We quit searching high and low for a much-obsessed-over house buying guide. Because, unfortunately, one…
Things you could buy for a dollar years ago are probably a lot more expensive these days. Even within a year, the prices of a lot of commodities can go up, down, and up again.
For real estate, the value of properties also depends on several factors like supply, demand, and the national economy. Do you know what your home is worth today?
A house seller will probably use the house’s original purchase price as a benchmark to determine the property’s updated value, adding in the cost of renovations over the years and considering the current state of the market. They may hire a licensed appraiser themselves to avoid doubt about the property value. Whatever the seller decides, the buyer still needs to spend on their own appraisal report to get approved by a mortgage lender.
Home Appraisals and Mortgages
After the housing market crash in the late 2000s, the Dodd-Frank Wall Street Reform and Consumer Protection Act was passed to ensure that a similar crisis does not happen again. Unfortunately, as a side effect, the mortgage application and closing periods were lengthened by the additional steps required. This was further exacerbated by the COVID-19 pandemic, as more appraisers and underwriters work through backlogs in an exceedingly hot real estate market. You might say that there are not as many appraisers as houses to sell in the country.
If you’re already on this next step, it’s a pretty exciting development in your journey to your new home. This means an agreement between you and the seller has been made, the first significant hoop you need to pass through. Now, you just need to finalize everything with the lender to make sure that everything is ironed out.
As we’re sure you probably have some worries and concerns, we’re going to answer three of the most common questions that first-time homebuyers ask about a home appraisal.
This article will impress the importance of a home appraisal to both the buyer and the mortgage lender. Read on!
What is a home appraisal report?
A home appraisal is a process that determines the fair market value of a home, its actual worth according to its unique properties, and even its neighborhood characteristics. You don’t want to overpay on the house, even if you have absolutely fallen in love with it. The difference in its real price will also affect your future prospects should you decide to resell.
Since you only retain partial equity of the home while you are paying the loan, this means that there is another party with some stake in the house: the mortgage lender. Therefore, the appraisal process must happen if you want to close your mortgage.
An appraiser would be the best person to tell you the current price of the home based on their complete property analysis. They can give you an unbiased estimate regardless of the presupposed value declared by the seller. It goes without saying that a seller can always shoot for the moon when they come up with their asking price, and real estate agents will want a tidy commission. On the other hand, appraisers will tell you the house’s real value in the current housing market. This is very important to lenders because if they overvalue their investment, they can lose big in case you default.
Since the professional opinion of a qualified appraiser will put a specific figure on the house you want, as much as possible, you must refrain from communicating with the appraiser, so you can avoid influencing the result that comes out of the appraisal process.
How is the fair market value computed?
Unlike some parts of the home buying process that can be done over the phone or online, an appraisal requires a physical inspection of the property.
You might wonder how different an inspection is from a residential appraisal, especially if you have to pay for both. Although their purposes may sound similar, the home appraisal process has many significant differences from an inspection.
Inspection vs. Appraisal
If you’re buying a home that has been lived in, you want to know just what problems you should expect. Are there leaks in the roof, or are there cracks on the wall? There will be a reason why the seller wants to let go of the house, and by law, they are required to disclose it. Just in case they don’t give you all of this information, you might discover this reason via a home inspection.
A physical inspection can take anywhere from 4 to 5 hours, depending on the home’s square footage. The more thorough an inspector is, the longer the process might take. You are not required to stay with the inspector as the home is checked, but it is recommended because this is the best way to get to know the property you are buying. You’ll be able to ask questions and clarify the results before they are even reported on paper. At this point, if you discover any features of the home that may bother you, there is still time to get out of the contract.
An appraisal is very similar to an inspection, but there are more things an appraiser needs to consider about the property. A notable difference between inspectors and appraisers is while you can choose the former, you cannot select your own appraiser. If the seller or the real estate agent chooses these professionals, it might put some doubt on the final appraisal report. Although you pay the fee at closing, you are not considered the appraisal’s client. The lender is usually partnered with an appraisal management company that assigns the appraisers who’ll do the job.
The cost of an inspection can be 250 to 400 dollars, while an appraisal can set you back 500 to 600 dollars. The cost of these services depends on the volume of available professionals.
Appraising the Property
Appraisers evaluate a house based on the Uniform Residential Appraisal Report for single-family dwellings.
Unlike an inspection, an appraisal will go beyond reporting on the interiors and exteriors of the structure. The final report will also describe the property in terms of comparable homes and sales in the neighborhood. Their observations will include a sketch of the property and photographs that are accompanied by explanations.
It is important to note that appraisals can be challenged, so the appraiser will list down the data and records they used to arrive at their judgment. Depending on your mortgage company, you may or may not be allowed to discuss the appraisal value with the professional they hired.
How long does house appraisal take?
Compared to an inspection which can only last a few hours, an appraisal report can take up to a week or two, keeping in mind that it will go beyond the home’s structure and use several factors to determine the overall value. So the appraiser will have to gather a lot of data, including comparable properties in the home’s location.
As in the availability of appraisers, the time needed for this process will depend on the market demand. If there aren’t any houses being put up for sale in the surrounding area, this can signal that the appraisal will only take a few days or less than a week.
If the appraiser is willing to give you an estimate, you can ask how long does an appraisal take during this time. Be prepared, though, of the possibility that you won’t be able to speak to the appraiser at all. You may not even know when the appraiser visits the property to conduct the home’s appraisal.
In a nutshell, inspections are there to reveal the red flags so that you can give your full consent to the seller should you ultimately push through with the transaction. On the other hand, appraisers are there to give more credence to a specific value you are accepting since these figures are so intangible and subjective.
Appraisals are necessary for real estate so that all three parties who matter in the transaction: seller, buyer, and mortgage lender, can arrive at an agreed-upon home value. The home sellers may not always be right about the price they declare.
As a buyer, the appraisal is a prerequisite to your purchase, whether or not the lender orders it. So even if you pay in cash, the appraisal fee will be worth every dollar.
When the time comes that you also need to sell the property, you can look back on this appraisal report to observe how much your investment has earned or even lost.