Home Purchase And Home Appraisals
You are a home buyer and entered into a real estate purchase contract and are pre-approved for a home loan. The mortgage application process now starts and your home closing is scheduled in 30 days. You do not expect anything to go wrong and no delays. You have good credit, good stable income, and reserves to close your home loan in time. What can go wrong? Home appraisals can sometimes be the main cause of delays in home closings and sometimes can kill the whole real estate transaction. Home appraisals are required for all real estate purchase transactions where the home buyer needs a residential mortgage loan. All mortgage lenders require a residential home appraisal for the subject property. There are two types of residential home appraisals. FHA home appraisals are for mortgage loan borrowers with FHA loans and Conventional appraisals are those mortgage loan borrowers with conventional loans.
What Is A Home Appraisal?
A home appraisal is a report written by a licensed appraiser certifying the valuation of the subject property. Home appraisals are required by the mortgage lender because this is used to determined the value of the property the mortgage lender is using as collateral against the mortgage loan they are giving you.
An appraiser is an independent third party licensed professional who has no financial part in the property and the outcome of the valuation of the subject property. Whether the valuation of the subject property comes in high or low, the value does not affect the appraiser nor is the appraiser rewarded for giving his valuation. The appraiser still gets paid regardless.
Home Appraisal Process
The home appraisal process has changed drastically since the real estate and financial meltdown of 2008. The mortgage lender orders the appraisal through an Appraisal Management Company, often referred to as the AMC. The Appraisal Management Company then assigns the appraisal order to one of the many local independent appraisal companies they have on their list of approved appraisers. The mortgage loan originator nor the mortgage lender can not have any contact with the appraiser like they used to in the past. It is illegal for the mortgage loan originator to have any contact with the subject property appraiser due to regulations created in fear of the mortgage loan originator might influence the appraiser to come up with a higher value. The home buyer is responsible to pay for the appraisal. Paying for the appraisal is the only cost outside closing that a mortgage loan borrower needs to come up with besides the home inspection fees, which is optional.
What Do Home Appraisals Consist Of?
Home appraisal reports are extremely detailed and consist of the following:
1. The property address and details of the subject property.
2. The home appraisal consist of comparable sales to the subject property. Three similar and like properties that comparable to the subject property needs to be on the report along with details of the recent sales and the price adjustments compared to the subject property.
3. General condition of the property: An appraiser is not a home inspector and a home inspection will not be done, however, general observations needs to be noted such as missing roof shingles, cracked driveway, broken windows, peeling paint, garage door not working, etc.
4. Geographical area notes such as schools, neighborhood analysis, property values in the area, growth, etc.
Things That Can Go Wrong With Home Appraisals
There are two things that can go wrong with home appraisals. The first is the appraisal can note that the property is in needs of repairs that do not meet mortgage lending guidelines such as broken windows, peeling paint, non-functional electrical, plumbing, and/or HVAC. If this is the case, the appraiser will turn the appraisal report noting that the property is in need of repairs. The seller will be notified that the repairs the appraiser noted needs to be done and the appraiser needs to go back out for a re-inspection. A re-inspection fee will be charged and it is normally $100.00 depending on the appraisal management company. If a re-inspection needs to be done, this will run into delays in closing the home and an extension is normally required due to the delay.
Low Home Appraisals
Another issue there is with appraisals is that the appraisal comes in low. In most cases when appraisals come in below the real estate purchase price, the seller normally lowers the real estate contract purchase price to the appraised value. There are times where the sellers do not want to budge on the sales price but the home buyers still really want the property. If this is the case, the home buyer can order an appraisal rebuttal through their mortgage lender. The seller’s real estate agent needs to complete a real estate rebuttal form which they need to list five comparables to the subject property and state the reason why they feel that the low appraisal is not justified. The appraisal rebuttal form is then submitted back to the Appraisal Management Company. The appraisal rebuttal process normally takes a week. Most appraisal rebuttals are not successful unless you can provide strong comparables to the subject property.
Buying Home With Low Home Appraisal
If the appraisal rebuttal is not successful, the home buyer can still purchase the property at the original purchase price but the mortgage loan will be based on the appraised value and not at the real estate purchase price. The home buyer needs to come up with the additional cash difference between the purchase and actual appraised value along with the down payment required based on the appraised value. For example, if the home buyer has a real estate purchase contract for $110,000 on a subject property but the home was appraised at $100,000, the home buyer’s mortgage lender will base the mortgage loan based on the $100,000 appraised value. If the home buyer is required a 3.5% down payment for the property purchase, the home buyer needs to come up with 3.5% of the $100,000 appraised value as well as the additional $10,000 ( $110,000 actual purchase price ) for a total of $13,500 along with closing costs to complete this real estate purchase transaction.
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