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Refinance Appraisal Vs. Purchase Appraisal

Victoria Araj5-minute read

June 21, 2022

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Appraisals are an important part of the home buying process, but did you know they’re also usually required when refinancing your mortgage?

In this article, we’ll go over some of the differences between the refinance appraisal and the purchase appraisal process, as well as when you need an appraisal and when you can skip it. We’ll also 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 professional opinion of how much your home is worth. Appraisals are important in the home buying process because they give you comfort in knowing that you aren’t overpaying for real estate. Appraisals also let lenders know 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.

Appraisals are also important in the refinance process because they give you updated info on the appreciation or depreciation of your home, dictating just how much equity you may be able to tap into should you choose to utilize it for other financial goals.

Purchase Appraisal

You’ll 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 for a higher final selling price.

What If Your Purchase Appraisal Is Higher Or Lower Than You Expected?

If You’re The Buyer

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.

But 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 the appraisal indicates the home is worth. You can pay the difference between the appraisal and the sale price at closing if you really want the property. In general, this is not recommended, and caution is always advised if you’re considering paying more for a home than its appraised value.

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.

If You’re The Seller

You also have options if your appraisal comes in low. 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.

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Refinance Home Appraisal

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.

What To Expect With A Refinance Appraisal

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.

When Isn’t A Refinance Appraisal Required?

Home 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. Rocket Mortgage® currently does not offer USDA Streamlines.
  • FHA Streamline: FHA Streamlines can 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.

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 appraisal tips you can use to increase your chances of a successful valuation:

  • 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. If you’re selling your home and you have more than one offer, it can be beneficial to provide your appraiser with a list of these offers. Multiple offers of about the same amount tell the appraiser that your home is at the right price point.

FAQs

What do home appraisers look for in my refinance appraisal?

Similar to a purchase appraisal, the appraiser will inspect the interior and exterior to determine the size, features and condition of your home. They’ll also look for any permanent improvements you’ve made to your property, including upgrades added outside of your home’s living space, such as a pool or garage. Finally, the appraiser will analyze the fair market value of your home against other comparable homes – or comps – that have recently sold in your area.

Is an appraisal always required for a refinance?

Home appraisals are often a refinance requirement, but not always. Your lender will always require a new home appraisal if you want to change your loan type or take a cash-out refinance. However, if you’re only refinancing your loan’s term, interest rate or payment structure, you can do so without getting a new appraisal.

Do appraisers always come inside for a refinance appraisal?

Your mortgage lender will determine the need for a full – or in-person – appraisal based on why you’re refinancing and how much equity you’ve added to your home’s value. If you aren’t refinancing to change your loan type, or if you haven’t built much equity in your home, your lender may decide that an alternative appraisal – such as a desktop, drive-by or hybrid appraisal – or even no appraisal is needed. As mentioned before, because you’re the homeowner, you’ll be able to attend a full refinance appraisal.

What is the easiest refinancing option?

A USDA Streamline Assist Refinance is the easiest refinancing option, as it allows you to skip the appraisal, credit check and debt calculation requirements. However, Streamline Assists also come with strict qualification criteria, so be sure to do your research.

The Bottom Line

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. Borrowers usually need to get an appraisal when they refinance, and they’ll always need one before they 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, cancel your offer or contest your appraisal whether you’re the buyer or seller. And, you can take a few steps before your appraisal to increase the probability of a high final valuation.

If you’re looking to refinance your mortgage, start the process today.

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Victoria Araj

Victoria Araj is a Section Editor for Rocket Mortgage and held roles in mortgage banking, public relations and more in her 15+ years with the company. She holds a bachelor’s degree in journalism with an emphasis in political science from Michigan State University, and a master’s degree in public administration from the University of Michigan.