Lenders rely on appraisers to give them the value of a property. Most mortgages will require an appraisal, even on refinances, unless it is a HARP loan and you have an appraisal waiver. The property is the collateral for your mortgage so the value is very important.
Appraisers will go out to the property, measure it, take pictures and then go look at comparables. The comparables (comps) are homes of similar style, age and square footage that have sold in the last 3-6 months and are ideally within a mile of your home. That doesn't always happen, but that is the ideal! They will make adjustments for number of rooms, condition, amenities, and the view of the home. There are many areas that can affect a value from the number of garages to the number of fireplaces – or if there is a deck or a patio. Because of this, there is room for error or a different value from another appraiser.
One thing to remember is an appraisal is a snap shot in time and can vary easily. For example, I had a client that had an appraisal done a 14 months ago for a refinance. Now they need to refinance again due to a personal situation, we had to have a new appraisal. The value came in about $30,000 lower – that surprised us since overall the values have gone up. I t alked to the appraisal management company and found out that many appraisals had been coming in lower recently. The only thing we could come up with was the time of year – not as many sales now as there are in the spring and summer. Possibly not as many in the area that my client lived in. Both appraisals were good, both done by long time appraisers.
On a purchase, the appraiser does have a copy of your purchase agreement – that can help with the value – at least they know what you are looking at! On a refinance, all you can do is look at the tax value, maybe at zillow and see what may have sold in your area. If you know a realtor, it can be worth your time to ask what has sold in your area- that is a similar home style and size.
If you have an appraisal done and feel the value is too low, you can appeal it. You will need to look it over and see if there are any mistakes. I just had another file that said there were not any bedrooms. The reason the appraiser said that was because there was not a closet. However, that is not a requirement, and these days some people use furniture as a closet or maybe a loft as a bedroom. This happened to be a cabin and the appraiser did change it after talking to others. Maybe the square footage is off- or maybe you have a bathroom they missed – all these things can affect the value of the property.
If you appeal the appraisal and the lender will not change the value, you do have some options. Your options are to see if the lender will allow a new appraisal or go to a new lender – they will order a new appraisal. That may delay your closing but without it, you may not be closing.
Appraisals do vary but we have to have one! As homes increase in value, we can see low apprasials until there are more comps there to show the higher value. This is common – unfortuantely! Talk to your lender and ask what options you have and then you can make a decision!