What Happens During a Home Appraisal?

The appraisal process is one of the most critical steps in a real estate transaction. This single assessment has the power to either make or break an entire deal and can be stressful for home buyers and sellers alike. Whether you’re buying or selling a home, it’s important to understand exactly how a home’s value is determined so that you know what to expect.

What is an Appraisal?

How much is a home really worth? This is the question an appraisal answers.

An appraisal is an unbiased, professional assessment of a home’s fair market value. It is typically used during the home buying/selling process and is also common in refinance situations.

Understanding a home’s fair market value holds undeniable importance, yet it’s crucial to recognize that this value is just one piece of a multifaceted puzzle. While it plays a pivotal role in determining a lending institution’s decision to finance a buyer’s purchase, there are various other variables at play. For instance, if an appraisal returns with a value lower than the sales price, there’s room for negotiation on the contract terms. Alternatively, buyers can choose to proceed with the purchase and cover the difference themselves. Additionally, even if the loan-to-value (LTV) ratio is on the lower side, it’s not a deal-breaker; rather, the LTV can be adjusted to accommodate the circumstances.

Lenders use a measurement known as the Loan-To-Value Ratio (LTV) to determine how much of a borrower’s mortgage they will fund. For example, a lender will not contribute more than 96.5% of a home’s appraised value on an FHA loan. This means that the other 3.5% is paid by the buyer in the form of a down payment.

An appraisal assures the lender that a buyer’s mortgage meets the required loan-to-value ratio and confirms that a home’s contracted purchase price is market-appropriate.

This information protects the lending institution in the event that a borrower defaults on their mortgage. If a home’s value exceeds a borrower’s mortgage, a bank can safely recover the entire cost of the loan by reselling the house.

But, an appraisal doesn’t just protect the lender – it also protects the homebuyer. For many people, purchasing a home is the most significant investment they’ll ever make. To avoid overpaying, it’s important that a home buyer fully understands just how much their investment is worth.

What Kind of Appraisals Are There?

There are several types of appraisal products, including:

• Appraisal Reports
• Hybrid Appraisals
• Desktop Appraisals
• Evaluations
• Automated Valuation Models

While each product serves a unique purpose, the Appraisal Report is the primary tool used during the home-buying process. More specifically, Fannie Mae form 1004 and Freddie Form 70 are the products most often used to assess the value of single-family homes.

What Happens During an Appraisal Inspection?

The Appraisal Report is conducted by a local, highly qualified, state-licensed appraiser. This appraiser can either be independent or part of an Appraisal Management Company. Per federal regulations, this appraiser must be an unbiased third party with no prior associations with either the property itself or the buyer’s lending institution. The appraiser must also comply with the Uniform Standards of Professional Appraisal Practice (USPAP).

This appraiser will travel to the home and conduct a thorough evaluation of its condition – both interior and exterior. This evaluation can take from 30 minutes to a couple of hours, depending on the property.

After the evaluation is done, the appraiser will then take a few days to conduct more research about local market trends and compare this home to others of similar size and condition which have recently sold in the area.

The appraiser then considers all this information to determine a home’s final value.

The final appraisal report must include the following:

• A street map showing the location of the appraised property
• An exterior building sketch
• An explanation of how the square footage was calculated
• Photographs of the home’s front, back, and street view
• Front exterior photos of each comparable property
• Interior photos of all rooms
• Any other applicable information which has been used to assess the fair market value, such as market sales data, public land records, and public tax records

It typically takes 1-2 weeks to receive a completed appraisal report.

What Influences an Appraiser’s Opinion?

An appraiser looks at several items when determining a home’s value:

Location

We’ve all heard it: location, location, location. Items such as school districts, subdivisions, and the condition of the surrounding area can influence an appraiser’s overall opinion of a home’s value.

Condition

When an appraiser evaluates a home’s condition, they delve into various aspects that contribute to its value. They take into account elements such as the roof’s condition, the state of the HVAC system, recent kitchen renovations, and the general curb appeal of the property.

