*As of July 6, 2020, Quicken Loans is no longer accepting USDA loan applications.
An appraisal is a professional estimate of your home’s value. Appraisals are important because they tell your lender that they aren’t loaning you more money than your home is worth. However, many homeowners don't know that they will usually need a new appraisal before they can get a refinance.
We’ll go over some of the differences between the purchase appraisal and the refinance appraisal process, as well as when you need an appraisal and when you can skip it. Finally, we’ll give you a few tips you can use before your appraisal to maximize your home’s value.
What Is A Home Appraisal?
A home appraisal is a rough estimate of how much your home is worth. When you buy a home or refinance, your lender usually requires an appraisal before they give you your loan.
An unbiased home value expert will take a look around your property or the property you want to buy during an appraisal. They will survey the general condition of the home and test its major systems.
Your appraiser will also take pictures and measurements of each room in the home, do some research on comparable properties in the area and assign your home a final value. The appraiser will then deliver an official estimation of value to both you and your lender.
Appraisals are important to lenders because they let them know that they aren’t loaning you more money than your home is worth. This prevents the lender from having to shoulder a major financial loss if you default on your loan.
For example, imagine that a lender gives you a $200,000 loan to buy a home. You buy the home but cannot make your payments and quickly fall behind. You default on the loan and go into foreclosure.
Then the lender tries to recoup some of their money by selling the home but find out that the home you bought was actually only worth $150,000. Though the lender can attempt to sell the home for $50,000 more than it’s worth, it’s unlikely that they’ll get all of their money back. Most likely, the lender will lose the $50,000.
Appraisals prevent this situation by acting as an upper limit for the amount of money you can borrow. Lenders usually will not loan out more than the appraisal value of the home. This protects your lender from financial loss and you from investing tons of money in an overpriced property.
One thing that’s important to remember is that a home appraisal isn’t the same thing as an inspection. During an inspection, an inspector will walk around the home looking for problems and recording them. Your inspection results are important because they let you know the exact condition of the home before you buy it.
An appraiser won’t tell you which outlets aren’t working or that there are a few shingles missing on the roof. Instead, he or she will only consider the overall condition of the home.
While obvious defects (like a hole in the roof or a missing wall) will decrease the value of the home, minor repair needs will not. Make sure you get both an appraisal and an inspection before you commit to buying a property.
Refinance Home Appraisal
Home appraisals are often a refinance requirement. The refinance appraisal process is almost identical to the process you went through when you bought your home. Let's take a closer look at what to expect before you apply for a refinance.
When Is It Used?
Appraisals are a requirement for most refinances. However, there are a few special refinancing programs that can help you refinance without an appraisal.
- VA IRRRL: A Veteran’s Association interest rate reduction refinance loan (VA IRRRL) is a special type of refinance that allows you to change your term or interest rate without an appraisal. You can also skip the underwriting portion of the refinance if you qualify for a VA IRRRL.
- USDA Streamline: USDA Streamlines are a simplified type of refinancing for people who have a USDA loan. Like VA IRRRLs, you can skip the appraisal when you refinance with a Streamline. Your lender might also offer USDA Streamline Assist refinance. Streamline Assists are the easiest refinancing option, as they allow you to skip the appraisal, credit check and debt calculation requirements. However, they also come with strict qualification criteria. Rocket Mortgage®currently does not offer USDA Streamlines.
- FHA Streamline: FHA Streamlines can also allow you to refinance without an appraisal in most cases. FHA Streamlines also require less paperwork and have looser credit standards than typical FHA refinances.
Each of these no-appraisal refinance options has a specific set of criteria you must meet before you qualify. Contact your lender and ask if you qualify for a VA IRRRL or Streamline if you want to refinance without another appraisal.
Note that you can only refinance your loan’s term, interest rate or interest structure without getting a new appraisal. Your lender will always need a new appraisal if you want to change your loan type or take a cash-out refinance.
