Home Appraisal Amount Vs. Loan Amount: How An Appraisal Impacts The Selling Price And Mortgage Amount
Hanna Kielar7-minute read
June 09, 2023
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What Is An Appraisal?
An appraisal is the best way to estimate your property’s fair market value based on the location, condition and recent sales of similar homes in the surrounding area. Beyond an estimate of how much your property is worth, an appraisal also indicates the amount a lender will let you borrow for a property.
What Does An Appraiser Do?
The home appraisal process is completed by a licensed individual called an appraiser. The appraiser can tell you, the buyer, and your lender how much a home is worth.
An appraiser analyzes a handful of factors when viewing the home. When comparing an appraisal versus a home assessment, an appraisal will look at where your home is and comparable sales in your area, as well as the condition of the home’s construction and any of its amenities or special features. The appraiser also looks at the size of the property and any major structural improvements such as additions and remodeled rooms.
Specifically, an appraiser will analyze:
The Exterior Of A Home
- The total land area or acreage of the property
- The condition of the property
- Any lead or peeling paint, but only if the house was built prior to 1979
The Interior Of A Home
- The HVAC system
- Rooms, windows and closets
- The garage, though it does not contribute to the square footage of the home
- Whether the basement is upgraded, though it also does not contribute to square footage
- Any built-in appliance upgrades
- The presence of an in-ground pool
The appraiser will rate the condition of the property as “good,” “average,” “fair” or “poor” after they’ve evaluated it. Then, they’ll use appraisal support software to compare it to other homes in the area. Comparable properties are other homes that have sold within the past 6 months nearby that are similar in size and sale price.
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How Long Does An Appraisal Take?
There is no universal appraisal timeline. However, appraisals in rural areas can take longer because certain rural areas may face a shortage of appraisers. It’s possible that it can take months to get an appraiser out to evaluate a property.
How long the appraisal takes can vary once an appraiser is onsite. Appraisers tend to spend a couple of hours on a property, depending on its size and condition. Properties that are large or in poor condition may take longer to appraise.
Appraisal Amount Vs. Mortgage Loan Amount
An appraisal directly affects the amount of mortgage you’re loaned, because your lender gives you a home loan based on the appraisal’s estimate of the fair market value of the home. It keeps the lender from lending you too much money, and keeps you from borrowing more than you need for a particular home.
If A House Is Appraised Lower Than The Purchase Price
What happens if the appraisal comes in below the purchase price of the home you want to buy? Though it might be an unexpected scenario, it can happen, and it’s best to be prepared.
A low appraisal doesn’t mean that a lender won’t lend money to you. It means that your lender will give you a loan based on the loan-to-value (LTV) ratio agreed to in the proposed contract. The LTV compares the size of the loan you’re getting with the value of the home.
The LTV represents the amount of the house your loan covers. Let’s take a look at a quick example of how LTV works when the appraisal comes back right on target with the home price.
The home you’d like to buy is appraised at $150,000. You and the seller agree that you’ll buy the home for $150,000. In addition, you tell your mortgage lender that you’re making a down payment of $20,000.
Here’s how to calculate your LTV: Subtract your down payment ($20,000) from the total selling price ($150,000). You get $130,000. This is the amount you plan to borrow. Next, divide your loan amount ($130,000) by the value of the property ($150,000) to get 0.866, and multiply that result by 100 to get your LTV. In this case, the LTV is 87%.
However, for a home priced at $150,000, what happens when the appraised value comes back at only $100,000? Since your agreed-upon price is $150,000, and your lender won’t lend more than the appraised value, you’ll have to make up the difference or work with the seller to see if they can reduce the asking price to the appraised value.
If A House Is Appraised Higher Than The Purchase Price
What happens if the appraisal comes in above the purchase price of the home? You’re in a good situation if this happens. It simply means that you’ve agreed to pay the seller less than the home’s market value. Your mortgage amount does not change because the selling price will not increase to meet the appraisal value.
Appraised Value Of A House Vs. Sales Price
Unlike the listing price, the house appraised value may not be what sellers are asking for their home. Lenders will only allow a loan amount based on how much the home is worth on the appraisal report.
