You’ve been pre-approved by your lender and you’re in contract, now it’s time to get your property approved. Appraisal time.
Your pre-approval probably went something like this—a mortgage lender looked at your bank statements, employment history and pay stubs, then approved you for a specific amount of money. Well, a home appraisal is just like that, but for the property itself. Instead of financial documents, it features an open floor plan, hardwood floors and other neighboring houses selling for, say, $400k-$450k. Once your appraiser has taken all of the factors into consideration, they’ll assign a value to the home. Which brings us to results. There are three potential appraisal outcomes: high, low, and equal. Let’s talk about what happens for each instance so you know what to expect. No jokes here.
Who, What, When & Where
appraisal/əˈpreɪzəl/ n. An expert estimate of the value of something.
Your home appraisal is a required step in the home financing process, handled mainly by your lender. It’s how they ensure the amount of the loan isn’t more than the value of the property, but it’s super valuable for you, too. An appraisal is a great indicator of the quality of investment you’re about to make. While the opinion of value can vary slightly from appraiser to appraiser, you’ll be getting a professional look into the overall condition of your home.
They’ll take into consideration things like the selling price of the homes like yours in the area, loan requirements, as well as any items that need to be fixed. Note: “Subject to” items must be fixed and reinspected before the loan can close.
Here's what to expect from your appraisal results:
Appraisal 1: High
Woohoo, you have instant equity! When the value of the home exceeds the amount you owe, that’s called equity. It’s what makes buying a home a worthwhile investment, and it’s usually a pretty slow-moving, but very valuable game. With your appraisal coming in high, you get a jumpstart to building that equity. You can borrow from it later down the road, or just rest easy knowing you’re in the positive.
Appraisal 2: Low
We see a lot of confusion when it comes to low appraisals. Some borrowers unknowingly hope for a low appraisal thinking it means the property price will also go down. However, the seller has no obligation to lower the selling price, and it’s definitely not something to count on.
So, if your appraisal comes in low, you have three options:
- Try to negotiate with the seller
- Bring more money to the closing table
- Or in extreme cases, walk away from the deal
We’ve already said our piece about negotiating with the seller, and it (most likely) can’t hurt to try.
If you still want to buy the property at the newly appraised cost and have a way to bring the extra cash to closing, this is where you’ll probably land. It simply means your loan will be available for the appraised value of the home, and the rest will be up to you to bring.
But, sometimes the difference will be too great.
“It all depends how low the appraisal came in, how much you want the house, and how much you’re willing to pay for it. If it’s a HUGE difference, it might be worth reconsidering the deal altogether if the sellers don’t budge.”
Just keep in mind it’s all about how much the home is worth to you. It may be worth a few thousand more, or maybe not. After your appraisal is done, the ball is in your court to decide which you want to choose.
All of this considered, we see only 1 in 10 appraisals come back low enough to cancel the contract. Those are great odds for you!
Appraisal 3: Equal
Nothing to see here, just a solid deal for everyone involved. This is the goal — the seller feels like they’re getting a good deal, and you feel good about paying what you’ve already agreed to pay. No changes needed to the deal or your closing costs. Full steam ahead.
Next Up
Completing your appraisal means the home part of your loan is ready to go. Your financials are looking good, too. Next stop for your loan is back to underwriting, where every piece of information we’ve gathered so far will be considered, and you’ll get an official decision soon. It may not be funny, but your appraisal is a super important step in the process. And when your appraisal is complete, you’re one step closer to buying your home!
