Main Content

How a Home Appraisal Can Make or Break Your Mortgage

a big brown house Buying a home often requires some serious haggling between buyer and seller to arrive at a price they’re both willing to accept. But even if you reach an agreement, the negotiations may not be over. If you’re a buyer who needs a mortgage, most lenders will require a home appraisal. So that means you’ll need to get one more opinion on how much the property is worth. Lenders require a home appraisal before they’ll provide a loan for the simple reason that the home serves as collateral. If for some reason you end up unable to make your mortgage payments, the lender will have to foreclose upon your home, then sell the property to recoup its costs. So it makes sense that it would want to make sure the property is worth that large chunk of change it’s handing over! If all goes well, the home’s appraised value will end up the same as what you’d agreed to pay. But it could also end up higher—or lower—and this has ramifications for the whole deal. In this fifth installment of our Stress-Free Guide to Getting a Mortgage, we walk you through everything you need to know about this crucial step and how to handle whatever news comes your way.

What appraisers do

To assess a home’s value, an appraiser considers these main criteria: location, structural condition, additions or renovations, and recent sales of comparable homes, or comps. Comps play the most important role when determining value, says Rick Phillips, an appraiser and real estate agent in Vienna, VA. “We’re looking for homes sold within the last six months that are equivalent in the numbers of rooms, square footage, upgrades, and location to the home that’s being purchased,” he explains. If a comp isn’t an exact match—which is typically the case—an appraiser will make adjustments in order to fairly assess the value of the property you want to buy. For example, if a recently sold home has four bedrooms and the home being purchased has only three bedrooms, the appraiser will make a market-determined deduction on your home’s price. A typical property appraisal costs around $300 to $500 and is usually paid for by the buyer upfront. But although the appraiser is hired by the buyer, “the appraiser doesn’t represent the seller or the buyer,” says Joe Parsons, senior loan officer at PFS Funding in Dublin, CA. And although an appraiser works to protect a lender from entering a bad deal, he doesn’t work for the lender, either. He is merely there to give an unbiased opinion about the value of a home.

How appraisals affect the sale

If the home appraises for the agreed-upon purchase price, you’re one step closer to settlement. If the appraisal comes in higher than what you’re paying, that’s even better. For example, if you’re paying $500,000 for a home and the appraiser says it’s worth $515,000, you’ve instantly gained $15,000 in equity. But if the appraisal comes in lower than you’d agreed to pay for the home, that could cause trouble. Low appraisals tend to occur in hot housing markets, where buyers are often forced to pay above market value for a home. The only problem is a lender won’t loan more than a home’s appraised value, which could leave the buyer to cover the difference, says Chris Dossman, a real estate agent with Century 21 Scheetz in Indianapolis. But if a buyer isn’t willing or able to do that, there are options:
  1. Negotiate with the seller. If the home doesn’t appraise for the contract price, the seller may agree to lower the sales price so the deal can go through. Dossman says this is the most common outcome.

  2. Appeal the appraisal. Sometimes called a “rebuttal of value,” an appeal involves your loan officer and real estate agent working together to find better comparable market data to justify a higher valuation. “Appraisers aren’t perfect,” says Parsons. “They make mistakes.” If you file an appeal, the appraiser will review the information and then make a judgment call on whether or not to adjust the valuation.

  3. Order a second appraisal. “It doesn’t happen very often, but it does when a buyer just absolutely has to have the property” and they believe the first appraisal wasn’t accurate, says Dossman. The initial appraisal might be significantly off base if, say, the appraiser overlooked a good comp or wasn’t familiar with the local housing market. Granted, if the seller is equally committed to keeping the deal alive, you might be able to persuade her to cover the costs of the second appraisal.

  4. Walk away. “It’s a bummer, but it may not be worth overpaying for a home,” says Dossman.
This is why, as ominous as the appraisal process might seem, home buyers should see it as a safety measure that keeps them from entering a bad deal. To find an appraiser, you can ask your real estate agent for recommendations or search by ZIP code at the Appraisal Institute. Credit: Daniel Bortz | Dec 15,2016,