What To Know About The Home Appraisal Process

Whether you are selling your home to someone buying with a mortgage it or working on refinancing your existing mortgage you will have to get an appraisal on your home.  An appraisal is prepared by a licensed Appraiser who looks at the condition and features of your home and compares them to other similar homes in order to come up with an opinion of value.  As long as your appraisal meets at least the sales price during a sale or meets the value the mortgage loan refinance is being based on you should be fine.  If your home ends up getting appraised for less than the agreed to sales price or less than the value of the refinance is based upon the purchase contract or refinance could fall through.  This article looks at how best a homeowner can prepare for an appraisal so they put their best foot forward to ensure the best chances of success.

When Does An Appraisal Happen?

Once an offer on a home has been made and accepted, and usually after a home inspection has been done (the buyers are comfortable with the home inspection results), the buyer’s lender will put in a request for an appraisal.  Generally the homebuyer is required to pay for the appraisal and may be asked to pay for it at the time it is scheduled or they may pay for it at closing depending on lender requirements.  Once requested it may take up to seven to ten days for the appraiser to actually come out to the home depending on how busy the home selling season is.  After the appraiser has visited a home the actual appraisal report should be issued within a few days.  When a lender is involved the appraisal report will be given directly to the lender from the appraiser.  After that the lender is required to give a copy of the report to the homeowner and to the borrower.  

Treat An Appraisal Like A Home Inspection

Just as with a home inspection where you want everything in the house to run and work great the same applies with an appraisal.  An appraisal is similar to a home inspection in that an appraiser will generally walk through all parts of the home and visually inspect it.  Just as a home inspector will check electrical outlets, check appliances, the furnace and windows some home appraisals do require similar in depth inspections in order to make sure the value of a home is what it should be.  Appraisals for certain types of loans such as FHA or VA loans usually have more in depth standards that can even call for repair of certain issues that do not meet the lending standard prior to allowing the purchase to take place. Generally when repair issues are called out by FHA or VA appraisers the seller must pay for the repairs to be made.

Whereas home inspectors may skip areas that they cannot access due to clutter a home appraiser will make note of the clutter and may require a subsequent visit in order to view the home without clutter.  If certain rooms cannot be accessed such as crawl space, basement or attic space a re-visit (and additional appraisal fee) could be required so the appraiser can get a good look in those areas.  As a result homeowners would be wise to make sure all the areas an appraiser needs access to are accessible and safe for the appraiser.  That means removing excess boxes, making sure doors are unlocked, pets taken out of the home or confined to an area where they will not impact the activities of the appraiser.

What Happens When A Home Is Appraised Below What Is Needed?

In the case of a mortgage refinance if a home appraises for less than the needed value to provide the loan the refinance will be generally be denied.  The homeowner might be allowed to bring money to the table in order to make sure the loan to value ratio stays in line with the lower appraised value.  What that means is the homeowner can still refinance the home but at a lower overall amount and they must pay some money out of their own pocket to pay off the old loan.  Depending on how much cash a homeowner must bring to the closing of the refinance loan and how much money can be saved with a lower refinanced interest this may or may not make economic sense.

In the situation where a home is being sold and the appraisal comes in below the purchase price of the home a number of things could happen.  The deal could be cancelled since the value of the home is less than the purchase price and most properly written real estate sales contracts contain an appraisal contingency clause which allow the buyer to cancel the purchase offer if the home’s value does not appraise at or above the purchase price.  Another alternative is that the home seller can reduce the purchase price of the home so that the purchase price and appraisal value are at least equal to each other.  A buyer can bring extra money to closing so that the value of the loan is within line of the loan to value ratio required under the particular loan product.  So for an example if a loan requires 20% down and the other 80% will be borrowed under the mortgage the buyer can add extra cash to the purchase so that the 20/80% ratio is maintained.

A final option that may work in some cases is the homeowner and/or borrower can request an appeal of the appraisal report. The homebuyer should be communicating with their lender to start an appeal of the appraisal.  As part of the appeal process the real estate agents should be preparing their own comparison home sales and also present an explanation as to how the appraisers comparisons may not have been accurate.  The lender may or may not decide to order a new appraisal and will look at information provided to them that could show the original appraisal as not being accurate.

A mortgage lender will not allow a sale to close where the appraisal value is lower than the purchase price and the seller is not willing to reduce the price or the buyer is unwilling to put down extra money, which effectively will terminate the deal. When the purchase is an all cash purchase oftentimes the cash buyers will forgo the appraisal and have done their own research to make sure their offer price is in line with what they believe the home’s value to be.  In the situation where a cash purchaser did have an appraisal and the value was lower than the purchase price they still could close with everything as is since there is no third party approval requirement of the purchase price with a cash sale.

Bottom Line

Whenever buying a home with a mortgage or refinancing an existing mortgage an appraisal will generally be required.  It is in the homeowners best interest to put their best efforts into making sure everything is in great working order and the house is presentable during an appraisal walkthrough.  Appraisals that come in before the needed value can result in a home sale being cancelled or the refinance falling through.

Additional Resources

• How Much Value Increase Do You Get From A Finished Basement by Joe Boylan
• Should I Get An Appraisal Before Listing My Home? by Abraham Walker
• Who Does The Appraisal Report Belong To by Tom Horn
• Reasons Why Your House May Come Low On Appraisal by Sharon Paxson

About the author: The above article “What To Know About The Home Appraisal Process” was provided by Luxury Real Estate Specialist Paul Sian. Paul can be reached at paul@CinciNKYRealEstate.com or by phone at 513-560-8002. If you’re thinking of selling or buying your investment or commercial business property I would love to share my marketing knowledge and expertise to help you.  Contact me today!

I work in the following Greater Cincinnati, OH and Northern KY areas: Alexandria, Amberly, Amelia, Anderson Township, Cincinnati, Batavia, Blue Ash, Covington, Edgewood, Florence, Fort Mitchell, Fort Thomas, Hebron, Hyde Park, Indian Hill, Kenwood, Madeira, Mariemont, Milford, Montgomery, Mt. Washington, Newport, Newtown, Norwood, Taylor Mill, Terrace Park, Union Township, and Villa Hills.