The Appraisal
What is an appraisal?
An appraisal is basically a verification of the value of the home you want to buy. It seeks to answer one question: is this home worth as much money as you are going to borrow and spend to buy it?
If you're borrowing money in the form of a mortgage to purchase your home, your lender will require an appraisal. Your lender wants to be sure that the home you're buying is worth all the money they're lending you. No lender wants to loan out $400,000 for a home worth $300,000.
Your lender will arrange an appraisal for you as part of the loan approval process. Since your loan can't be approved until the home is appraised, it's in your lender's best interest to schedule your appraisal as early as possible after you've reached mutual acceptance with the seller.
Tip!
The person who conducts an appraisal is known as an appraiser. The appraiser will visit the home, measure its dimensions, and inspect it for defects. The appraiser will also review recent sales of similar homes in the area to determine the home's market value. When the appraiser has completed the report, a copy is sent to the lender and the home-buyer for review.
Most appraisals go through without a hitch -- the home's value is verified to be worth the offer you're making to the seller.
Sometimes, the appraisal comes back low; the home's value is found to be less than your original offer to the seller. This may end up being good news for you; a low appraisal gives you leverage to negotiate a lower purchase price with the seller.
If the seller refuses to lower their asking price or offer other concessions, you can still go through with the original offer -- if you're willing to contribute more of your own money to the purchase. Your lender will only loan as much money as the home's appraised value, minus your down payment. If you increase your down payment, the lender can give you a smaller mortgage to match the home's lower appraisal value.
However, before you pony up more of your own money, take a step back. There may be a good reason that the home was appraised for less than the seller's asking price. A low appraisal may be a big red flag that the seller is asking for too much money for the home.
Tip!
When you make an offer on a home, your offer contract will usually contain several contingencies-- clauses that allow you to back out of the purchase under certain, very specific conditions. One common contingency is an appraisal contingency, which allows you to walk away from the deal and recover your earnest money if the appraisal comes back lower than the seller's asking price. Make sure your contract includes an appraisal contingency when you make an offer on a home.