If you are in the process of getting a mortgage, you have probably heard about the appraisal that will soon be necessary. As this is a perfectly normal part of the process, there is no need to be alarmed in any way. Still, it always helps to have a little more knowledge about how the situation is likely to go down so that you can prepare accordingly. In this article, we will give you the basics of home appraisal and explain how they affect mortgages like yours.
Why Is An Appraisal Necessary?
In essence, this appraisal is just your lender’s way of making sure that their interests are covered. A mortgage (of course) is a loan that is tied to a specific piece of property. Without an accurate assessment of that property’s worth, there is no way for them to judge the situation.
An appraisal is necessary to protect the interests of both the lender and the borrower. If the home turns out to be worth more than expected, the lender is likely to raise the amount of the down payment (since a down payment is usually 20% of a home’s market worth). If the home turns out to be worth less than expected, the borrower can re-negotiate the down payment, and possibly some of the other terms as well.
Without an appraisal, there is nothing to guarantee that anyone is getting a good deal. The lender will have no way to know if they are paying the right amount of money to the seller, and the borrower has no way of knowing if they are getting ripped off on their mortgage terms.
How Does The Process Work?
The appraiser is most often hired by the lender, but they are supposed to be completely impartial. It is generally understood that the appraiser does not work for the interests of anyone, as their only job is to examine the property and give a reasonable estimate of its worth.
This is where the appraisal process requires a trained professional. They need to know what to look for, and which information to check. An appraiser has to be an expert on the housing market, and they must be familiar with the local market conditions. They will evaluate your home based on several criteria.
The appraiser will want to see if the home is in a general state of disrepair, as repair costs can sometimes be deducted from the total value. This is great news for the borrower, as it equals a lower price, but it won’t really help you if the home needs extensive repairs. They will also look at any additions or renovations that have been done to the home since its last appraisal. Obviously, these things tend to add value to a home.
That brings us to the biggest and most important criteria: Sale prices of similar properties in the area. The number one way that an appraiser figures out their price is this: They look at similarly-sized homes in the area, looking specifically for those that have recently sold. By looking at the sale price, the appraiser has a good basis for estimating the worth of your prospective property.
In most cases, the appraiser will not have a perfectly similar home with which to compare yours. That’s why they will normally have to make adjustments based on the differences between your home and the comparison home. For instance, let’s say they find a house that is exactly like yours, except that it has a slightly larger yard. They will probably start with the price of the larger-yard home, and then reduce the price by a little bit to make up the difference. If you want your lender to give you more favorable terms, you will often have to convince them.
Can You Appeal An Appraisal?
It is good to know that appraisal values are not always final. While most appraisers are competent professionals, anyone can make a mistake. Also, some local markets make it easy for the appraiser to make a mistake. For instance, homes that are located in highly-sought locations will usually sell for more, even if the value of the home itself is somewhat low. Location can make a big difference, and can cause people to pay more than a home is actually worth. Likewise, homes that are located in run-down areas in which no one wants to live will usually be cheaper, regardless of the size or state of the property.
It’s important to realize that the housing crisis of 2008 was partly caused by inaccurate home estimates. The primary cause of this crisis was a pattern of irresponsible lending habits on the part of several key banking institutions. When issuing all of these subprime mortgage loans, banks were sometimes pressured by the government to lend money to those who were not necessarily qualified.
As we already know, all home loans require an appraisal. Thus, faulty appraisement must receive some of the blame for the aforementioned sub-prime mortgage crisis. As a result, the federal government passed guidelines that were intended to crack down on faulty or biased home estimates. Thanks to these regulations, appealing a bad estimate is now more difficult than before.
An appraisal is a perfectly normal part of the mortgage process. While it is likely to affect the terms of your mortgage, that effect could be very small. As long as your home doesn’t contain any unwelcome surprises like a rat infestation or a rotten piece of the structure, the appraisal should be no cause for alarm. In fact, you should look at the appraiser as your friend. Without him, you will have no way to know if the home seller has been honest about everything. We have, of course, tried to be completely honest with you in this short article, and we hope that you will thank us by filling out the contact form below.