What Hurts A Home Appraisal: Your Questions, Answered
Lauren Nowacki7-minute read
June 29, 2021
Whenever someone is getting a mortgage, an appraisal is typically required. Even though it seems like a mundane part of the mortgage process, it can be a source of stress if high expectations are met with low results. It could even prevent the sale of a home.
What is an appraisal and why is it so important? And, better yet, what hurts a home appraisal so much that it could put a home sale in jeopardy? Read on to find out.
What Is A Home Appraisal?
A home appraisal is a process that involves a third-party appraiser reviewing the home and comparing it to other homes in the area to determine its fair market value. It’s typically required by the lender when someone is using a mortgage to purchase a home or refinancing their current mortgage. There aren’t many differences between the two types of appraisals – both are used to determine the home’s value. However, one big difference is that in an appraisal for a home sale, neither the homeowner nor the buyer can attend. If it’s a refinance appraisal, the homeowner is allowed to attend, which can be to their advantage. If they attend the appraisal, they may be able to point out the work they’ve done, the new features they’ve added or the best parts of the home – which could help the appraiser determine a higher home value.
Why Is The Appraisal Value Important?
Why do you want the appraiser to determine a higher value for the home? Because a lender can only lend up to the appraised value of the home. This ensures the lender and the home buyer are paying a fair price for the home. It also helps ensure the lender won’t face a total loss if the homeowner defaults on the loan.
Because of this, a low appraisal could derail a home sale or refinance. If the appraisal comes in lower than the sale price, the home buyer will not be able to borrow enough money to cover the price of the home. They’ll either have to pay the difference out of pocket or renegotiate with the seller to drop the price. In a refinance, a low appraisal may mean the homeowner doesn’t have enough equity to borrow against.
On the other hand, a high appraisal can allow a buyer to borrow the money needed to purchase the home at the agreed-upon sale price. It can also increase the amount of equity a homeowner has, which could increase their cash-out refinance proceeds or could remove their private mortgage insurance (PMI).
Homeowners who receive a higher appraisal than expected should be wary of borrowing more money than they intended just because they can. There’s a risk of over-borrowing, which could lead to becoming underwater on their mortgage should home prices fall in the area. This can be especially risky if they’re getting a home equity loan or a HELOC, which Rocket Mortgage® does not currently offer.
Do Bank Appraisers Come Inside My Home?
An appraiser is looking at the condition of your home and any upgrades that may have contributed to your home’s value so that they can form a basis of comparison to similar homes in your area. That means they’ll need to know what’s inside the home and how it’s been maintained.
Prior to 2020, it was common for appraisers to come into the home and review the interior’s condition and features as part of the appraisal process. COVID-19 changed that, making it almost unthinkable to have a stranger walk through someone’s home, as it risked the health and safety of all parties involved. The problem was people still needed to buy homes and refinance their loans – especially when rates dropped to historic lows.
To remedy this, lenders began accepting several types of appraisals, such as desktop, hybrid and drive-by appraisals. While things are starting to return to normal, these types of appraisals may still be used today in addition to requesting a full appraisal, or home visit.
Does The Appraiser Work For The Lender?
The lender may order the appraisal, but it is completed by a neutral, third-party appraiser who is state-licensed or certified. This helps ensure the appraisal is done correctly and with no bias.
Keep in mind, appraisals for FHA, VA and USDA loans are different from conventional loans because those government-backed loans require safe and sanitary homes and may require the property pass certain guidelines set forth by these government entities.
Who Pays For A House Appraisal And How Much Does It Cost?
The party seeking to buy or refinance the home usually pays for the appraisal as part of the closing costs on the loan.
The cost of an appraisal will vary by appraisal type, home location and property type. For instance, an appraisal may cost more in some metropolitan areas or on properties that are more complex than others.
According to HomeAdvisor.com, the average cost of an appraisal is about $312 – $408 for a single-family home.
What Affects Home Appraisal?
The appraiser takes your home’s features, age and condition, then compares it to other similar homes in the area and what they sell for. Because your home’s value is based on the value of similar homes in the area, the local market will have a big impact on your appraisal. If the market is hot, many homes will sell at much higher prices, meaning your home could appraise for higher.
