By: Daniel Boxman of United Northern, NMLS ID# 1077102
What is a home appraisal and why do lenders need to know my home’s value?
An appraisal is a report that outlines an appraiser’s professional opinion of your property’s value at a specific point in time, based on specific factors. These factors include the location of the property, square footage, age and room count. The appraiser will also take into account what comparable properties have recently sold for in your area.
Whether you’re refinancing or buying, a bank must have a good idea of the value of your home because it determines your maximum approvable loan amount. Once they have your home’s value, they can determine your loan-to-value ratio. Your loan-to-value ratio is one of the criterions that banks use to establish how your mortgage will be structured - the other two being your credit score and your debt-to-income ratio.
How much do appraisals cost?
Appraisal fees vary depending on the state, the type of property, and the property value. The type of mortgage will also affect the cost of the appraisal. For example, an appraisal for a single-family home on the East Coast that’s not considered high value will cost you $425 if you’re applying for a conventional loan. However, a FHA loan appraisal for that same property will cost you $450. Multifamily properties can cost up to $600 to get appraised and some high value property appraisals can be even more. You should confirm the cost with a mortgage professional prior to ordering your appraisal.
How does an appraisal affect my ability to obtain a loan if it comes in lower than expected?
If you are buying a property and the appraisal comes in lower than the price agreed upon with the seller, the deal will have to be renegotiated, unless you decide to pay down the difference between the sales price and the value or walk away from the deal all together. It’s strongly suggested that the contract of sale have a clause, which states the validity of said contract is contingent upon the appraisal.
If you are refinancing your current mortgage and the appraisal comes in lower than expected, the transaction might not be dead if your loan-to-value ratio is still adequate. If not, you should ask your mortgage professional about your options.
An unfavorable appraisal can stop a mortgage transaction dead in its tracks. You have the right to receive a copy of the appraisal report and review it for errors. If the report contains errors, you can get appraisal reconsideration and force the appraiser to correct them. In the case that there are no errors and the report is solid, you can order another appraisal.
Now that your lender has received your appraisal report, they can begin underwriting your file. The underwriter will make the ultimate decision of whether or not the loan is accepted or denied. They will verify all documentation submitted by the processing department and make sure the information meets the loan program guidelines. If there are any deficiencies, they will ask for additional documentation to remedy them. Once they’re comfortable that all guidelines and criteria have been met, a final commitment will be issued along with the final rate-locked Good Faith Estimate.
Signing the Commitment
It is now time to sign the final commitment. The commitment is a contract that is usually sent to all parties involved in the transaction including realtors and attorneys. Once you sign the commitment, you have accepted the conditions in the contract and your mortgage has been completed. At this point, both you and the bank are obligated to fulfill all the terms of the mortgage and failing to do so will put your down payment and other prepaid fees at risk. Now that the commitment is signed and executed, all parties are notified and you are now ready to work on closing.