Most mortgages and refinance loans require a new home appraisal to find the fair market value of the home.
A home appraisal helps a mortgage lender to ensure the home is actually worth the amount they are lending.
Appraisals help borrowers, too. After all, no one wants to pay more for a home than what it’s worth.
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What is a home appraisal?
The home appraisal process collects several kinds of data to arrive at a home’s fair market value. Most data points fall into two categories:
- The home itself: A real estate appraiser assesses the home you’re buying. The home’s condition, square footage, number of bedrooms and closets, functionality, landscaping, recent upgrades and its location will affect its market value.
- Local housing market conditions: No property exists in a vacuum. The behavior of the housing market affects a property appraisal. Recent sales of similar homes in the area — known as comparable properties, or “comps” — help real estate appraisers arrive at a property value.
The appraiser should cite both kinds of data in the home appraisal report which goes directly to the lender.
A home appraisal is not the same as a home inspection. Yes, the appraiser will check out the home’s condition but only for the purposes of arriving at a valuation.
Be sure to order an independent home inspection to get a full picture of the overall condition of the home before buying.
Home appraisal checklist
Here’s a list of things a home appraisal will ordinarily check to find the value of a home:
- The structural condition of your home
- The home’s square footage and the size of the lot
- The home’s curb appeal
- The number of bedrooms, closets, and bathrooms
- The quality of the home’s electrical and plumbing systems
- The condition of the basement or crawl space
- The quality of the home’s countertops, cabinets, and fixtures
Also, the appraiser will check out outdoor amenities such as swimming pools, pool houses, permanent sprinkler systems, garages, and driveways.
Appraisal problems that can affect the home buying process
A residential appraisal for a single-family home is a routine part of the home buying process. Mortgage lenders order property appraisals and read appraisal reports every day.
But, sometimes, the appraisal can slow — or even stop — the mortgage approval process.
This can be frustrating, especially for first-time home buyers. But in many cases, borrowers can get their mortgage loan back on track.
Here are some common home appraisal problems:
1. Appraised value is lower than the sale price
Regardless of a home’s asking price or contracted purchase price — and regardless of automated values listed on websites like Zillow — a mortgage company will order an independent appraisal to find the home’s value.
The lender will order an appraisal from a licensed appraiser. If the appraiser’s valuation comes in lower than the agreed-upon sales price, the loan can’t move forward as is.
To get the loan back on track, the seller would have to drop the sales price to the appraised value. Or, the buyer could make up the difference, in cash, by making a larger-than-required down payment.
The second option may be your only way to overcome a low appraisal. But there can be risks involved, too. It would mean you’re paying more for the home than it’s worth. You may even be entering home ownership with negative home equity.
It’s also possible to dispute an appraisal by asking for a reconsideration of value. Your Realtor can help with this, but there’s no guarantee the dispute will succeed.
2. Deferred maintenance on critical repairs
When properties are appraised, they’re evaluated as they are at the time of the appraisal.
This means the property is inspected based on its current condition. The valuation won’t reflect any future home improvements or repairs, even if the seller agrees to make them before closing.
Properties must meet certain minimum standards before a lender will approve the loan. If there is evidence of major deferred maintenance on the property, the mortgage will likely be declined.
One of the most common deferred maintenance items is roof repairs. If the roof appears to be in poor condition in the appraisal pictures, then often lenders will ask for a certification from a roof inspector estimating the remaining life of the roof.
Other deferred maintenance issues that may get flagged by an appraiser include:
- Broken window panes
- Leaking water lines
- Missing handrails
- Outdated HVAC systems
- Noticeable electrical problems
Government-backed mortgages, like FHA, VA and USDA loans, have some additional property standards that conventional loans don’t. For example, all properties built before 1978 require repairs for peeling paint due to lead paint concerns.
Generally, sellers defer maintenance to save money, but delaying repairs can halt the sales process altogether. In fact, lenders will ask that many repairs be fixed before issuing a home purchase loan.
3. Habitability concerns are flagged
Excessive deferred maintenance can jeopardize the home’s habitability which could make the home ineligible for a mortgage loan. This can be particularly true of appraisals for FHA loans, which have stricter requirements.
If an appraiser notices structural issues such as cracks in the foundation, the home’s value can fall dramatically. Cracks suggest unstable settling of the property. This often will prompt an engineer’s report to determine whether or not the foundation is in proper shape.
Foundation repairs can be costly — the average cost is $4,000, while major repairs can cost as much as $10,000. And, if the foundation needs to be replaced, then the cost can be as high as $100,000.
Lenders often won’t approve home loans for properties that need such extensive repairs, but government-backed loans like FHA loans have rehabilitation mortgages available that allow borrowers to finance the home as well as the needed repairs.
Two common FHA rehab loan types: FHA 203(k) Rehab Mortgage and HomeStyle Renovation Mortgage.
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4. Unique property without local comparisons
The appraisal reflects data that compares the market value of your home with similar properties that have sold in the area. The key word here is “similar.”
For example, if you’re buying a duplex and there are no duplexes around for miles, then there are no comparable sales with which the appraiser can determine value.
Extreme examples would be atypical properties like a geodesic dome, log cabin, or barndomineum, which are rare in most areas. These sorts of properties can slow down the appraisal process.
If you’re buying an unusual type of property, talk to your loan officer about the appraisal process before applying for your loan. Your loan officer may be able to find a licensed appraiser who has experience with unusual structures.
