Refinance appraisal vs. purchase appraisal

An appraisal is an important part of the home buying process because it determines the fair market value of a property. But did you know it’s also usually required when refinancing your mortgage?

Before you refinance, you may want to understand the key differences between the refinance and purchase appraisal processes. You’ll also want to know when you need a home appraisal and when you can skip it.

Let’s take a look at how an appraisal for a home purchase differs from an appraisal for a mortgage refinance. Then, we’ll go over 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 the home’s fair market value. An appraisal can be an important part of the home buying process because it protects you from overpaying for a new house. Purchase appraisals also protect lenders from loaning home buyers more money than a property is worth. This prevents the buyer from borrowing more than the home’s value and having potential financial difficulties later, because they are underwater on their mortgage.

Appraisals are also important in the refinance process because they give you updated information on the appreciation or depreciation of your home’s value. This process determines how much equity you may be able to tap into should you choose to utilize it for your financial goals.

Appraisal for a home purchase

If you’re using a mortgage to finance your home purchase, your lender will likely require an appraisal before you can close on the mortgage and purchase the house. Let’s take a look at some of the specifics of the appraisal process for a home purchase.

When do you need a purchase appraisal?

You’ll need to get an appraisal before you qualify for a mortgage loan when you buy a house. The only way you can avoid an appraisal before buying a home is if you skip the mortgage and pay for the house in cash.

Appraisal requirements benefit you the most as the buyer. The home appraisal ensures that you aren’t paying more for a home than it’s worth.

As the home seller, you can usually expect the buyer to request both an appraisal and home inspection. In an effort to increase your home’s value before selling, you might want to make some last-minute repairs and upgrades on the house. This can help you 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?

For buyers and sellers, your purchase appraisal could come in higher or lower than you expect, but what does that mean as you move forward?

If you’re the buyer

If the home appraisal comes back higher than you expected, you just got a great deal on the house. 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. It’s up to you to cover the discrepancy.

You have a few options if you get a low appraisal as a home 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 property is worth. You can pay the difference between the appraisal and the sale price on closing day, though this course of action isn’t always recommended.
• Request a new home appraisal. 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 reasons for appraisal appeals.
• Cancel the real estate transaction. Most offer letters include an appraisal contingency, which 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

As the seller, you also have options if the home 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 their earnest money deposit.

Appraisal for a mortgage refinance

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 mortgage 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 can be a major benefit as you calculate your home equity. By attending the home appraisal, 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 valuation 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 Streamline Refinance (VA IRRRL): The Department of Veterans Affairs (VA) Interest Rate Reduction Refinance Loan, also called a VA Streamline Refinance and 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 Streamline Refinance.
• USDA Streamline Refinance: A USDA Streamline Refinance is a simplified type of refinancing option for homeowners who have a United States Department of Agriculture (USDA) You can skip the appraisal when you refinance with a USDA Streamline. Rocket Mortgage® doesn’t currently offer USDA Streamline Refinances.
• FHA Streamline Refinance: FHA Streamlines can allow you to refinance without an appraisal in most cases if you initially bought your house with a Federal Housing Administration (FHA) loan. FHA Streamlines often require less paperwork and have more lenient credit standards than typical FHA refinance options.

Each of these 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, USDA or FHA Streamline Refinance if you want to explore the possibility of refinancing without a home appraisal.

Home appraisal for refinance vs. purchase: FAQs

Let’s take a look at some frequently asked questions about refinance and purchase appraisals.

What do home appraisers look for in my refinance appraisal?

Similar to a purchase appraisal, the appraiser will inspect the interior and exterior of the house to determine its size, square footage, number of bedrooms, features and overall condition. They’ll also look for any permanent improvements you’ve made to your property.

Finally, the appraiser will analyze the fair market value of your home against other comparable homes, called real estate comps, that have recently sold in your area.

How do purchase and refinance appraisals differ?

With a purchase appraisal, you normally don’t attend the appraisal since you haven’t purchased the home yet. When a refinance appraisal is conducted, you’re able to be in attendance because you own the home that’s being appraised.

Is an appraisal always required for a refinance?

Home appraisals are often a refinance requirement, but not always. Your lender will typically require a new home appraisal if you want to change your loan type or take a cash-out refinance. However, if you’re only changing your loan’s term, interest rate, monthly payment amount or payment structure, you can often 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 your reasons for refinancing and how much equity you’ve built in your home. 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 (like a hybrid appraisal) or even no appraisal is needed.

What is the easiest refinancing option?

A USDA Streamline Assist Refinance is often considered the easiest refinancing option, as it allows you to skip the appraisal and debt-to-income ratio (DTI) assessment. However, USDA Streamline Assists also come with strict qualification criteria, so be sure to do your research.

Keep in mind that Rocket Mortgage currently does not offer USDA Streamlines.

The Bottom Line

An appraisal is a professional estimate of how much a home is worth. Borrowers usually need to get an appraisal when they refinance, and they’ll always need one before they buy a home when using a lender.

Are you looking to refinance your home loan? Start the process today with Rocket Mortgage.