Here are some other things that could affect a home appraisal:
- Location of home
- Size of land
- Number of bedrooms and bathrooms
- Square footage
- Year built
- Curb appeal
- Major systems and home appliances
- Condition of home and systems
What Factors Negatively Affect Home Appraisal?
There are things that can hurt a house appraisal and cause your appraisal to come back lower than you may have expected. If you know some of the things that can hurt a house appraisal, you may be able to avoid the lower valuation. Of course, keep in mind that there are some factors, like the sales price of comparable homes in your area, that may be beyond your control. Staying on top of the market conditions in your area and knowing if your home has one of these common issues can at least help you avoid the shock and know what to expect when you have your appraisal done.
Unique Or Rural Homes
If you have a unique or rural home, there’s not much you can do to change that. The reason having a unique or rural home can be a problem is that it can be difficult to assign a value to unique houses or rural properties because of a lack of comparables. There are far fewer homes in rural areas, so it may be hard to find multiple homes that have sold in the area. And unique homes are called that for a reason – no other home is like it. So how do you find similar homes to compare it to?
When appraisers come across this issue, they may have other options, like looking for comps in competitive neighborhoods, finding a fit between the top and bottom price inside the market or giving a range in value instead of an exact number. Of course, these estimates are less precise, which means the home could end up being undervalued.
Outdated Systems, Appliances and Interiors
Updating appliances or any major systems, like plumbing, electrical or HVAC, can be costly, so if yours are outdated, it could affect the overall value of the home. And if the interior hasn’t been changed for decades, it may not appeal to buyers, which can also cause the value to decrease.
Outdated features like these could also signal that the home has not been taken care of properly and more issues lie beneath.
Structural And Other Construction Materials
Construction has changed over the years and builders have found new methods, technology and even materials that can make the home stronger, more energy-efficient, safer and, thus, more valuable.
Some homes, particularly older homes, were built with dated materials that are now seen as hazardous. This includes things like asbestos tile and insulation and lead paint. Even if the materials are safe, if they haven’t been updated, your home may not be as energy-efficient, which could also affect value. This is especially true for old windows and doors. Roof and siding that is outdated, worn out or damaged can be pricey to fix, so that could also be a major issue that can drive down value.
What Can I Do To Prevent A Low Appraisal?
You won’t be able to change everything in your home before an appraisal and, remember, some things will simply be out of your control. However, there are some steps you can take to help prevent a low appraisal. Prepare for your appraisal by reviewing an appraisal checklist and taking the following steps:
- Do your own research on market conditions and the sale price of similar homes in your area that have recently sold.
- If you’ve made upgrades to your home, show proof. Create a file that details all of these improvements and includes sales receipts.
- Inspect the interior and exterior of the home, including your major systems and appliances and note any areas of concern. If something needs to be repaired or updated, get that done before the appraisal.
- Improve your curb appeal. It’s the first thing the appraiser will see when they arrive at your home, so start off on the right foot. It can also indicate that you’ve maintained the rest of the home as well, so if your exterior looks a little ragged, make sure you clean it up.
- Make sure your decor and home improvements aren’t too personalized. You’ll want a potential buyer to be able to picture themselves in the home and the appraiser will know when they’re unable to do that.
- Clean up messes and clutter. A clean home that’s free of clutter makes rooms look bigger and more spacious, allows the appraiser to better view the features of your home and shows that you take care of the home.
- If you have concerns, talk to your real estate agent and see if there’s anything else you or they can do.
The Bottom Line: Give Yourself The Credit You Deserve By Getting A High Appraisal
Appraisals are conducted by licensed, third-party professionals to determine the fair market value of a home. They help ensure you’re paying a fair price for the home and help prevent you from owing more on your loan than your home is worth. They also help a lender determine how much money it can loan you for your purchase or refinance. That’s why you want to do all you can to avoid a low appraisal. Taking certain steps to prepare for a successful appraisal can help all parties involved, whether you’re the buyer or seller, lender or borrower.
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