Understanding Home Appraisals vs. Inspections
I often find myself explaining to first-time buyers the importance and relevance of appraisals and how they differ from home inspections. It’s your lucky day because I’ve decided to share that wisdom with you too.
Home appraisals play a crucial role in real estate transactions by providing an objective assessment of a home’s value. An appraisal helps the lender determine the value of your property as collateral for the loan. Typically, the lender orders the appraisal, and you pay for it as part of the mortgage loan process. Besides purchases, appraisals are also used in divorce settlements and contested estates.
The appraiser compares recent sales of similar properties, examines market trends, and conducts an in-person inspection of the home. This is different from a home inspection. If the appraised value matches or exceeds the contract price, the transaction can proceed as planned. Appraisals are important because they give both the lender and buyer confidence in the investment.
Preparing for the Appraisal
- For Buyers: Include an appraisal contingency in your offer to protect against a low appraisal.
- For Sellers: Gather documentation of upgrades, repairs, and unique features. Make cosmetic upgrades to enhance the home’s appearance, as a well-maintained home generally appraises higher.
During the Appraisal
Seller/Listing Agent: Be present during the appraisal to answer questions and provide additional information. Realtors can offer their own comparable sales data, which is especially helpful if the appraiser is not familiar with the area.
Once the appraisal is complete, the lender must provide you with a copy of the appraisal as soon as possible, but no later than three days before closing.
After the Appraisal
Review the appraisal report for accuracy and address any errors or omissions that could affect the value. If the appraisal is lower than expected, you can request the lender to submit a dispute. Collect and provide any factual information that addresses specific concerns, such as:
- A plat map to correct lot size.
- Measurements of your home to correct total square footage.
- Pictures of your home’s interior/exterior showing updates or improvements.
- Receipts for materials and labor to correct property condition.
- A list of similar homes near your property that sold within the past six months, including the sales prices, as better comparables.
You can submit up to three potential comparables for review. The underwriter will determine if the information is acceptable and will send the dispute to the appraisal management company. The appraiser will review the potential comparables and either adjust the appraisal based on the new information or prepare a rebuttal explaining why these comparables should not be used.
What to Do If the Appraisal Is Low
If the appraised value is lower than the agreed sales price, some sellers might lower the price to match it, while others may refuse to negotiate. If a seller refuses to negotiate, the buyer can either make up the difference, request another appraisal (subject to lender approval), or terminate the contract (if your contract has an appraisal contingency). If the seller won’t lower the price, you can ask for concessions like covering repairs or closing costs.
Stay Informed and Educated
Understanding the appraisal process can reduce stress during the home loan and financing process. Knowing how a lender uses appraisals to determine factors like your interest rate, required down payment, and loan approval is essential for protecting your interests. If you believe your appraisal is inaccurate, taking quick action can protect your home equity and finances.
If you have any additional questions, please feel free to reach out. I’m here to guide you through the process.
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Blog post date: Thursday, June 27, 2024
