Anyone can buy a home at any price, but if you need a mortgage, you will also need an appraisal to determine the value. An appraisal is based on sales of comparable homes ideally within a mile of your home and sold within the last six months!
The reason we need an appraisal is to show that the value of collateral (property) is sufficient for the loan. If the value is more than the purchase price, you don't have any problems. If the value is low, then you have a few choices:
-you can negotiate with the seller to lower the price
-you can pay the difference between the sales price and the appraised value in cash
-you can cancel the purchase agreement.
Recently many lenders have started pulling automated values on each property. So now we have to deal with both an appraisal and an automated value. If the computer says the value isn't there, it can kill a deal before you even get an appraisal done! The problem with automated values is the value isn't based on the individual property and a person is not looking at the property to see if there are reasons for a higher value. You put in an address and a value and it comes back with a pass/fail or alerts. If the property is a duplex, a condo or in a rural area, they are more difficult to get a good value. If the property is in an area with a lot of foreclosures, it can hurt the automated value.
There are times where an automated value can help if the appraisal comes in low or if the underwriter has questions on the appraisal. It can be another piece to the puzzle to help underwriters determine that the value is there for the property.
This is just another piece to the puzzle that has changed over the past year. The values are so important and now the appraisals are one of the bigger pieces that the underwriters really dig through – more than they ever did before. We used to see 3 comparable sales – now it's common to see 5-7 comparable sales listed on the appraisal. The appraisers are commenting more and more on the appraisals to explain why they are using comps and adjustments.
If you get a low appraisal or have an issue with an automated value, talk to your lender and see if you or your agent can give them more information to change the value. Sometimes a second appraisal is done to show support for the purchase price.
