Home Appraisals 101

Home Appraisals 101

What is an Appraisal?

Whether you are buying a home or selling your existing one, there are a number of questions you need to ask yourself, and one of them is this: is the asking price an accurate one?

Simply because you have been pre-approved for a mortgage, or that other homes in the area have a similar asking price doesn’t mean that the home is worth that amount. Determining how much a home is worth is done through an appraisal.

What is an appraisal? It is an expert opinion of a licensed professional about the value of your property. If a home is appraised at $300,000 but the asking price is $400,000, then the home can be considered overpriced. Likewise, if the asking price is $310,000, then the asking price matches the appraisal.

How is an Appraisal Used in the Home Buying and Selling Process?home-appraisals-101

An appraisal protects mortgage lenders by ensuring that home buyers are not borrowing too much for their purchase. After all, if the buyers default, it is the lender who ends up with the property.

It also helps borrowers helps remove some of the emotion associated with home buying by ensuring that the amount of their loan is in line with the value of the home.

For sellers, an appraisal helps them determine a fair asking price for a home to facilitate a faster sale.

An Appraisal is not an Inspection

What is an appraisal? It is not the same thing as an inspection. An inspection will point out current or potential problems in a home and indicates any areas that do not meet minimum building codes. The inspection report can help you assess if you want to purchase a home and determine if you have the budget to fix any problems. However, it does not indicate the overall value of a home.

What is the Difference Between a Comparative Market Analysis and an Appraisal?

In addition to an appraisal, you can also find out the value of your home through a comparative market analysis.

The analysis determines the current market value of your home. It includes homes that have been recently sold, as well as homes in your area that are currently for sale, along with historical trends and property tax details, and for home features. The analysis is a good tool to use when you are determining a sell or offer price.

However, one difference between the two is that a mortgage lender will use the appraisal, and not the analysis, when determining a loan amount. Also, because they have no vested interest in the sale of a home, only a licensed home appraiser, and not a real estate agent, can appraise a property’s value.

How Do You Know if Your Appraisal is Accurate?

When a home buyer requests a mortgage, the lender orders an appraisal of the property in question. To ensure the accuracy and objectivity of an appraisal, lenders must adhere to the Home Valuation Code of Conduct. This document outlines the practices related to appraisals for conventional loans, including the fact that lenders must order appraisals from an appraiser directly or from an appraisal management business. This acts as a way of minimizing appraisal fraud.

What Home buyers Should Know

When you’re buying a home and the appraisal comes in at or above the contract price, then the transaction can continue as planned. However, if the appraisal is less than the contract price, the transaction could be delayed or even halted.

Buyers can use a low home value as a way of negotiating a better price. After all, a lender generally won’t lend any buyer more than the home itself is actually worth.

What Home Sellers Should Know

For sellers, a low, albeit accurate, appraisal may mean that the buyers will need to drop the asking price to get the home to sell. No one wants to overpay for a home.

Keep in mind that if your area has a larger number of distressed sales, a home’s value to be dragged down. Federal guidelines, meant to remove inflated appraisal values that contributed to the housing crisis, can cause appraisals to come in below a fair market assessment. Challenging such appraisals can be difficult.

The Bottom Line

What is an appraisal? In a simple, easy home transaction, an appraisal seems like just another task on the list. But when the price of a home and the appraisal do not match up, this can cause delays or even stop a transaction.

Knowing what is involved in an appraisal can help you streamline the process and save undue stress and hardship during the home buying process.

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