What Is A Home Appraisal?
A home appraisal is the process by which a licensed person assigns a “fair market value” to a property.
Appraisals are performed by professionals known as appraisers and, with photos, research, and analysis, home appraisal reports can sometimes stretch to 30 pages of more.
The home appraisal process helps to determine whether a home buyer is over-paying for a home relative to similar for-sale homes. This protects the home buyer, refinance applicant, and the mortgage lender providing financing on the home.
Home appraisals are used for refinance loans, too.
Depending on a home’s appraised value, a borrower will get access to different mortgage rates and options; and, may even get to submit less documentation as part of the mortgage approval process.
However, home appraisals don’t always come in “at-value”, which is to say that — sometimes — home appraisals assign a home value that is less than for what you hoped or planned.
What do you do then?
What Happens When A Home Appraises For Less Than Its Purchase Price?
When your home appraises for less than its purchase price, it affects your mortgage, and can affect your contract, too.
Remember that mortgage lenders use the value determined by a home appraisal to find the “value” part of your mortgage’s loan-to-value (LTV) calculation.
If the appraised value is less than the purchase price, lenders will use that value to determine your LTV. This will raise your down payment amount.
When your home appraises for less than its purchase price, there are a few potential outcomes :
- Buyer and seller renegotiate a new, lower home sale price
- Buyer increases down payment to meet new LTV and down payment minimums
- Buyer chooses neither option, and cancels home purchase contract
- Request an appraisal rebuttal (see below)
The possibility of a “bad appraisal” is among the reasons why home purchase contracts are often written with an appraisal contingency. Should the home fails to appraise for its contracted purchase price, the contingency clause allows buyers to re-evaluate and, potentially, walk away.
Appraisal contingencies are also sometimes used to renegotiate or exit contracts after an appraiser identifies required repairs, such as chipped paint or cracked windows.
As a home buyer, it’s risky to waive your appraisal contingency. You may lose your negotiation leverage in the event that the home appraises for less than its purchase price.
If you’re selling a home, and it doesn’t appraise for your listing price, a few things could be going on.
Your real estate agent may have listed the home too high. In this case, you may want to bring down the listing price closer to the appraised value. There aren’t too many home buyers that will kick in thousands of extra dollars to cover the difference.
And, ordering another appraisal may not yield the results you’re looking for.
In hot markets, though, it’s common to list a home at a higher price than similar homes have sold for yet. Some markets rise so fast that appraisal values can’t keep up.
An appraiser must base your home’s value on what has sold recently.
You have a few options, though, if the appraisal comes in low.
- Wait until a comparable home sells at a similar price
- Request that your buyer make up the difference in cash
- Lower your listing price to match the appraised value
While none of these may be ideal, they are options. If you are in no hurry, you can re-list the home at a later date for another try at getting top dollar.
What To Do If Your Refinance Appraisal Comes In Low
A “low appraisal” happens a lot more on refinance transactions than on purchase ones.
The homeowner often has a figure in mind, but it’s not always based on actual sales in the area, or truly comparable sales.
But there are things you can do if your refinance appraisal value comes in low.
First, you can see if you even need that extra value you were hoping for.
For example, you are requesting a loan of $100,000 on a home you think is worth $200,000. That’s just a 50% loan-to-value (LTV). The appraisal comes in at $170,000. While, perhaps a shot to pride, the lower value doesn’t matter. You are now at 60% LTV, well within an approvable range.
But what if your LTV shoots too high:
- $100,000 requested loan
- $125,000 expected value (80% LTV)
- $120,000 actual value (83% LTV)
You probably want to keep your loan-to-value at or below 80%. Above that, and you incur private mortgage insurance (PMI). You are could try an appraisal rebuttal (see below), but these rarely work. Instead, you could do a few other things.
- Lower your requested loan amount to 80% LTV and pay the difference in cash
- Take less cash on a cash-out refinance
- Cancel the refinance until you gain more equity
- Request a new appraisal
Keep in mind that if you cancel the refinance, you will most likely have to pay the appraisal fee. Likewise, ordering a new appraisal is no guarantee of a higher value, and you are on the hook for two appraisal bills.
Plus, the lender may not allow an additional appraisal.
There is another option, though. Try the popular HARP refinance program. It is set to expire September 30, 2017. Until then, ask your lender if you are eligible. You will not need PMI if you don’t have it currently. And, there is no limit to LTV.
With the HARP loan, you can have a 150% LTV or higher and get access to the same rates as conventional loan borrowers with 20% equity.
The Appraisal Rebuttal Process
The home buyer, in some cases, can request an appraisal rebuttal. This is a formal process in which the buyer’s lender submits a request for the appraiser to re-examine the value.
Additional comparable homes may be submitted to the appraiser, as well as “missed” characteristics about the subject property that may add to its value.
These rebuttals often have little or no effect. Appraisers are reluctant to change a home’s value on the report. The appraiser will submit a rebuttal response, stating that value has been changed based on new evidence, or that it wasn’t changed and why.
How Appraisers Determine A Home’s Value
With the exception of no-appraisal, streamlined refinance loans, nearly every mortgage application requires a home appraisal to get approved.
Appraisals are performed by licensed home appraisers and there are several appraisals methods an appraiser can use to value a home.
For home buyers and existing homeowner who plan to live in the home getting financed, the “Sales Comparison” method for appraising a home is the most common.
When using the Sales Comparison appraisal method, a home appraiser compares the subject property (i.e. your home) to other, similar homes with similar physical attributes which are in the immediate vicinity.
“Immediate vicinity” varies by region.
In a dense city such as Seattle, Washington; Chicago, Illinois; or, San Francisco, the immediate vicinity for a home will be within 0.25 miles — usually not more than a few city blocks.
In less-dense areas, the immediate vicinity of the subject property could range to several miles.
Appraisers are most interested in similar homes within these areas. They look at such traits as: number of bedrooms; number of bathrooms; age of home; quality of home finishes; and square footage.
They also consider the “appeal” of a home based on its school districts, and proximity to traffic and shopping, as examples.
Then, for each comparable home, appraisers search public records for home descriptions, sales data, and other available information about a property. This data is used to formulate the value of the subject property.
If the home across the street recently sold for $600,000, does not contain a finished basement, but is identical to the subject home in every other way, the subject property may be valued at $620,000.
Comparable homes sold in the most recent 90 days are hugely important in the Sales Comparison approach. Homes sold over 6 months are mostly irrelevant.
What Are Today’s Mortgage Rates?
Homes don’t often appraise for less than their purchase price — especially in a rising home value environment. However, it can happen so it’s best to know your options.