As you can imagine, it’s in the seller’s best interest to try to get the home appraised for a value that matches the selling price. If an appraisal comes back low, a buyer can go back to the seller and negotiate a lower sale price or walk away from the sale entirely. For the buyer and seller to both get what they want – a home that sells – the seller may seriously consider lowering the price.
How Does An Appraisal Differ From A Home Inspection?
Though an appraiser isn’t looking for things like paint on the walls or children’s toys in the yard, small things can still affect the appraiser’s overall assessment. It’s important to note that while appraisers evaluate some of the obvious issues that may affect the value of a home, appraisals are different from a home inspection.
A home inspection is a much more detailed walkthrough of a home and examines wear and tear, risks, damage and hazards. You still need to do an inspection even if you have an appraisal done on a home you plan to purchase.
How Can I Avoid Hurting My Appraisal?
Here are a few things you can do to make sure you don’t hurt your appraisal:
- Clean your home. The cleaner it is, the more the great elements of the home will pop out to an appraiser.
- Double-check items that leave a first impression of your home. This could include the paint on the walls, handrails, railings on decks, plumbing, roof leaks and cracks in the walls, ceiling or foundation. Check on water intrusion anywhere in the home, particularly in the foundation.
- Make known repairs before an appraiser arrives. If you know the roof has some leaking issues or the basement is in need of repair, make those repairs ahead of time.
- Organize receipts and take photos of any renovations or improvements. New appliances and other new features, such as repairs to the leaky roof, should be kept as proof of the home’s improvements.
How To Handle A Low Appraisal Value
If you’ve agreed to pay more for a home with a low appraisal, what are your options? Here are a couple of routes you can take if your appraisal does come back low.
1. Renegotiate The Sales Price
If you’re unable to dispute the appraisal, you can also go back to the seller and ask them to lower the sale price if the appraisal comes back low.
2. Properly Petition For A Review
A lender, buyer or seller can’t ask an appraiser to give the property a specific value. But if you work with your agent to provide evidence of errors in the appraisal and the lender finds your request is well-supported, they may ask the appraiser to take a second look.
3. Keep Your Eye On The House
If a deal falls through, homeowners might have a hard time getting higher offers from other buyers. They may come back to you to negotiate again. Keep an eye on the home just in case the sellers don’t receive any more offers.
What Is An Appraisal Contingency?
The contingency clause in your purchase agreement means that you can walk away from a low appraisal on a home without losing money. It’s important that you can walk away from the get-go, so make sure your purchase agreement contains an appraisal contingency to be absolutely safe. If the home doesn’t appraise for the amount you’ve agreed to pay, sometimes walking away is the smartest and safest thing you can do.
FAQs About Appraisal Amount Vs. Loan Amount
As a home buyer, you may be concerned about what home appraisals and the seller may do in the case of a home appraisal discrepancy. Here are some common questions home buyers are also asking.
Can the seller back out if the appraised value is too high?
The conditions of the offer contract will determine when the buyer and seller can back out of the purchase. However, the seller may simply want to renegotiate if the appraised value comes back significantly higher than the selling price.
Do sellers usually lower their asking price if the appraised value is lower?
Whether the seller decides to lower their asking price will depend on a number of factors, including how motivated they are to sell or if they have other offers over asking price.
The Bottom Line
Understanding what a high or low home appraisal means for both the buyer and seller can help you when evaluating potential homes. The appraiser can tell you and your lender how much a home is worth.
If you feel you have a good handle on home appraisals and how they can affect selling prices and loan amounts, you may be wondering what your next steps are. A good place to start is to move forward with a preapproval so you have an idea of how much you can afford on a mortgage. Get approved for a loan today with Rocket Mortgage®.
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Do You Need An Appraisal When Refinancing?
Refinancing - 5-minute read
Andrew Dehan - June 09, 2023
Appraisals are almost always required to refinance your mortgage, but a no-appraisal refinance isn’t completely off the table. Find out more here.