In most cases, home appraisals have no impact on mortgage loans, since the value is equal to or greater than the contract price. However, about 8% of the time, the appraised value of the property may be lower than the price agreed by the buyer and seller. Home appraisals are performed by a professional appraiser to give an estimate of the market value of a home or property. They are usually made at the request of a lender considering your application for a new or refinanced mortgage.
Because appraisers base their valuation on comparable sales, they may struggle to justify a sale price that is higher than that of similar homes sold recently. According to the Appraisal Institute, an association of professional real estate appraisers, a qualified appraiser must have the required license or certification in all 50 states and be familiar with the local area. Because real estate trends and valuations can vary widely, you're likely to get a more accurate valuation if you're looking for an appraiser who knows the local housing market. When you buy a home and it's under contract, the appraisal will be one of the first steps in the closing process.
If you choose to withdraw your offer to buy, you could lose part or all of your security deposit, unless you have an appraisal contingency that allows you to withdraw in the event of a low valuation and recover your deposit. When all goes well, the home appraisal is just another box to check on a closing checklist. In some cases, home appraisals may be low because values have declined in the neighborhood, home improvements must be made, or the buyer has simply offered too much. If you're a buyer, owner, or seller, you'll want to understand how the appraisal process works and how an appraiser determines the value of a home.
Because the appraisal primarily protects the lender's interests, the lender will normally order the appraisal. While you can't change the location of the property, you can do something about other factors that could lower the home appraisal. In a refinance transaction, an appraisal assures the lender that you are not giving the borrower more money than the home is worth. If the appraiser expects a percentage of the home's value to be paid, it may be a sign of an unethical practice, which should be avoided.
Seemingly small features of the home that are overlooked during the assessment can lead to serious miscalculations in the report. For example, several appraisers who value the same property may each obtain a different value. If the buyer included an appraisal contingency in their offer, they can exit the deal with the bond intact if the valuation falls below the contract price.