5. Declining market in the neighborhood
The appraiser is required to assess the real estate market in the neighborhood by selecting one of three choices: increasing, stable or declining.
If the property is in a neighborhood that has experienced declining values over the previous 12 months, then the lender can ask for more money down, regardless of what the final value may be.
If the borrower doesn’t have the extra money for a larger down payment, then their mortgage could be declined.
Will a bank finance a house with asbestos?
A lot of older homes still have asbestos which is dangerous if inhaled. If your home’s appraiser finds asbestos, will the loan move forward?
The short answer is: It depends. The presence of asbestos may become an issue for government-backed loans with strict minimum property standards.
Most houses built before 1980 have some form of building material that contains asbestos. If the building material isn’t damaged (also known as friable) then the harmful fibers aren’t airborne, which is where the health hazard occurs.
Common building materials that may contain asbestos:
- Insulation
- Floor and ceiling tiles
- Siding
- Roof shingles
- Flooring glue
The biggest health risk posed by asbestos is during remodels or renovations when the asbestos-laden building materials can get damaged and cause the fibers to become airborne.
Laws pertaining to asbestos vary by state. Many require that homeowners test for asbestos as well as have it removed by a licensed asbestos contractor prior to starting any renovation projects.
Why do I need an appraisal to refinance?
When you’re refinancing an existing mortgage loan, an appraisal measures the value of the home, which in turn allows them to calculate the value of your equity — or the part of your home you’ve already paid off.
The appraisal helps the mortgage lender to ensure that it’s not lending more than the home is worth. It can also help to determine the mortgage rate and loan options available to you.
Finally, an appraisal is always required for a cash-out refinance, since the lender is trying to verify how much equity the homeowner has available to borrow.
Though conventional wisdom says you need 20 home equity to refinance, there are loan programs that will allow you to refinance even when you have less equity. For example, both Fannie Mae and Freddie Mac offer programs that allow refinancing with as little as 3 percent home equity (though you’ll need to pay PMI on the refinance loan).
There are a few loan types that can allow a homeowner to refinance without an appraisal, including the Streamline Refinances available to homeowners with VA, FHA or USDA loans. However, they’re only available for eligible borrowers who are looking for the same loan type they already have: an FHA borrower can use only the FHA Streamline Refinance; a VA homeowner can use the VA’s Streamline Refi; and so on.
A home appraisal to eliminate PMI
Even if you’re not refinancing, a home appraisal could lower your monthly payments on a conventional loan. The savings can come from eliminating private mortgage insurance, or PMI.
Conventional loans require PMI as long as you owe more than 80 percent of your home’s value to your lender. This insurance protects the lender from losing money in case of foreclosure.
Once you’ve paid the loan down by 20 percent, you can cancel PMI which could save money on your house payment each month. PMI rates vary, and they’re based on the size of your loan. It’s common to pay $150 or more for PMI each month.
Even if you haven’t paid your balance down to 80 percent of your home’s original selling price, you may have 20 percent in home equity — if the value of your home has increased significantly since you closed on the loan.
The best way to prove to your lender that your home is worth enough to eliminate the need for PMI is to get a new home appraisal.
House appraisal FAQs
What does an appraiser look at in a house?
A licensed home appraiser looks at the home’s condition and location as well as local market conditions. The appraiser will check the general structure and functionality of the home, but only for the purpose of assessing the home’s value. You’ll still need a home inspector to check out the home’s systems and to be sure things like the water heater, air conditioning, and fireplaces are working properly.
What will fail a home appraisal?
Different loan types have different minimum requirements for home appraisals. Government-insured loans like FHA and VA loans tend to have stricter requirements. For example, the VA has its own appraisal process which looks for the VA’s Minimum Property Requirements.
How much does a home appraisal cost?
Appraisal fees vary based on the home’s size and location. Typical appraisal fees vary from $300 to $800.
How should I prepare for a home appraisal?
The home buyer is not involved in the home appraisal process. The seller can prepare by making repairs and removing clutter to make the home more accessible to the appraiser.
How long does a house appraisal take?
The on-site part of the appraisal should take only a few hours to complete. But the appraiser also has to research recent sales of comparable homes and prepare the appraisal report. Lenders often wait up to 10 business days from ordering the appraisal to receiving the appraisal report.
What happens after the appraisal?
After the appraisal, the lender uses the valuation to set the maximum loan size for the home. If your loan requires a 5 percent down payment and the home is appraised at $300,000, the lender won’t issue a loan larger than $285,000, which is 95 percent of $300,000.
What lowers a home appraisal?
Anything from deferred maintenance on the home to cool market conditions can lower a home appraisal. Recent sales in the neighborhood will help determine the market value of the home. So if sales have been slow, or if sellers have been accepting lower offers, the value of all homes in the area can be affected.
Does a messy house affect an appraisal?
No, a messy house will not directly affect the property value. Licensed appraisers are trained to look beyond superficial and temporary conditions, like cluttered countertops and unswept floors, to find the fair market value of the home. However, curb appeal can influence a home’s fair market value.
How to avoid a low home appraisal
A low appraisal can stall your home purchase or refinance loan. If you’re worried about getting a low appraisal, talk to your real estate agent or loan officer before the lender orders the appraisal.
Your Realtor and loan officer should be able to help identify potential appraisal problems that can put your mortgage at risk.
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