Why do you need an appraisal when buying a home? A home appraisal is a professional estimation of a property’s market value put together by an independent certified appraiser (source). Various factors have an impact on the value of a property, including its location, structural condition, and the amenities that it offers. Appraisers also weigh comps, the recent sales of similar properties in the area. In many cases, they also consider the potential replacement cost when completing the appraisal process. An appraisal is normally required when you’re buying a home, but why do smart homebuyers opt for one even if it’s not required? And what should you do if you don’t agree with the appraisal?
Why Do You Need an Appraisal When Buying a Home?
A Lender’s Requirement
Why do you need an appraisal when buying a home? The short answer to this question is that you need one to get financing for your purchase. While figures provided by the National Association of Realtors reveal that 35 percent of home sales were cash purchases in February 2014, the number of homes purchased in that manner has fallen sharply ever since. In June 2019, just 16 percent of home purchases were all-cash purchases.
Clearly, the vast majority of buyers are using home loans to finance their purchase, and most lenders require an appraisal before they will approve a mortgage. As The Mortgage Reports indicates, the reason is simple: Before lending what most Americans would consider to be a substantial sum of money, lenders want to be sure that the home is truly worth its price. After all, when you take out a mortgage, the property that you purchase with it is used as collateral to secure the loan. Lenders want to know that their investment is safe and that they can sell the property to recoup their money if you should default on your loan. In fact, if the appraisal comes in too low, the lender is unlikely to approve the loan for the amount originally requested. That’s why many eager homebuyers find the appraisal process nerve-wracking.
An Advantage for Homebuyers
While the prospect of losing out on a home that you love may be frustrating, many experts argue that home appraisals actually benefit would-be homebuyers. Forbes notes a few advantages appraisals offer:
- Appraisals offer peace of mind by proving an accurate picture of a home’s value before you fully commit to the purchase.
- Appraisals protect buyers by making it harder to pay more than a home is worth since lenders tend to limit your loan to an amount that is roughly equal to or less than the property’s appraised value.
- Appraisals help to keep home prices in check by limiting the ability of eager buyers to pay unwarranted prices.
When the Appraisal Is Lower Than Expected
When an appraisal comes in at or above the sale price, your deal is normally in good shape. What about a low appraisal? That creates a dilemma. As The Balance reports, when an appraisal comes in lower than expected, your lender is likely to reduce the amount of your loan to match it. This leaves you with four options:
- Dispute the appraisal. Look for new information or new comparable properties that might support a higher valuation.
- Walk away from the sale.
- Negotiate with the seller for a reduced price that reflects the appraisal’s findings.
- If the seller is unwilling to lower the price, put down additional funds to make up the difference between the sale price and the appraised value.
If you have questions about how the home appraisal process works or any other element of buying a home, turn to the team at PrimeLending Twin Cities. Helping you achieve your housing goals is our top priority. Count on us for clear answers, helpful insights, and quality service. Contact us today to learn more.