Home Purchasing 101-5 Appraisal

One key item in your journey to homeownership is getting an appraisal.  So what exactly is an appraisal, and why is it so critically important?

After you place the contract, your lender will order an appraisal to be performed on the property in order to determine its market value. It protects the bank from lending you more than you need for the home; it also protects you from paying more than you should. If you are already at the point of appraisal, congratulations! Success is waving at you ahead.

An appraiser basically looks at the conditions and permanent fixtures of a property as well as the neighborhood and community amenities.  Similar properties in the area that have been sold recently are often used for comparison. In the final report provided by the appraiser, all this information will be disclosed along with an estimate of the home value. Then, the loan officer will decide, based on the result of the appraisal, what amount of mortgage to offer.

You may have already noticed a potential problem with this arrangement: it’s pretty important that your home “appraises” for a value close to the amount you want to pay for it! As an example, if you agree in your contract to pay $300,000 for a home, but the home only appraises for $200,000, then your mortgage lender will only be able to lend you up to $200,000 on your mortgage loan.  So you’ll either have to come up with $100,000 on your own – or find a new home.

So how can you protect yourself? Talk to your realtor about the fact that you really want to only place a contract on a home at a value close to its current market value. Do neighborhood research on your own to determine what pricing would be a fair offer.  Most importantly, make sure your purchase contract has a clearly worded “Appraisal Contingency” that says something like this: “This contract is subject to the property appraising at the contract sales price (or more), or the contract may be canceled by the buyer without any penalty fees.” That way, if it does not appraise for enough, you can back out of your contract without having to lose your deposit to the seller.

With these tips in mind, you’re sure to be smart about the appraisal process and be protected in case it doesn’t appraise for enough.  You’re on your way to homeownership!

- Jyothi Ramakrishnan