04/19/21: Monopoly Mortgage Monday – Appraisal Order Square.
Hello, again Southern Lakes Credit Union Members. It’s time to play Mortgage Monopoly!
You give the dice a good shake, toss them across the board, and land on the Appraisal Order square. What is a home appraisal you ask? How does the process work? Whether you’re buying or selling a home, a critical step of the process is the home appraisal. As a buyer, a key part of getting a mortgage is having an appraisal performed to confirm the market value of the property.
Why Lenders Want an Appraisal
An appraisal is an unbiased, professional estimate of the value of a property for sale. Lenders generally require a home appraisal before they’ll issue a mortgage because they want to ensure the value of the property. If the actual market value of a property is lower than the sales price negotiation may need to happen between buyer and seller or additional cash down may need to be placed on the home prior to completing the mortgage.
How the Appraisal Process Works
The appraisal happens after an offer has been made and accepted. As the buyer, you’ll pay for the appraisal. When working with a realtor the appraisal company works with the realtor to complete the appraisal. If no realtor is involved the appraisal company will work with the seller and possibly you to arrange for the appraisal.
Once it’s complete, the report is sent directly to the lender. As part of the mortgage process, you may receive a copy of the appraisal also. Be sure to ask your lender for your copy.
The average cost of a professional appraisal typically ranges from $500 to $600. The price can depend on your property type and location. More expensive homes or homes that have more than one unit will typically cost more. Expect the appraisal process to take from 7 to 15 business days. With the current real estate market, it could take longer. The appraiser is a qualified professional who is licensed or certified to do the work and has no direct or indirect interest in the transaction.
Using Comps to Determine Market Value
The appraiser will research the area the home is in and will analyze the neighborhood as well as the details and condition of the house to provide an assessment of the fair market value.
The most important component involved in arriving at a property’s value is called comparable sales, or “comps.” These are similar properties, usually located within a mile or so of the home in question, which has sold in the last 90 days.
The appraiser compares several of the property’s features against the comps to arrive at the value. Factors include square footage, appearance, amenities, and condition.
For example, a large four-bedroom home in an area where mostly three-bedroom homes have recently sold will likely have a higher value than those comps. Likewise, a house with peeling paint and a patchy lawn in a well-manicured subdivision will typically appraise at a lower value than otherwise similar properties.
When the Property Appraises for Less than the Sales Price
Sometimes the appraised value of a house comes in lower than expected. This can affect several aspects of the sale.
If the lender is deciding your loan amount as a percentage of the property price, it will choose either the sales price or the appraised value, whichever is less. Most lenders won’t loan more than between 80% to 97% of the home’s fair market value, so the appraisal value of the home is important when it comes to how much you’ll be able to borrow.
If the property appraises at the same as or at more than the sales price, you’re on your way to get the loan amount you applied for. If it appraises for less, you will have to work with the seller and the lender to determine if negotiations need to occur, if you will have to put more cash down, or if the loan amount will need to be reduced.
Dealing With a Low Appraisal
A low appraisal can delay or even cancel a sale; buyers don’t want to overpay for a house, and sellers may not want to drastically lower the price they were hoping to get.
You have a few options if the appraisal comes in low. If you wrote your offer contract to include a contingency that requires that the property be valued at the selling price or higher, you can walk away from the deal.
Another option is to try to negotiate with the seller to reduce the sales price. A third alternative might be to put more money down to cover the difference between the appraised value and the sales price.
And you can always ask for the appraisal to be reviewed. Find out what comparable sales were used and ask if they’re appropriate.
The next step after you have an Appraisal Order is Processing. I will cover that topic for you next week. This is quite a bit of information, so I know you must have some questions. I invite you to reach out to me so I may help answer them. You can either leave them in the comment section below, message me here, or call me at (262) 723-4888 x810.
Until next time folks! I am Joe Riesterer, Mortgage Loan Officer with Southern Lakes Credit Union. NMLS #290200