For anyone buying, selling or refinancing a home, the appraisal is a very important part of the transaction. The appraisal gives you a fair market value of the home and is what the mortgage is based on. If the appraisal comes in higher than the purchase price, we use the purchase price for value and if it's lower, we use the appraisal. There are a few refinances where an appraisal is not required, but for most, you still need the appraisal to determine a value for the home.
When the appraisal comes in high, it's just good news for the buyer – they know they have a little equity in the home and they feel like they got a deal!
When the appraisal comes in low on a purchase, it becomes a problem. The appraised value is what the mortgage will be based on and that can affect the mortgage transaction. The buyer may have to put more money down or you may have to renegotiate the purchase. Typically there are three options when the appraisal comes in low.
- Buyer and seller renegotiate a lower sales price
- Buyer increases their down payment and meets the new down payment requirements.
- Buyer cancels the transaction and the purchase agreement is cancelled.
Sometimes the listing agent may have additional information that can be presented to the appraiser to help increase the value. It doesn't always work, but there are times where it may. The one area I see this work more often is new construction where some properties may not be listed on the MLS so the appraiser is not aware of them. Just remember this doesn't always work as the other properties may not be the same type of home or may have other adjustments that do not help the value.
Once the buyer and seller agree to the changes, we can move forward with the mortgage. Sometimes it's an easy decision and it happens quickly – sometimes it's not! Sometimes you may know going into a transaction that you may have appraisal issues – your realtor may have given you an idea that the purchase price may be a push and it may be difficult to get the appraisal to come in at the value. Other times the appraiser may not be able to find enough comparable sales to reach the value needed. The appraiser needs 3+ homes that he can use on the appraisal that are ideally within one mile of the subject property and similar style and size. They also need to have sold within about 6 months of the purchase agreement.
If there are questions on the appraisal, talk to your loan officer and see if you can get the changes needed. Sometimes it works and sometimes it doesn't! You will be given a copy of your appraisal before closing so you will be able to look it over.