When considering whether to loan money for the purchase of a home, lenders must rely on the evaluation of the home by a credible appraiser. Against the possibility of foreclosure or mortgage fraud, they sometimes double-confirm that a home is truly worth at least the sale price. If the appraisal does not show a value at least as high as the asking price or indicates that the home needs significant repairs, the lender considers the appraisal -- or rather, the home -- unsatisfactory.
Appraisal and Purpose
Your home appraisal is performed by a licensed appraiser and provides an estimate of your future home's market value using recent comparable sales in your neighborhood. The appraiser looks at similar homes with similar features. The purpose of the appraisal is to determine that your future home is in salable condition and has a value that equals or exceeds the purchase price specified in your purchase contract.
At the end of an appraisal report, the appraiser must indicate whether her appraisal is “as is,” “subject to the repairs, alterations, inspections or conditions listed below” or “subject to completion per plans & specifications.” “As is” means that the appraiser used the home’s current condition in determining its market value. “Subject to completion” -- typically used for brand new homes -- means a home is under construction. “Subject to the repairs” means the appraiser found a number of issues that reduce the home’s value. When an appraiser marks this box, she is indicating she finds the current condition of the home unsatisfactory. Your lender will not lend against this home.
Low Home Value
The appraiser considers a number of factors. In her appraisal report she includes addresses and photos of homes to which she has compared your home, the method she used to calculate your home’s value and the final value she has given your home. Several foreclosures in your neighborhood could depress your future home’s value, as can poorly tended homes. If the appraiser assesses your future home’s value below the sale contract price, the home is deemed unsatisfactory collateral, so the lender will not finance the purchase.
You are allowed to see any appraisal report for which you have paid. Occasionally an appraiser unfamiliar with your neighborhood may use a nearby neighborhood with less flattering characteristics. This happens more often in urban areas undergoing development. The developed neighborhood will have much higher property values than bordering neighborhoods in earlier stages of development. In addition, if your future neighborhood has had few sales or the homes differ dramatically in style and features, the appraiser may err on the side of caution and give a lower value. If you strongly disagree with the appraisal, you can ask your lender to use another appraiser more familiar with the neighborhood or you can switch to a different lender. If you believe the low appraisal is legitimate, you can request the seller to lower the sale price.
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