Home appraisals are a key, but sometimes dreaded, part of purchasing or refinancing a home.
When a home appraisal report comes back “on the money,” matching the sale price of a new home purchase (or higher), consider it grounds to celebrate. Your purchase can move forward with flying colors!
When a home appraisal comes in too low, however, undercutting the home’s sale price — or the value you were hoping for to get approved for your refinance — it can leave you at a loss for what to do next.
With money on the line and plans that feel in limbo, it’s important to understand 4 things about home appraisals. That way, you’ll be better prepared to deal with a favorable (or not so favorable) outcome. Read on.
Home appraisals have a simple, important purpose. They determine the fair market value of a home. In an appraisal, a licensed home appraiser will prepare something called a Uniform Residential Appraisal Report (here’s an example). The appraiser does this by evaluating factors about the property including:
Appraisals protect you as the borrower, ensuring you don’t pay any more than the home is actually worth in the current real estate landscape. In a refinance scenario, appraisals verify the fair market value of the home in order to move forward with new loan terms. In both scenarios, a mortgage lender is not going to take a risk on underwriting a loan for more than a property is worth.
Issues with home appraisals are the second most frequent cause of delayed closings behind financing issues, according to the National Association of Realtors. Appraisals have the power to keep a transaction moving forward smoothly, delay it by days or weeks, or cancel one altogether.
There are generally 3 appraisal outcomes to be prepared for:
Appraisal Value Matches Purchase Price - The most ideal scenario — your purchase price is right on the money.
Appraisal Value Comes in Over Purchase Price - You’re paying less than fair market value of the home and have instant equity in your home.
Appraisal Value Comes in Under Purchase Price - You have 3 options here: You can attempt to negotiate the seller down in price, pay the difference out of pocket, or walk away from the deal.
Even in the most optimistic of purchase deals or refinance transactions, it’s important to stay tentative until you’ve come through the appraisal period with a favorable outcome or the decision to move on.
It’s also important to remember that an appraisal is just one person’s opinion of value — and you have the ability to request a repeat appraisal or a new appraisal by a different appraiser if you have any doubt over an appraisal report.
Home appraisals must, by law, be performed by licensed or certified home appraisers. The appraisal is ordered through an AMC, an Appraisal Management Company. This is part of the AIR, Appraisers Independence Requirements, developed in October of 2010. These were protections set in place by Freddie Mac, Fannie Mae, and the Federal Housing Finance Agency to protect mortgage investors, homebuyers, and the housing market.
Licensed and certified appraisers have undergone specialized training and hundreds of hours of education in property valuations and varied strategies for evaluating properties. He or she also knows and adheres to local, state, and federal home appraisal regulations, including the Fair Housing Act.
Waiving a home appraisal means waiving a traditional in-person appraisal by a licensed appraiser. Instead, the appraisal is performed electronically using data and property analytics to value the home.
Typically, appraisal waivers happen when automated underwriting systems, AUS (Fannie Mae) and LP (Freddie Mac), determine that a home’s sales price is in line with market values and the overall risk of the loan failing is low. This is determined by occupancy type, down payment size, credit score, and housing market conditions.
When the pandemic took hold of the U.S. in early 2020, appraisal waivers became more frequent, as home appraisers struggled to safely perform property valuations within social distancing guidelines.
Not all loans get waivers and not all buyers want a waiver. And sometimes, different levels of appraisals may be performed.
For example, a desk review happens when a licensed appraiser evaluates the sales and sale comparables, but does not physically inspect the home or comparables. This means they rely on data from the MLS (Multiple Listing Service) and tax records. There also could be a drive-by appraisal where the appraiser doesn’t enter the home, but instead makes sure it exists and has valid comparables.
I’m a licensed mortgage broker serving Arizona, California, Colorado, and Florida and I’m happy to help guide you through the pre-approval and loan process, including answering more of your questions about appraisals.
Reach out to me anytime at 480-313-7103 or email@example.com to discuss your loan options and the process!