As part of the mortgage approval process, a home appraisal will be conducted to independently value the property you’re buying. This appraisal protects both the homebuyer and the mortgage lender by guaranteeing that the home is actually worth the amount the buyer has agreed to pay. Home appraisals are the best way to obtain an independent measure of your home’s value.
Why an independent appraisal?
If you’ve already signed an agreement of sale, the price accepted by the seller is arguably the market value of the home. However, homes with certain features are worth more to certain buyers than others. For example, some buyers will pay more to live in a certain school district or to purchase a home with a pool. As such, mortgage lenders avoid risk of loss by ensuring that a home can be resold for an amount equal to or above the agreed-upon sales price. Homebuyers also don’t want to see the value of their real estate investment fall shortly after settlement.
The home tour/physical inspection
Typically, a home appraisal is arranged by the lender, but the buyer pays for the service as part of the loan closing costs. Independent appraisers look at recent comparable sales prices as a starting point. The appraisal will generally include a visit to the home in question. During this visit, the appraiser will tour both the inside and outside of the home and take photos. To properly value the property, the overall condition of the home will be examined, along with any upgrades added by the homeowner or other distinguishing characteristics affecting the home’s value.
Keep in mind that an appraiser is not performing a home inspection. A home inspector looks for problems with the home that need to be repaired. Home inspectors will also test the major systems of a home, such as the HVAC, electrical and plumbing systems. In contrast, an appraiser focuses more on the overall size and condition of the home, although they will note any major defects they observe.
The final appraisal report should be prepared in the format of the Uniform Residential Appraisal Report. According to the Consumer Financial Protection Bureau, the buyer may request a copy of the appraisal and review the information prior to settlement. As long as the home’s appraised value is equal to or above the sales price, the mortgage loan process will move along to the next step. However, if the appraisal is lower than the sales price, the lender will usually refrain from granting the mortgage loan. At that point, the buyer and seller should consult with their real estate agents. The sales price may be renegotiated or a second appraisal requested.
For most home purchases, the home appraisal serves as a simple validation of the market value of the home. If you have any questions or concerns about the appraisal process, don’t hesitate to speak with your mortgage lender or real estate agent.
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