The Role of the Appraisal

If you are buying a home and taking out a mortgage, the Lender is going to order an appraisal of the property by a licensed real estate appraiser to be sure that they – the Lender – are making a good investment. You can offer whatever you want on a house, but if you’re taking out a mortgage to pay for it, the Lender has a vested interest in ensuring the home is worth what you offered. After all, they don’t want to lose their money in the event the home winds up in foreclosure.

The appraisal is an important part of the mortgage commitment process. It is ordered by the Lender once you have completed your home inspections and have confirmed that you are definitely going forward with the purchase. This is typically around the time that the Purchase & Sale agreement is signed and your mortgage application is now considered “complete”.

Appraisals are typically completed within a week of being ordered, although that depends on how active the market is. When the volume of home sales is unusually high, the time it takes to get an appraisal can be longer, since there is a finite number of licensed appraisers. The appraiser visits the home you are buying, completes an extensive report about the home, and then delivers the final appraisal report to the bank, usually within a few days.

The general rule of thumb with conventional mortgages is that if you are putting down 20% and financing 80%, the home needs to appraise for at least the sale price. The Lender figures that if you default on your loan, they should be able to recoup at least 80% of the value of the home, in the event they need to sell it. If you are putting down 20% and the home appraises for LESS than the sale price, you may be able to renegotiate with the Seller and pay the appraised price instead of the offer price.

If you are putting down less than 20%, whether intentionally or due to a low appraisal, you will typically need to take out mortgage insurance, which gives the Lender some added insurance on the amount over 80% that they are financing, should you default.

If you are putting down MORE than 20% — let’s say 50% — then even if the home appraises for a bit LESS than your sale price, you can still buy it for the agreed-upon price, although you may not wish to do so. On a related note, if you are paying straight cash for the home, there is no automatic appraisal at all, although you yourself can request an appraisal and can even write into your offer that your purchase at the agreed-upon price is contingent upon the home appraising at or above the sale price.

Whether you’re putting down 5 or 25 percent, paying cash, or financing the entire amount with a VA loan, I can help guide you through the process to home ownership. Please contact me for expert guidance. It would be my privilege to assist you.