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Home Appraisal: How It Affects Selling Price And Mortgage Amount

7-minute read

No matter where you are in the home buying process, an appraisal can help you purchase your future home at the right market value. An appraisal can also affect both the selling cost and mortgage amount. Read on to learn exactly how an appraisal helps both the buyer and seller during the home buying process.

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 involves 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 they’re tasked with the appraisal of your home. They will consider where your home is located, check the quality and condition of the home’s construction, its amenities and any other 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 the square footage of the home
  • Any built-in appliance upgrades
  • The presence of an in-ground pool 

The appraiser will rate the condition of the property “good, average, fair or poor” after they’ve evaluated it. Then, they’llcompare it to other homes in the area using special appraisal support software. Comparable properties are other homes that have sold within the past 6 months nearby that are similar in size and sale price. 

How Long Does An Appraisal Take?

There is no universal appraisal timeline. 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 actual appraisal process 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.

House Value: Selling Cost Vs. Mortgage Loan

The appraisal affects both buyers and sellers through the mortgage loan amount and selling cost.

How Appraised Value Affects A Mortgage Loan

An appraisal directly affects the amount of mortgage loan you can get 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 moneyand keeps you from borrowing more than you need for a particular home.
 
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. You might need to bring more money to the table to make up the difference.
 
What is LTV, anyway? The LTV represents the amount of the house your loan covers. Here’s 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 the 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.
 
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.

How Appraised Value Affects Selling Cost

The sales price is the price that a seller asks for a property and is completely different from the appraisal value.
 
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 ask them to lower the sale price. If the seller refuses, the buyer could end up walking away from the home completely. In order for the buyer and seller to both get what they want – a home that sells – the seller may seriously consider lowering the price.
 
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 definitely 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 walk-through 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.
 
Here are a few things you can do to influence the 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. Get A Second Opinion

You can dispute the appraisal. Hopefully, the first appraiser will reconsider or you can ask for a second appraisal from a different appraiser. If the second appraiser offers a higher appraisal, hopefully your lender will accept it.

2. Renegotiate The Sales Price

You can also go back to the seller and ask them to lower the sale price if the appraisal comes back low.

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 a good idea to be absolutely sure that you can walk away from the get-go, so make sure your purchase agreement contains a contingency clause 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.

Summary

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, the buyer, and your lender how much a home is worth.
 
An appraiser analyzes where your home is located and checks the quality and condition of your home’s construction, its amenities and any other special features. Then, they’llcompare it to other homes in the area using special appraisal support software.
 
An appraisal affects the amount of mortgage loan you can get. It keeps the lender from lending you too much moneyand keeps you from borrowing more than you need for a particular home.
 
Sellers want the home to be appraised for a value that matches the selling price, so there are ways that they can spruce up the home before the appraiser visits.
 
If an appraisal comes back low, buyers have a couple of options: You can get a second opinion from a different appraiser, renegotiate the sales price or walk away from the sale altogether.
 
Do you have further questions about what the home appraisal process entails? Rocket Mortgage® by Quicken Loans® has Home Loan Experts ready to answer any of your questions.

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