Role of the Appraisal in Your Home Purchase

If you are obtaining a new loan to purchase a property, the mortgage lender will almost always require an appraisal. An appraisal is an independent opinion of the market value of the property. The appraiser is actually hired by the lender, therefore the lender is the client of the appraiser, not the purchaser. The appraisal is done to ensure that the property has enough value to cover the loan amount in the event the borrower defaults and the lender must foreclose. The less the buyer puts down, the more concerned the lender is about the property appraising for the purchase price. A $3,000 low appraisal on an FHA or VA contract, for example, could possibly kill the transaction. However, a $3,000 low appraisal on a 20% conventional loan will rarely kill the transaction. In an FHA or VA transaction, if the property appraises $3,000 low, the buyer will have to bring that amount to closing in the form of an additional down payment, according to the FHA/VA provisions of the contract. On a 95% conventional loan, the lender will make the loan on 95% of appraised value ORpurchase price, whichever is less. The buyer would then need to bring the difference in the form of additional down payment.

Appraising is not an exact science, but is an opinion of market value based on recently sold comparable properties. Usually the appraisal will come in at contract price, unless the justifiable value of the property is significantly different. If you have three appraisals done on a property, each one will usually be slightly different. If the appraisals are reasonably accurate, they should all be within about 5% of each other. In the typical transaction, only one appraisal is done.

If the appraisal comes in at contract price or higher, the transaction proceeds without a hitch. If the appraisal comes in low, there are a few options.

1. If the contract was conditional upon the property appraising for contract price, the buyer has the option of terminating the contract by the appraisal objection deadline.

2. Review the appraisal to see if there are any other comparables not used that might indicate a higher value.

3. Get another appraisal by an appraiser approved by the lender.

4. Proceed with the transaction, paying the required extra amount of down payment in cash/cashier’s check at closing. (The lender may need to be consulted about acceptable sources of cash for the additional down payment.)

When making an offer on a property, the buyer has the option of whether or not to make the offer conditional upon the property appraising for the purchase price or greater. In most cases this is the prudent thing for a buyer to do. However, in a hot market where there might be competing offers, a buyer may choose to waive the appraisal condition in order to make the offer more attractive to the seller.