What To Expect
You’re already familiar with the appraisal process if you have a home loan. However, refinance appraisals have one major difference that sets them apart from purchase appraisals. Because you own your home, you can attend the appraisal.
This is a major benefit to home equity calculation. This way, you can guide your appraiser’s attention to any upgrades or renovations you’ve made since you moved in. This can lead to a higher home value and more equity in your pocket.
You’ll also need to get an appraisal before you buy a home.
When Do You Need A Purchase Appraisal?
You’ll need to get an appraisal before you qualify for a mortgage loan whenever you buy a home. The only way you can avoid an appraisal before buying a home is if you skip the mortgage and pay in cash.
Appraisal requirements benefit you the most as the buyer. You don’t want to get stuck paying more for a home than it’s worth.
You should count on the buyer requesting both an appraisal and an inspection if you’re the seller. It’s beneficial for you to make any last-minute repairs before you receive offers on your home. This will ultimately allow you to sell your home with fewer delays and allow for a higher final selling price.
What If Your Purchase Appraisal Is Higher Or Lower Than You Expected?
Pat yourself on the back if you’re the buyer and your appraisal comes back higher than you expected. You just got a great deal on a home. You can proceed to the closing as planned.
What happens if you’re the buyer and your appraisal comes in lower than you expected? You could face some complications with your mortgage lender. Lenders won’t loan out more money than a property is worth.
For example, if you offer $150,000 for a home but an appraisal determines that the home is only worth $130,000, your lender won’t give you the full $150,000 you need. It’s up to you to cover the discrepancy.
You have a few options if you get a low appraisal as a buyer.
- Make up the difference in cash. A low appraisal doesn’t mean that the lender won’t give you a loan. It just means that you can’t borrow more than your home is worth. You can pay the difference between the appraisal and the sale price at closing if you really want the property.
- Request a new appraisal. Appraisers aren’t perfect. You have the option to contest the appraisal and request a new one. Review the appraisal report and look for errors that could justify an appeal. Failing to notice upgrades and comparing the property to properties very far away from the home are a couple of common reasons for appraisal appeals.
- Cancel the transaction. Most offer letters include a contingency that allows you to back out of the sale if the appraisal comes in well below your offer. Sometimes the best thing to do when you get a low appraisal is to walk away from the home.
What if your appraisal comes in low and you’re the seller? You also have options. You can offer to lower the purchase price to meet the appraisal value or you can appeal the appraisal.
Remember that if your buyer’s offer letter includes a cancellation clause for a low appraisal value, you must release his or her earnest money deposit.
How To Prepare For A Home Appraisal
A low appraisal can be a serious problem whether you’re selling or refinancing. Luckily, there are a few steps you can take to increase your chances of a successful appraisal.
- List upgrades and improvements. Permanent upgrades you’ve made to your home since you moved in increase your property’s value. Create a list of all your upgrades and renovations and present it to your appraiser.
- Use some staging tricks. You can’t really add another bedroom to your home or increase your square footage in the month before a refinance. However, you can still maximize the look and feel of your space. Clear off kitchen countertops, replace old light bulbs with brighter ones and hang mirrors to make your home appear larger.
- Provide an offer list. It can be beneficial for you to provide your appraiser with a list of offers if you’re selling your home and you have more than one. Multiple offers of about the same amount tell the appraiser that your home is at the right price point.
An appraisal is a rough estimate of how much a home is worth. Lenders require appraisals for assurance that they aren’t loaning out more money than your home is worth. You usually need to get an appraisal when you refinance, and you’ll always need one before you buy a home.
A low appraisal can cause problems for buyers, sellers and refinancers. You can contest the appraisal and request a new one if it comes back lower than you expected before a home purchase.
You can also cover the difference in cash or cancel your offer or contest your appraisal whether you’re the buyer or seller. You can also take a few steps before your appraisal to increase the probability of a high final value.
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