We all know that feeling …
When you finally found your dream home after months of searching and almost giving up. It is indeed an exciting and happy time, but finding the perfect house isn’t a “home run” just yet. It’s more like the first base really. After all, buying a home is a huge step in most people’s lives! It is a process with certain steps that must be taken carefully. It may seem daunting at first, but if you as a home buyer ask the right questions and get the necessary the help, then you can make the process smoother.
Examining Mortgages and Appraisals
Unless you have the cash stashed somewhere, the next logical step for you to take is to get a mortgage. Don’t worry… you are not alone. The majority of buyers in the US market apply for a mortgage when they are purchasing a home. In most cases, before a bank or lending company grants your request for a loan, they require an appraisal to be made on the said property.
But what is an appraisal? Who does it? And why is it necessary?
To answer these relevant questions, here are the 5 basic facts every home buyer must know about home appraisals:
- Banks and lending companies almost always NEED an appraisal before granting a loan to a home buyer. But why?
An appraisal is an opinion of market value of the home or real estate property. The bank wants to assure that the home is at least as valuable as the contract price.
But why do banks need this assurance?
Unfortunately, it is a known fact that not all buyers can fulfill their mortgage obligation. Borrowers, for whatever reason, may stop paying the bank the promised amount at the set time. When this happens, the banks may try to salvage their considerable investment by trying to sell the property. But if the property value turns out to be way less than the amount that the bank lent to the borrower, then the bank loses! Lending thousands or millions of dollars comes with this risk, so banks need a way to secure their investment. This is why an appraisal is so important to them. Remember that banks want to make sure their investment is secure, and the appraisal is key to that security.
- Certified independent appraisers do the appraising NOT the bank.
Because an appraisal essentially protects the bank’s investment; they normally would order the appraisal. However, despite making the order, they cannot execute it. The appraising is done by a third party to ensure appraisal remain objective, neutral, and accurate.
This leads us to the next fact.
- Appraisals may protect home buyers.
Even though the appraisal is ordered by the bank, the buyer can get a copy of the appraisal and review it. Many contracts have a mortgage contingency or appraisal clause, stating the buyer can get their earnest money back if the home does not appraise for a certain amount. This helps buyers if they offered to pay too much. They can move on or try to renegotiate if the appraisal value is lower than the contract price.
- An appraiser is not some random Joe.
You cannot just get your uncle to verify the market value of a home just because he is a contractor, a flipper or in the real estate business. In fact, real estate agents, even those who are at the top of their game, cannot take over the appraising process. Appraisers are highly-trained professionals who are certified or licensed by the state. We have gained a specific set of skills, knowledge and experience that enable us to value a home in a fair and objective manner. Appraisers are regulated and are required to get continuing education. Misleading and biased reports do not go unnoticed or unpunished. So, trust that most appraisers are doing their best to perform their job because you are not the only one looking after them.
- You don’t have to conduct your own independent appraisal
Based on our experience, you probably do not need a separate appraisal in most cases. If a buyer has a real estate agent, the agent should be able to educate the buyer regarding sales in the neighborhood. If for some reason, the agent is not able to do this, then yes – it might be a good idea to get an independent appraisal.
Another scenario where an independent appraisal may be helpful is when the subject property is unique and/or there are very few similar homes that have sold recently. This would take in depth analysis that goes beyond what is typical. In this case, an experienced appraiser may be able to do this for you. It is also important to note that if you wish to have an independent appraisal, this report will not be accepted by the bank. The bank has to order the appraisal by someone on their approved list.
The appraisal process is not a hurdle for home buyers. Just as it is useful to the bank or lending companies, it is also incredibly beneficial to home buyers.
A home is one of the largest purchases, so it would make sense to determine what a fair market value is.