Your Guide to The Home Appraisal Process as a Homebuyer
Purchasing a home can evoke a mix of excitement and apprehension. The process involves various steps that may catch you off guard or seem unexpected.
Among these steps, getting an appraisal stands out as one of the most crucial. An appraisal plays a significant role in determining the value of a property.
You might be wondering when the appraisal is done when buying a home. The appraisal is ordered once your offer is accepted by the seller, and you have signed the purchase contract.
If you're unsure about the purpose and importance of an appraisal, you're in the right place. Let's delve into what you need to know.
What is a home appraisal? First and foremost, let's clarify what a home appraisal entails. A home appraisal involves evaluating the fair market value of a real estate property. A qualified professional, known as a home appraiser, objectively assesses the property to determine its worth.
Appraisers consider various factors to determine the value of a property, such as:
- Comparable properties: Appraisers begin by assessing the prices of recently sold properties in the same area. They utilize local multiple listing services (MLS) and other resources to evaluate this information.
- Age and condition: Appraisers examine the history of the home, including its construction date and maintenance records, to gauge its overall condition.
- Size of the house: The square footage of a home significantly impacts its value. Appraisers compare the size of the house to similar properties in the area to add or deduct value accordingly. The number of bedrooms and bathrooms also influences the home's worth.
- Location: Factors like the anticipated growth of the neighborhood, the property's lot location, and the prices of other properties in the area can impact the appraised value of the home.
- Lot size: A larger lot typically commands a higher value, especially if it is situated in a highly desirable area.
- Upgrades: Recent additions or renovations to the home can add considerable value. Some upgrades, such as kitchen or bathroom updates, carry more weight than others.
- Outdoor space: Well-maintained yards or pools often contribute to the value of a home and are noted in the appraiser's report.
Home appraisals help buyers avoid overpaying for a property and assist lenders in ensuring they do not lend more money than the home's actual worth.
So, you've made it through the house-hunting phase and negotiations. But when does the appraisal take place in the homebuying process? Let's walk through the appraisal process so you know what to expect.
Step 1: Submit a full loan application. Before you begin shopping for homes and making offers, it's advisable to get prequalified or preapproved for a mortgage. However, you may not submit a full loan application to a lender until your offer is accepted, unless you have already obtained an underwritten preapproval.
Step 2: Your offer is accepted! Once you make an offer on a home, the seller may accept, deny, or propose a counter-offer. If the seller accepts your offer, you, as the buyer, will sign the purchase contract to finalize the sale's details.
If your offer required an earnest money deposit, you would submit this deposit at this stage. Typically, earnest money is deposited into an escrow account, where it remains until the closing.
Step 3: Order the appraisal. Typically, the lender will coordinate the appraisal right after your offer gets accepted. If you are paying cash for your new home, it would still be a good idea to order your own appraisal to ensure you are not overpaying for the property. In this case, you or your buyer’s agent will be responsible for finding a reputable appraiser to evaluate the home.
Step 4: Appraiser gathers data and visits the property. Once the lender orders the appraisal and the assignment has been accepted, the appraiser will reach out to either the seller’s agent or the seller directly to schedule a time to inspect the property in person. The appraiser will take a look at the purchase agreement and purchase price before-hand, but this shouldn’t impact how they evaluate the property’s value. Their job is to use multiple factors to calculate an objective fair market value of the property. Once the appraiser gathers all the information they need and takes pictures of the home inside and out, they will write up an appraisal report. There isn’t a standard format required for all appraisal reports, however, Fannie Mae and Freddie Mac have developed standard appraisal report forms that are often used.
All appraisal reports should include at a minimum:
- The opinion of value of the property (including the approach the appraiser took to determine this value)
- Date that the property was assessed
- Detailed information about the property (square footage, bedroom count, lot size, building materials, and so on)
- Information about the neighborhood
- Whether the property is located in a FEMA Flood Zone
- Evaluation of the comparable sales that were used to determine value
- Any defects that will need to be fixed before closing (safety issues, chipped paint, or exposed wiring)
Step 5: Lender receives the appraisal report. The typical appraisal takes between 21 and 28 days to be completed in 2022, so expect to wait about three weeks to get yours back. In most cases, the lender orders the appraisal so the report is submitted to the lender.
The Equal Credit Opportunity Act Regulation B requires lenders to provide borrowers with a copy of the appraisal report 3 days before consummation of the loan, but in some cases this can be waived.
Step 6: Renegotiate as needed. The appraised value of the home can impact both your loan and how much you have to pay for the property. In some cases, the appraisal can lead to a renegotiation.
Here’s what to do for each scenario.
If appraisal comes in low-
Sometimes appraisals come back lower than the agreed-upon purchase price. According to CoreLogic, the percentage of appraisals coming back lower than the offer price was 20.1% as of May 2021, but they expect this percentage to drop to between 7% and 9% in 2022.
If your appraisal comes back low, you may need to rethink your offer and plan for negotiation. A lower appraisal means the lender won’t lend you as much money as you will need to finance the purchase.
Your options include:
- Trying to renegotiate the deal to a lower price
- Finding a new lender and getting another appraisal in hopes that the second appraisal will match the offer price
- Gathering data to support the purchase price and challenging the appraisal with a reconsideration of value
- Providing more cash to cover the gap
- Walking away if your purchase agreement allows
Ultimately, you should strategize with your real estate agent to determine what makes the most sense for you and your situation.
If appraisal is accurate-
Whew! With an appraised value that matches your purchase price, you can move forward with the purchase and closing smoothly.
If appraisal comes in high-
WooHoo! A high appraisal is also cause for celebration. It means you have agreed to pay the seller less than what the property is worth, so you have already built equity in your new home!
Understanding home appraisals can be overwhelming. Having the right agent on your team puts you on track for a simpler homebuying process. An experienced real estate agent can help you understand a home appraisal report and guide you through the journey to homeownership.
Reach out to our team for more information and to get your home search started!