Amenities

This includes a home’s number of bedrooms, bathrooms, square footage, and acreage. It also can consist of special features, such as a sunroom, swimming pool, or home theater.

Comparable Sales

Comparable sales are homes near the subject property which have recently been sold. These homes make up the local real estate market, and their sales prices are used to determine how much a subject property is worth.

Ideally, homes used as comparable sales are nearly identical in location, size, and condition to the subject property. Additionally, these homes must have been sold fairly recently – typically within 90 days from the date of the appraisal report.

How Much Does an Appraisal Cost?

While the cost of an appraisal varies for each real estate transaction, it typically falls between $500-$900. This price is determined based on a home’s location, size, and condition.

Typically, the home buyer pays for the appraisal. It’s important to note that a processing fee is usually charged if a buyer uses a credit card to pay for an appraisal. If the buyer pays via a debit card, usually, there is no associated processing fee.

Is an Appraisal Always Required When Buying a Home?

In a cash sale, where a buyer pays a seller in full for the cost of the home, an appraisal is advisable but not necessarily required.

However, an appraisal will almost always be required when using a mortgage to secure a home.

An exception to this is when a buyer uses a mortgage product known as a Property Inspection Waiver (PIW). This type of mortgage allows specific borrowers the ability to bypass the appraisal report. Instead, a lending institution will pull mortgage market data supplied by Fannie Mae and Freddie Mac and run it through an automated underwriting system. Through this process, they are able to originate a loan without using an appraisal report.

What Happens if an Appraisal Value Is Too Low?

A low appraisal is no minor issue; in fact, it can cause an entire real estate transaction to fall apart. Without the professional assessment needed to back up a home’s contracted purchase price, a lender cannot fund a borrower’s mortgage. This is why many real estate contracts have an appraisal contingency written into them; this way, if a buyer needs to back out of a deal due to a low appraisal, they can do so with no penalty.

Even so, there are several options available before ripping up the purchase contract:

Talk to Your Realtor

Upon receiving a low appraisal, immediately speak with your realtor. Check with them to see if there are any overlooked comparable sales or significant information which would support a higher appraised value.

Dispute the Appraisal

If there is significant evidence to support a higher appraisal, you can ask your lender to submit a Reconsideration Of Value (ROV). This is a formal request for an appraiser to re-examine their expert opinion based on the evidence you provide.

Renegotiate

When a rebuttal fails, it’s time to head back to the negotiating table. A low appraisal means a buyer has the rare opportunity to renegotiate a home’s purchase price with the seller.

Pay the Difference

In the event that a seller isn’t open to renegotiation, a buyer can always pay cash for the difference between a home’s appraised value and its contracted sales price.

Talk to Your Lender

If you are unable to pay the difference, be sure to discuss the situation with your lender. Sometimes, they can reconfigure the terms of your contract to help resolve the situation.

If none of these options are able to provide a solution, then it may be time to consider walking away from the transaction. While often a devastating decision to make, sometimes it’s simply the best answer.

What is an Appraisal Management Company?

Finding a genuinely unbiased appraiser who meets all Appraiser Independence Requirements (AIRs) can be a complex process. This is why many lenders choose to order an appraisal through an Appraisal Management Company (AMC).

An Appraisal Management Company (AMC) is a third-party institution of licensed, certified appraisers who work on behalf of the appraisal user. This company will interview several of their appraisers in order to find the right one for a real estate transaction. The “right” appraiser is one who is state-licensed, state-qualified, and has neither any prior information regarding the subject property nor any contact with the lending institution.

In a transaction using an AMC, the lending institution and the appraiser have minimal contact with each other, unless additional information/explanation is needed. Instead, the AMC monitors all communication to ensure that there is no risk of fraudulent activity tampering with a home’s appraised value.

While not required, the use of an AMC is advisable to ensure appraiser independence, which is regulated by Regulation Z.

Hopefully, this post has given you a comprehensive overview of the appraisal process. However, if you have any additional questions, contact your local BankSouth Mortgage Branch Office today!