What is the Purpose of an Appraisal?
A mortgage has many specific pieces involved in it. Obviously there is the money supplied by the lender to pay the seller for their asking price. There are also many other items such as the title report and title insurance, a survey (sometimes), proof of homeowner insurance policy and an appraisal. An appraisal is actually one of the more important pieces and yet it still brings questions from buyers and sellers alike.
Required by the Lender
First and foremost, if a home is being purchased through the use of a mortgage then the lender will require a formal appraisal. A licensed appraiser works independently of the real estate agent and the lender to ensure that there is no undue influence on the process. The appraiser’s report will indicate if the home is worth the asking price.
Appraisal ordered after a Selling Price has been negotiated
The appraiser is contacted after the real estate agent(s) and all associated parties have worked out a price for the home. The appraiser will look at the contract along with a host of other items such as
* Square footage of the home
* Local property taxes for the home
* When the home was built
* General shape and condition of the property
* Average sales price of similar homes in the area
The price for the appraisal depends on the area of the country. Sometimes the appraisal fee is paid by the borrower up front and other times it may be paid as part of the closing costs.
Wise to Inspect First and Appraise Second
In an ideal world the buyer of a home would hire a home inspector to review a property before the home is appraised. The job of an inspector is to seek out any potential problems with the property. This can be as simple as finding a loose door knob to as complicated as finding out the entire heating and ventilation system needs replacing. Once the inspector has looked at the home the appraiser can approach the property with some idea of any possible short comings of the home and assign the correct value to the home. In a worst case scenario an inspection could lead a buyer to cancel a contract and look for a different home.
The Journey of the Appraisal
Once the appraiser has finished the report a copy will be sent to the mortgage lender and possibly the real estate agents. If the buyer paid for the appraisal up front then they too will get a copy when it is complete. Otherwise, the buyer will receive a copy at closing.
The lender, whether it is a bank or local mortgage company, will have their own process to review the appraisal and ensure the numbers look accurate. If the value of the home is much lower than expected then the lender may cancel the loan. On the flip side, if the home is determined to be worth more than the asking price then the buyer will have instant equity.