If you are navigating the mortgage process, you probably know that getting an appraisal is an important step before finalizing your new home purchase. Appraisals play a vital role in determining the value of a property, and they help ensure that the investment you’re making is a smart decision for both you and your lender. We will dive into what appraisals are, when you need one, who performs them, and how they impact your mortgage loan.
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What Is An Appraisal?
An appraisal is an assessment of a home’s market value, conducted by a licensed appraiser. This evaluation is essential for lenders, as it helps assure them that the home is worth both the purchase price and loan amount. The appraisal determines the loan-to-value (LTV) ratio, which is a key factor in the lending decision. As the borrower, you’re responsible for the appraisal fee, which will be listed on your loan estimate and is typically paid to the vendor when the appraisal is ordered.
The appraiser considers several factors to determine the home’s value, including:
Comparable recent home sales
The appraiser looks at similar homes that recently sold in the area to establish a baseline value.
The home’s size, condition, and features
Elements like square footage, the number of bedrooms and bathrooms, the condition of the property, and any unique features such as a pool or updated kitchen, all influence the appraisal.
Location and neighborhood characteristics
The appraiser evaluates the home’s location, including the quality of the neighborhood, proximity to schools, and other local amenities.
Current real estate market trends
The appraiser considers broader market conditions, such as whether the home prices are rising or falling in the area.
When Do You Need An Appraisal?
Most home purchases will require an appraisal. However, there are exceptions and specific situations where the requirements might differ:
appraisal waiver
In some cases, automated underwriting systems like DU and LP may suggest an appraisal waiver. This usually occurs if the agency has sufficient information about the general market in the area. If you receive an appraisal waiver, your lender will let you know, and you can decide whether to accept it or opt for a full appraisal.
Refinancing
The need for an appraisal doesn’t differ much between a purchase transaction and a refinance. However, with FHA and VA Streamline Refinances, no new appraisal is required if you’re only doing a rate and term refinance (i.e. no cash-out).
Specific purchase types
Appraisal requirements can vary depending on the type of purchase. For example, if you’re an investor buying a rental property, a supplemental report with rent analysis will be required along with the standard appraisal. As another example, for new construction properties, two appraisals are often required: an initial appraisal to estimate the home’s value based on the plans, and a final inspection to confirm its value after construction is complete.
Who Performs The Appraisal Inspection?
Appraisals are conducted by independent, licensed appraisers who are trained to assess property value without bias. It’s common for lenders to work with appraisal management companies to hire and schedule appraisers for inspections. It’s important to note that for VA-backed loans, the VA assigns the appraiser to ensure the home meets specific guidelines.
There are strict regulations governing the selection of appraisers to prevent conflicts of interest for the mortgage transaction. For instance, at FBC Mortgage, the borrower cannot shop for the appraiser like they can with home insurance companies or title companies.
How Do Appraisals Affect Your Loan?
An appraisal has a direct impact on your loan and the overall transaction. If the appraisal matches (or exceeds) the purchase price, the loan process will move forward without issue. Your lender will proceed with the mortgage based on the agreed-upon purchase price, bringing you one step closer to closing.
If the appraisal is low, it could potentially complicate the deal, leading to several potential outcomes:
renegotiation
You may need to renegotiate the purchase price with the seller to align with the appraised value.
Loan reconstruction
The lender might adjust the loan terms, potentially requiring a larger down payment to maintain the original LTV ratio.
Paying the difference
As the buyer, you could choose to pay the difference between the appraised value and the purchase price out of pocket.
Challenging the appraisal
In some cases, the seller may challenge the appraisal if they believe the home was undervalued, providing additional information or comparable sales to support a higher valuation.
Appraisals are a safeguard in the mortgage process, ensuring that the home’s value aligns with the purchase price and loan amount. By understanding how appraisals work, you can better prepare for what lies ahead and make informed decisions during your home purchase. It’s a good idea to speak with your Mortgage Loan Originator who can guide you through the appraisal and lending process and offer clarity when you need it.
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Why Choose FBC Mortgage?
FBC Mortgage, LLC is a leader in helping home buyers with fast and simple loans. We’re dedicated to exceptional customer service and are always available when you need us most, even at night and on the weekend. We’ll help you navigate your new home purchase, and keep you updated along the way with weekly check ins, so you know you’re taken care of. That’s one of the many reasons why 95% of our clients would recommend us to their friends and family. It’s also why the nation’s top home builders and Realtors trust FBC to help their new home buyers.
Buying a home is one of the most important financial decisions you will make. Understanding mortgages and the home buying process can help make it less stressful, and so can partnering with a mortgage lender you can trust. At FBC Mortgage, LLC, we’re dedicated to helping home buyers finance their dream home.
All information presented is for educational purposes only and not intended as financial advice. FBC Mortgage, LLC is a national mortgage lender headquartered in Orlando, Florida. Specializing in residential mortgage lending, including purchase, refinance, construction, and renovation loans. See what our clients have to say. NMLS#152859 EHL ©2024.
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