Why are Home Appraisals Used for Mortgage Applications?
Home appraisals are a very common practice when purchasing a property or if you are refinancing your home. The main reason for doing so is for lenders to limit their risk by ensuring the property’s value. You may be wondering “if I’m purchasing the home for $X amount why do I need an appraisal, is the purchase price not enough to justify the property value?”. Well, the purchase price and the market value are two different factors. In competitive markets, purchase offers for a particular property can exceed the market value due to aggressive buyers therefore because a home is sold for a particular amount does not necessarily mean that is its value. Home appraisals can vary between $350-$500 so it’s important to budget for this expense if you’re thinking of purchasing a home or refinancing your property.
What is a Home Appraisal?
A home appraisal is when a third-party appraiser inspects the property and compares them to other similar properties sold in the area to determine the fair market value of your home. When purchasing a home, the appraiser will complete their assessment typically with the presence of the listing agent, although if you are refinancing your home, you are allowed to attend the appraisal. Attending the appraisal can be beneficial for you as you can point out any work that has been done on your property that may increase its value.
How are home appraisals involved in the mortgage process?
Lenders always need to take proper precautions when loaning large amounts of money and by obtaining the property’s appraisal validates the loan in the event the borrower defaults on their mortgage. They want to ensure that they would not be at a loss.
With that being said, the outcome of the appraisal can make or break your mortgage approval. If an appraisal comes in lower than expected, it will affect how much the lender will be willing to advance. To remedy this situation, if purchasing, the borrower may be required to increase their down payment amount to reflect the difference, although not everyone has the funds to match this which could cause the deal to fall through. When refinancing, if the appraisal comes in lower - it will simply affect the amount of equity accessible in the property and funds will be reduced for that amount. Although if the appraisal comes in higher than expected, it increases the amount of funds you can access.
What affects a home’s appraisal?
While we all like to think we know the value of our property, the truth is that the market is constantly changing. For example, within the past couple of years, most properties have increased in their market value. We’ve noticed that properties that were bought 3-4 years ago have increased significantly in value, in some cases by around $200,000. So what contributes to a property’s increase or decrease in value? In short:
Location
Age
Land size
Square Footage
Curb Appeal
Major systems and home appliances: age and condition
Number of bedrooms and bathrooms
In addition to the list above, your home’s value depends on the local value so appraiser’s will be comparing your home to other properties in the area, typically ones that have recently sold to help determine the value of your home.
Rural or unique homes can make the appraisal difficult as there are less comparables to support the assessment. This does not necessarily mean it decreases the value, although it makes it difficult for appraisers as there are no-other or less homes like it which increases the possibility of it being undervalued.
Certain factors like local market conditions and location are out of your control. Although here are some tips to do what you can to prepare your home for an appraisal:
Continue regular maintenance and repairs on major systems
Maintain your property to preserve its curb appeal
Declutter your home before scheduled appraisal: while most appraisers are experienced enough to look past any clutter, doing your part to make the space presentable will increase the accuracy of the assessment.
Keep track of any renovations or upgrades that may increase your home’s value: this could include upgraded systems (specially energy-efficient systems) and new appliances
As mortgage brokers, we have little control over the outcome of your appraisal although we conduct adequate research when submitting your mortgage application to associate an educated estimate of your property’s value. Regardless of the outcome of your appraisal, we are dedicated to providing you with the best mortgage product options and guiding you through the intricacies of the mortgage process.
