A home appraisal is when an impartial third party assesses the
value of a home for the purposes of either purchase or refinancing. A mortgage lender uses the appraisal to make sure it’s not lending
too much money to the buyer that it couldn’t get back through a sale if the
buyer defaults. Appraisals also help a buyer make sure that the price she’s
paying isn’t significantly above market value.
The home appraisal plays a key role in
buying process, both for a purchase and for a refinance.
That’s why it’s important to understand the ins and outs of the home appraisal
process. Most consumers, for example, don’t understand the difference between
an appraisal in the purchase of a home and a refinancing. Click here for full
In a purchase transaction, the appraisal is
used to confirm whether the purchase price is a true market value. In a refinance,
the appraiser assesses the value based on market conditions and comparable
sales, with no consideration of the loan amount or value estimate of the
borrower or the lender. The appraiser also looks for any defects in the home,
and if necessary, recommends
repairs to be completed prior to loan closing.
determine a home’s value, the appraiser will consider a wide range of factors,
including the home’s location, size, amenities, condition and any new features
that the owner has installed. Then, the appraiser will use the price of
comparable homes to determine the free-market value of the property.
home appraisal process can be a frustrating experience for homeowners,
especially in a refinance, because this is one aspect of the process over which
they have very little control. The value determined by
the home appraisal service sometimes seems arbitrary. What homeowners
often fail to realize is that the appraisal process is equally frustrating to
lenders, since they also have no input in this aspect of the loan transaction. The
appraiser has no affiliation with the lender.
Appraisers are not allowed contact with Lenders
to the crash in the housing market, mortgage lenders were notorious for
pressuring appraisers to inflate values. This was particularly true for
refinances. Lenders often had a cozy relationship with a handful of appraisers
who got the bulk of their business, and often consulted the loan officers about
what value they needed to make the deal work. This practice was arguably one of
the causes of the housing bubble in the middle part of the last decade.
the bubble burst, regulators came down hard on lenders’ role in the appraisal
process. Now mortgage lenders cannot have any direct contact with the
appraiser. A third party who selects the appraiser and coordinates the
appointment with the homeowner. This regulation has prevented artificial
inflation of values and undue pressure from lenders. However, the added layer of bureaucracy in the
process can cause delays. It has also become nearly impossible for loan
officers to help their borrowers to coordinate appraisal appointments.
The appraiser determines
the value of a home based on comparable sales in the same neighborhood. The
appraiser will look for similar homes that sold within a six-month period. If
the comp is bigger or smaller than the subject property, the appraiser will
calculate an adjustment. Similarly, the appraiser will make an adjustment if
there are any additional features such as a deck, a view or a yard, which add
value to one property but not the other. Cosmetic features like
a renovated kitchen or exterior molding do not have a significant impact on
value. If a home sold via a foreclosure or short sale, that is given equal
weight in comparison as a home sold via a conventional sale.
If you disagree with the value the appraiser
assigns to your home, there is a procedure by which you can dispute
the value. However, doing so is very difficult. You have to find your
own comps that support a higher value than those the appraiser used. Submit
those to the lender’s underwriting department and they will make their own
assessment of the value. Realistically, because of the regulatory scrutiny on
banks, underwriters are very reticent to changing the value on the appraisal.
If you do want to dispute a value, make sure you present a very strong case.
If you are the Seller in the transaction a low
appraisal will affect the sale, as the Buyer may not have the money -or may be
unwilling- to pay the difference. You,
on the other hand, may not be agreeable to take less than the agreed sales price,
and the inability to reach an agreement can kill the deal and put your property
back on the market. A good and
experienced Realtor will guide you and assist you in the handling of appraisal
issues and will help you make the best decision.
Source: Gregory Erich Phillips