Everything You Want to Know About Real Estate Appraisals
You hear a lot about buying a house and it often revolves around mortgages, interest, and credit scores. There is something that is incredibly important when it comes to buying and selling a house that is not talked about until it has to be. That topic is real estate appraisals. It can be something that causes a lender to deny you a mortgage. It can be the turning point for you in deciding if you actually want to move forward with the purchase of a house. Real estate appraisals play a huge role in the home buying and selling process and you read this article to find out as much as you can about them before you proceed with a home purchase.
What Is An Appraisal?
The most important reason for an appraisal is to verify that you are not paying more for a house than it is worth. A bank also wants to know that they are not lending you more money for a house than it is worth. Keep in mind that a house is used for collateral with a mortgage. Lenders prefer that you put 20 percent down on your house when you are purchasing it. This gives them some faith in how risky it is to lend money to you. When you put 20 percent down, you have 20 percent equity in the house, which means you already own 20 percent of it.
A Beginner’s Guide to Knowing The Value of Your House
In that situation, the bank is allowing you to borrow 80 percent of the value of the house. If they have to foreclose on the house because you are not making payments, the lender sells the house to get their money back. The appraisal gives the bank some confidence in the price for which the house should be selling. It helps the lender to protect themselves in the event something bad happens and they have to take ownership of the house.
How Is An Appraisal Determined?
When it comes to real estate appraisals, you should get as much information as you can. Most of the time, your lender is going to be the one that requests and often schedules the appraisal. Every state requires that appraisers must be licensed or certified. They must also be aware of federal regulations and the local area. Appraisers must not work for the lender as they have to be impartial. They cannot have any direct interest or stake in the sale or purchase of the house. Some lenders require appraisers have experience with appraising houses in the area.
The appraisal of a house or property is strongly dependent on the recent sales of similar properties and the market trends. Other items that impact the value of the house are square footage, number of bedrooms, bathrooms, and the amenities in the house. Part of the appraiser's job is to visually inspect the inside and outside of the house. They must make note of all conditions that negatively impact the value of the house. They also note any repairs that are needed. In the report, the appraiser must describe the outside and inside of the house, as well as the neighborhood, and the recent sales that are comparable to the house being appraised. The appraiser gives a complete analysis and concludes the value of the house based on all the above-mentioned factors.
The appraisal also includes a map of the street view of the property and all the sales that were used for comparison. Also in the report, you typically find a sketch of the outside of the house, detailed explanation of the square footage, as well as pictures of all sides of the house. Any other information that is used to determine the value of the house is included in the report. This could include items such as public records, land and tax, and data about sales. Typically, an appraisal will cost several hundred dollars. It is the borrower’s responsibility to pay this fee.
What Should I Know As A Buyer?
As a buyer, there are some key pieces of information about real estate appraisals that you should know. Real estate appraisals are one of the first steps in the closing process. As long as your appraisal comes back around or higher than the price of the contract, then you are good to go. The price on the contract is the price for which you are agreeing to buy the house. If the appraisal comes in below the contract price, it can delay or completely stop the sale of the house. The seller of the house wants the appraisal to come back at the expected value just as much as you do.
If you are the buyer and the appraisal comes back lower than expected, it can give you an opportunity to negotiate the price of the house. The lender is not going to give you any more money than what the house is worth. It is rare for the bank to even give you 100 percent of the value of the house. Remember how I mentioned above, that the closer to the value of the house that the lender lets you borrow means a greater risk for the lender.
Whether You Are A Buyer or A Seller - The Accury Store Is The Place For You.
An appraisal is good for you as a buyer because it helps you understand the actual value of the house in comparison to what you are paying for it. If the seller feels that the appraisal is too low, they may not be willing to lower the price of their house. You can always have a second appraisal done by a different appraiser. You can also present your case for why the value of the house should be higher to the appraiser and that person may agree with you and adjust the value.
What Should I Know As A Seller?
As a seller, real estate appraisals are important to you, too. If the appraisal comes back low and it is correct, that means you have to lower the price of your house, or you will not be able to sell it. There is a slight chance you can sell it to someone who is paying cash because they do not have to have an appraisal. However, most buyers are not going to buy a house based on the seller's opinion of what the value should be. There are federal laws that prevent appraisals from being inflated because that caused the housing crisis back in the early 2000s. If your area has seen a lot of bad house sales, it can lower the value of your house and its appraisal value. If there has been a rash of foreclosures in the area, you may be able to talk to the appraiser and convince that person that your house is worth more simply because it is in better shape.
Mortgages and Appraisals
It is unusual that you would need real estate appraisals if you are not trying to get a mortgage for a specific house. I want to take a few minutes to talk about mortgages because they are an important piece of home buying.
