prices and tight, competitive housing markets such as those seen across much of the U. An appraisal contingency is a clause in the offer letter or sales contract that allows you to withdraw your purchase offer in light of the appraisal results. In locations where earnest money otherwise may be forfeited for withdrawal of a purchase offer, an appraisal contingency can protect you from the loss of those funds.
Appraisal contingencies are fairly standard buyer-protection measures, common in boilerplate real estate contract language. In today's highly competitive real estate climate, some buyers are explicitly waiving appraisal contingencies as a tactic to make their offers more attractive to sellers.
This approach can make an offer stand out among multiple bids, but it's risky unless you are certain you have the cash on hand to make up any difference between the property's appraised value and your offer price. A lender's appraisal can come back below your purchase offer for lots of reasons, so it pays to anticipate that possibility and its implications, and to respond in a way that protects your money and your plans for buying your next home.
If both you and the buyer are motivated to make the deal happen, you may choose to split the difference between the sale price and the appraisal amount. If the buyer included an appraisal contingency in their offer, they can exit the deal with their earnest money intact if the appraisal comes in under the contract price.
According to Jacobs, sellers in her area anticipate the possibility of a low appraisal value when considering offers. In a strong market, sellers look for an appraisal gap guarantee when evaluating offers.
This addendum stipulates that the buyer pays the difference between the appraised value and contract price if the value comes in low. With strong buyer demand and low home inventory, Jacobs routinely sees such clauses with offers.
Seller Resources. Table of Contents. If you finance your home construction with an FHA k rehab home loan , you might get lucky. This also applies if you use a k refinance to add some home improvements when you refinance your property. With the exception of no-appraisal, Streamlined Refinance loans, nearly every mortgage application requires a home appraisal. While many lenders use automated valuation models AVMs to get an idea of your property value, the majority of transactions still involve a licensed human.
Using this method, a home appraiser compares the subject property i. Appraisers are most interested in sales of similar homes within these areas. They look at such traits as:. Then, for each comparable home, appraisers search public records for home descriptions, sales data, and other available information about a property.
This data is used to formulate the value of the subject property. However, it does not contain a finished basement like yours does.
Comparable homes sold in the most recent 90 days are hugely important in the sales comparison approach. Homes sold over six months ago are less relevant. There are two other methods for appraisers to value property — the replacement cost approach and the income approach. The replacement cost approach estimates what it would cost to buy your lot and build a house like yours, then subtracts depreciation.
However, insurers will come up with their own valuation when they underwrite your policy. For the income approach, an appraiser researches rental data in your housing market to determine what your home would rent for on the open market, and uses this information to calculate your property value.
The new appraisal could be very different, provided that the low appraisal wasn't a Federal Housing Administration FHA appraisal.
These appraisals are assigned a case number, so the same appraisal would be used if the first and second buyers had FHA appraisals. The price of an appraisal will depend on where you live. An appraisal takes many factors into account, both on your property and in the surrounding area. Awkward floor plans, lack of curb appeal, and aging wiring or appliances could all hurt your appraisal. Living in a remote area without easy access to major roads, schools, and hospitals could also hurt your appraisal value, as could high crime rates in your neighborhood.
Freddie Mac. Board of Governors of the Federal Reserve System. Accessed Oct. The Brookings Institution. Consumer Financial Protection Bureau. National Association of Exclusive Buyer Agents. Actively scan device characteristics for identification. Use precise geolocation data. Select personalised content. Create a personalised content profile. Measure ad performance. Select basic ads. Create a personalised ads profile. Select personalised ads. Apply market research to generate audience insights.
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