Banks require an appraisal on a home before they’ll approve a mortgage loan because the property is the underlying asset that serves as collateral for the loan. A lender will only approve a loan for a property that appraises for the full sales price of the home or more.
The Home Appraisal Process
An appraiser determines a home’s appraised value by looking at factors such as square feet, number of bedrooms, number of bathrooms, the location of the property, and the age of the property. Any improvements made to the home, as well as market conditions, will be taken into account. The appraiser then compares the data on your home to other comparable properties’ data and the market to arrive at your home's value.
Because the bank ordered the appraisal, per federal regulations, the appraiser cannot discuss the findings with you unless the bank gives written permission. Per the requirements of The Consumer Financial Protection Bureau, your lender will provide you with a copy as soon as the mortgage company receives it (or at least three days before closing.) Although you may waive your right to receive a copy of the appraisal, it’s good to review it so that you understand how your lender is determining the amount of your loan.
You and your realtor should review the report to see which homes were chosen for comparison, and to make sure the appraisal includes accurate information and takes into account intangible things that can add value to a home, such as location in a highly-rated school district.
What Happens if Your Home Appraisal Differs from the Sale Price?
If the appraisal of your home comes in at a higher price than what you’re paying for the property, you have immediate equity in the home. If your house is appraised at a lower price than the price to which you’ve agreed, you and the home seller will have to adhere to the contract negotiated. However, if your contract is contingent on an appraisal, you have the option to withdraw your offer and have your earnest money deposit returned to you.
If you waived the house appraisal contingency or would like to purchase the home anyway, you can renegotiate the contract if the seller is willing. If not, you have a couple of options to proceed:
- Put down additional money to make up the difference between the appraised value and your purchase price.
- Challenge the home appraisal with documentation from your realtor. However, any communication with the appraiser must go through the lender. As discussed above, according to federal regulations the appraiser cannot directly discuss the appraisal with you, as it was ordered by the bank.