What are real estate appraisals and why are they important?
A Real Estate appraisal is a process that provides an accurate valuation of a property. As a result, not all appraisers will come to the same conclusion.
An appraiser compares a subject property to recently sold and active listings. These properties, called comparables or “comps,” can be selected based on location, similar location, style, age, etc. Adjustments made to the price of the comp will be based on how they compare to the subject property.
The lender will require an appraisal if buyers are obtaining a mortgage. The lender wants to protect their investment. Above all, the appraisal ensures that you are not overpaying for the property. There are a few options if the property does not appraise. For instance, the price may be reduced to the appraised value. The buyer can come up with the difference in cash. Finally, the seller may choose to put the home back on the market.
FHA loans may complicate the appraisal process. If the home does not appraise at contract price, the appraisal will stick with the home for 6 months. Essentially, if the home is put back on the market, another FHA buyer must use the same appraisal. This can cause the seller to avoid accepting FHA qualified buyers.
Another reason a mortgage lender will require an appraisal is to verify the home is in good condition. This is particularly true for FHA (3.5% down ) and VA loans (0% down). There are certain guidelines that must be met for a home to qualify for these loan types. The appraiser is the individual who verifies the condition. There are several issues that would be problematic. They may include an old or leaking roof, wood rot, lack of flooring in place, non-working a/c, etc. Again, the appraiser is providing an assessment of the home to confirm the lender is making a good investment.
Conventional loans appraisals are far less strict, but still required. The buyer will be putting down a larger amount and therefore has some “skin in the game.”
Appraisals are completely optional with a cash purchase and many times the buyer will waive the appraisal contingency. As a result, most sellers would select a cash offer over a financed offer.
To sum it up, Real Estate Appraisals are just part of the process when obtaining a mortgage for a home. If you have questions regarding appraisals or any other real estate questions, we’re here to help!
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