So, you are out looking for homes and you finally find one that is priced at the market price or a touch below and you pounce on it! Problem is, so do a few more people and the purchase price gets bid up. Still, after being coached by your agent that the home is still very much worth the price in the context of what the current market conditions tell us, you can find that an appraiser may not agree with the contract price because there may not be enough similar style and location friendly homes to use for comparision.
So, what happens when the home you want to buy, doesn’t appraise for its Purchase Price? Dan Green from Waterstone Mortgage tells us:
Whether you're buying, selling or refinancing a home, the home appraisal is an important part of the process.
What Is A Home Appraisal?
By definition, appraising a home is the act of assigning monetary value to a property; determining its "fair market value".
For today's home buyers, a home appraisal helps to determine whether you're over-paying for a home relative to similar for-sale homes, or getting a "good price". For refinancing households -- save for those using a no-appraisal-needed streamlined refinance -- the appraisal helps to determine your mortgage eligibility.
Appraisals are performed by licensed home appraisers and there are several different methods by which an appraiser will assign value to a home. The Sales Comparison approach is the most common.
Via the Sales Comparison appraisal approach, a home appraiser will compare your home to similar homes in the immediate vicinity with similar physical attributes.
Examples of such traits includes number of bedrooms; number of bathrooms; age of home; quality of home finishes; and square footage. Location matters, too, such that similar homes in different school districts may have different appeal and may not be considered "comparable".
Appraisers will then look at recent sales data of such similar homes, and will assign your property's value based on available data, and with adjustments made for variances between homes. A home with a finished basement, for example, may be adjusted to a higher value; as might a home with recent renovations.
Homes sold in the most recent 90 days will receive the highest weight in the Sales Comparison approach. Homes sold over 6 months are often given no consideration whatsoever.
What Happens When A Home Appraises For Less Than Its Purchase Price?
Another home appraisal function is to help set your downpayment amount on a purchase.
Mortgage lenders use home appraisals as the "value" portion of the your mortgage's loan-to-value (LTV) calculation, where "value" is equal to the lower of your home's purchase price or its appraised value.
For example, if you purchase a $410,000 condo in Chicago, Illinois with an appraised value of $400,000, and you plan to make a 3.5 percent downpayment via the FHA, your required downpayment amount is fourteen thousand dollars.
Conversely, if your home appraises for more than the purchase price, the required downpayment amount is $14,350.
When your home appraises for less than its purchase price, there are three potential outcomes :
1. Buyer and seller renegotiate a new, lower home sale price to appraised price or somewhere in the middle between contract and appraised value.
2. Buyer increases downpayment to meet new LTV and downpayment minimums
3. Buyer chooses to challenge--as for "reconsideration"--of appraised value if there appear to be inconsistencies with conditions, elements or comparables chosen; this doesn't have a high chance of working out, but if you like your lender, you might want to give it a try
4. Buyer chooses an alternative Mortgage Lender, with seller's knowledge and agreement of delay, and hopes to have a new appraiser that comes in at a value that works for the buyer to consummate their mortgage.(my recommendation)
5. Or, Buyer chooses neither option, and cancels home purchase contract
The possibility of a "bad appraisal" is among the reasons why the majority of home purchase contracts are written with an appraisal contingency. In the event that the home fails to appraise for its purchase price, the contingency clause gives buyers an opportunity to re-evaluate. When we are in a rising market, there is an increased likelihood that an appraisal may not have caught up to the current trend.
If you have any questions, please contact either Dan Waterstone at:
or contact me and I will be happy to answer any of your questions.
Mark Slade
Keller Williams
917.797.5059
Good Homes
Mark Slade
Appraisal contingencies are also sometimes used to renegotiate or exit contracts after an appraiser identifies required repairs, such as chipped paint or cracked windows.
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