Real estate transactions are full of surprises. Whether you're selling, buying or refinancing a house, the mortgage appraisal can be a huge source of uncertainty. If the appraiser says that the home is not worth the sale price, things can get chaotic for everyone.
If your bank's appraiser decides that the home is worth less than the mortgage amount, you have several options. You can appeal the decision, increase your down payment or negotiate with the seller.
What Is a Home Appraisal?
Lenders require appraisals to protect their investments. Since the home is the collateral on the mortgage, your bank wants to make sure that they will not be upside down on the property if it forecloses. That's why lenders send specialized professionals to look over the home, compare it to similar houses in the area and decide how much it is worth. The appraiser must be licensed, meaning that he has hours of training. Your appraiser may have years of expertise as well.
The appraisal process ensures that the new homeowners aren't underwater immediately. This protects both the bank and the buyer from making a bad deal. The appraiser determines the value of the home based on structural points. The color of the walls, the furniture and the cleanliness do not affect the appraisal.
The appraiser is usually in the home for under an hour. However, it may take him a few days to research home prices in the area and write the report. If the final report says that the home has a value that is well below the price on which you and the seller agreed, the transaction may be in jeopardy.
Appealing The Appraisal
If you have questions about your appraisal, you and your agent can refute it. This doesn't always work, but it is worth a shot. You can ask to see the recently sold homes that the appraiser used for comparison.
If you see significant differences between the comp homes and the one you want to buy, bring it up with the lender. If some of the homes sold before major market changes, you can point to that as a reason for a faulty appraisal.
Your real estate agent will write a letter detailing all the ways that the appraisal was inaccurate. The lender then sends the letter to the appraisal department for review. You can expect to hear back in a few days. If your appeal does not work, you still have options.
Consider Your Loan Options
If you still want to buy the house in question, you can make changes to your loan terms in order to appease the bank. The goal is to take the risk off of the lender and put it on you.
In some cases, your lender may ask you to add private mortgage insurance, or PMI, to your mortgage. This helps keep the investment safe and allows you to move forward. Instead, you could choose to increase your down payment to meet your lender's requirements.
As a last resort, you can go through another lender. If you truly believe that your appraiser was unfair or did not know enough about the market, you can try your luck with a different lender. This would set back your closing date, but it may keep your transaction on track.
Home Appraisals for Refinancing
If you want to refinance your home to release some equity, you will need an appraisal as well. Like with the appraisal when you bought the home, the bank will hire someone to look at your home and compare it with recent sales in your neighborhood. Unlike buyers, you won't compare the appraisal value to the sale price.
Instead, you need to consider the value of your home as it relates to the loan amount. So, if home values have grown significantly since you bought the place, a refinancing appraisal may reveal that you have a higher percentage of equity in your home. If you financed with less than 20 percent down, this appraisal could help you get rid of PMI.
Dealing with Low Refinancing Appraisals
When sellers list properties, they often examine the sales of similar houses in their area to determine a price point. However, some refinancing homeowners don't do so much homework. This leads to refinancing appraisals coming back low more often than evaluations through purchases.
If the market has gone down since you bought the home, it hasn't been very long since the purchase or you haven't made many improvements, you are likely to face a low appraisal. Lenders may reject your refinancing application if it turns out that the value of your home is lower than the amount you owe on the mortgage.
You may want to cancel the refinancing plans if it turns out that you do not have 20 percent equity in your home, even if you are right-side up. Mortgages without this level of equity require PMI, which can cost you hundreds of dollars per month.
Like with purchasing appraisals, you can change lenders and request a new appraisal for your refinancing. However, you will still have to pay the original lender a fee for the first appraisal. If the second appraisal also does not go your way, you will have to pay that fee as well. Only use this option if you feel confident that the first appraisal was unfair.
Low Appraisals and Sellers
Sellers can struggle with low appraisals as well. If you're selling your home for a price that lenders think is too high, you may struggle to find a buyer who will go through with the purchase. In some cases, the problem is that your agent simply listed the home too high.
Other times, a particularly hot market can be to blame for your low appraisal. You can present evidence of the quickly changing market to an appraiser. If you have concerns about this issue, you can order your own appraisal.
You can also choose to wait to sell until other homes near you sell at higher prices. Of course, that is not always possible. Instead, you can decide to only take cash buyers or insist that financed buyers pay the difference in their down payment. Your final option is to lower your asking price to what the appraiser suggests.
Avoid the Low Appraisal
While unseen problems can affect a home's appraisal, buyers and sellers can avoid some of these problems with diligent research. Before making an offer on a home, research the comparable homes in that area or have your real estate agent do it for you. If the sellers ask for much more than similar recent sales in the neighborhood, offer something closer to the comps.
If you are in contract on a home and nervous about an upcoming appraisal, you have options. First, you or your real estate agent could attend the appraisal. While you may not be able to persuade the professional to go against the code, you can point out valuable assets that she may have otherwise missed.
Communicate With Your Appraiser
Even before the appraisal date, you and your agent should keep communication open with the appraiser and lender. If you know of potential problems upfront, being open about the situation can help avoid trouble down the road. This is especially important if there is a problem that the seller is working on fixing.
Sometimes the house has no major issues, but the market is growing quickly. If this is the case in your area, make sure your appraiser knows before she completes the report. You can show upward trends over the past six months as proof that comps from that time don't reflect the current market.
You should bring all similar situations to the appraiser's attention, such as if the home you're buying has a particularly great view or is unique enough to have few comps. Luxurious outdoor areas and finished basements sometimes don't raise the appraisal as they should. Talking to the professionals about it beforehand can help you make your case.