What is an appraisal?

You may be wondering, “What is an appraisal anyway and when does it occur?”

If you are, you aren’t alone. Those are common questions. The lender usually orders the appraisal about the time the investigations/inspections period is complete or maybe sooner if the closing date is close. The rest of the process including the appraisal, underwriting and title work is a bit fuzzy to most people.

In addition, you might be wondering:

1. Does the homebuyer receive a copy of the appraisal?
   Yes. The Equal Credit Opportunity Act (ECOA) requires creditors to automatically send a free copy of home appraisals and all other written valuations on the property after they are completed, regardless of whether credit is extended, denied, incomplete, or withdrawn.
2. Does the buyer or the seller pay for the appraisal?
   Typically the buyer pays for the appraisal. However if the seller is making monetary concessions toward the buyer’s closing costs, the appraisal might be included in those concessions.
3. Who hires the appraiser?
   The mortgage lender orders the appraisal and is the appraiser’s client. Sometimes a lender will use an appraisal management company (AMC) to manage the appraisal process. An AMC will order an appraisal on behalf of the lender. Some lenders order the appraisal directly from an appraiser.
4. How much does an appraisal cost?
   There are a number of factors that determine the cost of an appraisal, but we usually see as low as $475 and as much as $750.
5. Why does the lender give the lender a copy of the sales contract?
   The Government Sponsored Enterprises (GSEs) require that an appraiser analyze the sales contract and the appraiser must confirm analysis of the contract on the appraisal report. The appraiser looks at the terms of the contract and compares them with what is typical in the local market. The contract has information such as the down payment amount, seller contributions, or personal property items that might be included in the sale. The appraiser must also verify that the property seller is the owner of public record.
6. Why do appraisers sometimes take assignments if they live outside of the market area?
   Appraisers are required to be competent in the geographic area where they are working (same for REALTORS®!) Some appraisers work in cities and counties beyond their residence, but are knowledgeable about those specific areas. If you suspect that an appraiser is not competent to appraise in your area, you may contact the lender who is the appraiser’s client.
7. Does a buyer’s choice of financing impact the appraisal process?
   Yes. The appraiser must comply with the Uniform Standards of Professional Appraisal Practice (USPAP) and appraisal regulations, but also follow any additional requirements from the mortgage lender, Freddie Mac, Fannie Mae, FHA, USDA and VA. For instance, some loans will require the property to meet certain minimum property requirements.
8. What happens if the appraisal comes in lower than the purchase price of the home?
   When a home appraises too low, parties must come back to the negotiation table. Sellers may need to agree to lower the price or buyers may have to come up with more money on their own. If all else fails, the deal may fall through. This article does a good job of explaining what your options are in that situation

What happens if you’re the buyer paying $200,000 for a home and the appraisal value comes in right at the purchase amount price? Is this a good or bad thing? This is definitely a good thing, as it means the bank will give you a loan for the full amount of the purchase price.

But what happens if an appraisal comes in high (where the appraisal amount is above the purchase price)? Does this happen very often? No, it’s very rare for an appraisal to come in over the purchase price because the bank just needs to know that the property is worth the purchase price so they feel secure making the loan. Therefore, it’s not common for an appraisal to come in over purchase price. When it does, buyers are often very happy, because essentially you now have instant equity and we got a great deal! Occasionally though if your home comes in significantly over the purchase price (say $50K or $100K over the purchase price), it can cause problems. In this scenario where a home comes in significantly over the purchase price, sometimes the underwriter will wonder if there was something shady going on that allowed you to get such a great deal. So, as the buyer, all in all it’s best when the purchase price comes in at or close to the purchase price.

For more information, here is a link to The Appraisal Foundation’s “Guide to Understanding a Residential Appraisal.”

Still have a question? Call or text anytime 405-585-6580 or email Steve@SoldonShawnee.com.