What is mortgage?
A residential mortgage is what you get when you need money to purchase property. This is a loan and as with any loan, you pay back the money over time by making regular monthly payments. Just like any other loan, the lender adds a fee to the loan, called interest, for allowing you to borrow money from them. A mortgage is different from other loans because as mentioned above, you are using your house or property as collateral. That means that if you stop paying on your mortgage, the lender has the right to take your house. You do not own the house completely until you pay the mortgage in full. Below you can take a look at today’s mortgage rates:
The most common type of mortgage that you will find is a fixed mortgage. This means that the rate is fixed and the agreed-upon interest rate remains the same for the entire life of your mortgage. Mortgages usually comes in terms such as 15-year, 20-year, 30-year, and even 40-year loans. The most common are 15 or 30-year terms.
If you cannot afford to put down 20 percent for your mortgage, the lender requires you to have private mortgage insurance (PMI). Lenders look for you to have a higher credit score to qualify for this type of mortgage. The good news is if you have a high credit score, you may be approved with only 3 percent down.
Does An Appraisal Make A Difference For A Mortgage?
Real estate appraisals directly impact the amount of a mortgage you can receive. Your lender is going to approve your mortgage amount based on your qualifications and the value of the house.
If the appraisal changes the expected value of the house, it does not mean you cannot get the mortgage. It means that the lender is going to lend you less money. The lender prefers to stay in a specific loan to value ratio. If the lender gives you less money, you will either need to have a larger down payment, or negotiate a lower price with the seller. In many cases, the seller does not want to accept less for a house. Selling a house is emotional and often sellers believe their house is valuable because of all the memories in the house. That emotion is directly tied to the price, even if they are not aware of it. As a result, it is incredibly hard to get a seller to agree to a lower price.
What Is Loan To Value (LTV) Ratio?
Real estate appraisals can change the amount of money a lender gives you based on the agreed-upon LTV. An LTV is the percent of your house that your mortgage handles. When it comes to examples that involve figures, I like to show you the numbers to make it easier.
When your appraisal comes back in the expected range, you may have a situation like:
You make an offer for a house that is $150,000. You have $20,000 to put down, which means you need a mortgage of $130,000. The lender agrees to let you borrow that money. The house appraises for $150,000.
To determine the LTV:
That equals $130,000.
You need to borrow $130,000 from the lender.
Divide $130,000 (amount you want to borrow) by $150,000 (house value) and you get 0.866. You have to multiply that by 100 to get a percent, which is 87 percent.
You should already know how much of a LTV ratio the bank is willing to have for the house you want to buy. That is typically an agreed upon amount. As long as you stay within that ratio, the lender should have no problem giving you the money for your mortgage.
Mortgage Refinance and Appraisals
Real estate appraisals play a role in a refinance mortgage also. When you refinance your mortgage, you are replacing your current mortgage with a new one. Often times, people do this so they can get a lower interest rate, take out some of the equity in their house, or lower their monthly mortgage payment.
A large number of mortgages come from refinancing. It is best that you have at least 20 percent equity in your house to be able to refinance it. Different lenders have various requirements for refinancing. When you refinance your house, you have to go to closing all over again. That means you have to pay closing costs. Some lenders offer a no-cost refinance. What happens, in this case, is you pay a slightly higher interest rate so that you do not have to pay any money for closing. Whenever you are considering a refinance, you should shop around with various lenders and see what they have to offer. Different lenders have incentives that may be worthwhile to you.
Does An Appraisal Make A Difference For A Refinance?
Real estate appraisals always make a difference. It does not matter if you are buying a house for the first time, or refinancing your house. If your home comes in with a low appraisal value, a lender may not be willing to allow you to refinance your mortgage. Your house must appraise for at least the amount for which you want to refinance your home.
There are some instances where you may not need an appraisal. If you have an FHA mortgage, you can refinance through an FHA program. A low appraisal can be just as devastating for a refinance as it can be when you are making an original home purchase. The major difference with a refinance is this is a house that you already own, or at least have a mortgage for and you are stuck with it. In the case where you want to buy a home when the appraisal comes back low, you can walk away from that house with no obligation.
Conclusion
There are a lot of details that you need to be aware when it comes to buying, selling and appraisals on houses. This article should give you enough information so that you can gain a better understanding of these topics. If you feel you do not have enough information, then you should do a little more research before you run out to buy a house. It is one of the largest purchases you are going to make. You want to be sure that you are making the right decisions for you and your needs. Buying a house can be emotional and it is easy to lose sight of what makes the most sense for you because you are caught up in the emotional aspects of buying a house. If you pay attention to the facts and make decisions based on them, you should make a well educated and thoughtful decision.