In today's current market, many Lenders and Loan Officers are seeing a trend of homes appreciating in value, or at least remaining stable. However, this isn’t the case in every market. In some cases, the appraised values may be less than the actual market value, which presents a delay in processing a home loan. We’re going to discuss why a home appraisal is still necessary, and how it can affect your real estate transaction.
When you put a home on the market, it’s nearly impossible to foresee whether any interested buyer will want to pay with cash or use financing. This uncertainty makes a home appraisal very important in the buying process. If the homebuyer is financing the home, then an independent appraisal of the home’s current market value is required. Appraisal results determine a home’s value, and therefore should reflect the asking price. A low appraisal on a home can result in a dead deal, because the buyer may not want to purchase at a higher price than its appraised value. If you’re faced with this situation, planning ahead and understanding your options can save the real estate transaction.
In a best-case scenario, appraisals help validate the asking or contract price. However, if an appraisal comes in lower than the price, the Lender’s Loan-to-Value ratio (LTV) uses the appraised value amount, and will only lend a percentage of that lower value rather than lending based on higher contract price. When this occurs, there are a few options:
1) The buyer can put more cash into the deal by paying the difference between the lower appraisal value and the higher contract price. This is not always a bad option, as home price appreciation will often occur and may be worth the investment.
2) If this is financially unviable for the buyer, then it may be possible to terminate the contract since the maximum loan amount is below what is needed.
3) The best alternative is for the buyer and seller to negotiate a deal where the seller may be willing to modify the contract price or offer seller concessions to offset costs. Appraisals can be disputed but this will extend closing timelines. For buyers, Appraisal Contingencies used with Financing Contingencies allow for more options to negotiate if an appraisal comes in low.
When it comes to home appraisals, they are definitely a step worth taking. Now, whether you get the appraisal before or after you list your home is another decision. Many Realtors are capable and highly efficient with their sale comps and pricing abilities. If you’re listing without a Realtor, then an appraisal may be your best bet. Every situation is different, and mortgage professionals have different opinions across the board. What matters is that you feel confident in your asking price if you’re selling, or confident in your purchase price when buying. How you get there is completely up to you.