Purchasing a home is the largest investment of money most people will ever make. Therefore, you want to get a good value for the money you spend. A home appraisal is an important landmark along the way. This is the first of a two-part article about home appraisals.
The formal appraisal is the lender’s last major checkpoint in the loan process. Both the buyer and the seller (and their realtors…) have each made their own “appraisal” of the property when they examined comparables. The buyer took it a step further by having a home inspection completed.
The mortgage lender, though, is looking at the transaction from a different perspective from anyone else. The lending institution needs to know that they will still be able to get their money back from the sale of the property if you default on your loan for any reason. In order to feel sufficiently comfortable in lending you a large sum, they will hire a professional, state-certified home appraiser to valuate the property.
Most lenders will choose their own appraiser for the job.
Good realtors will do a CMA (comparative market analysis) and can come up with values similar to those of home appraisers. But the only valuation a bank or other lender will use for lending a large amount of money is an appraisal.
There are two basic methods appraisers use to valuate a property.
- Construction Cost: What would it cost to rebuild the property exactly the same as it is now? This is a typical method that home insurance companies use in calculating the minimum amount of insurance necessary for your home. This method works particularly well for homes that are relatively new, since construction costs are fairly straight-forward to calculate. It’s more problematic, though, with older homes since you start running into more the specialized and expensive areas of historic and custom renovation.
- Comparables: What have similar properties sold for recently? This is pretty much the same method that the buyer, seller and realtors did earlier in the process to come up with their figures. Appraisers, though, will have their own formulas for valuating differences between comparables. They will note each difference between the home being appraised (the subject property) and three comparables, and then add or subtract value to the subject property depending upon whether the difference increases the value or not.
Why is an appraisal so important to you, the buyer? It’s the final determining factor for whether or not a lender gives you the mortgage loan you need. If the appraiser comes in with a figure lower than the purchase price, the lender may very well decline the loan or require other collateral to make up the difference.
If the appraisal is what you expected or higher, then it’s time to celebrate because the lender will most likely approve your loan. But if it comes in low, it’s important not to panic. There are still a number of things you can do at this point to mitigate a low figure, and we’ll look at them in more detail in Part 2 of this article.
Call Susanne today at 614-975-9650 to discuss the ins and outs of home appraisals.