What to Expect During the Home Appraisal Process
So, your offer has been accepted, you’ve completed your home inspection and applied for a mortgage. Congratulations! Things are coming together nicely and you’re one step closer to owning a home.
At this point in the process, your mortgage application will be submitted to processing in preparation for underwriting, where an underwriter will then assess your creditworthiness by judging your willingness (credit history) and ability (income and assets) to repay the mortgage loan, as well as the collateral being offered to secure the mortgage—which in this case is the home itself.
Since the home will be used as collateral for the loan, an appraisal of the property will be needed to determine its market value and ensure the value of the home supports the loan amount. Having an accurate appraisal of the home’s market value is required for the lender to determine the maximum loan amount and derive the loan-to-value (LTV) ratio, which we’ll touch on again later in this post.
To explain the home appraisal process in more detail, I invited Thomas R. Kennedy III, vice president at Broad Street Valuations, Inc., an independent nationwide appraisal management company specializing in residential real estate appraisals, to explain how a home appraisal is conducted and what factors are considered during the process. Here’s what he had to say:
Ordering the appraisal. The appraisal process is fairly hands-off, meaning your mortgage company and real estate agent will coordinate many aspects of the home appraisal process for you. While your loan is in process, the lender will order an appraisal on your behalf, at which time an independent, third-party appraisal management company will select an appraiser to evaluate the home.
Scheduling the inspection. A real estate appraisal should not be confused with a home inspection. While home inspectors assess the home for potential defects, appraisers evaluate the home’s major characteristics, materials used for construction and the current condition of the home. Once the appraisal has been ordered by your mortgage company, the appraiser will contact the listing agent to obtain authorization to access the property and coordinate a time for the appraisal inspection to take place.
Determining the opinion of market value. During the appraisal process, appraisers will spend time evaluating the major features of the property (location, above grade square footage, foundation, number of bedrooms and bathrooms, age, garage, upgrades, lot size, etc.) and assess the materials used to build the home, as well as the property’s current condition, to determine its market value. While there are many factors that go into determining the market value of a home, appraisers must at a minimum complete the following tasks:
- Perform a complete visual inspection of the interior and exterior areas of the home
- Inspect the surrounding neighborhood
- Inspect each of the comparable sales from at least the street
- Research, verify and analyze property data from reliable public and/or private sources
- Report analysis, opinions and conclusions in the appraisal report
Creating the appraisal report. Once the appraiser has performed an inspection of the property and completed their valuation research, they will compile an appraisal report—which typically takes two business days after the inspection, depending on the complexity of the report being generated. After the report is complete, they will send a copy to the mortgage company responsible for originating your loan. This document will outline the information used to determine the home’s value. Your lender will provide a copy of the appraisal report to you.
Using the appraisal in negotiations. The market value of a home represents the most probable price a property should bring in a competitive and open market. It may differ from the agreed upon purchase price. If the home appraises for less than the contract price, it is not uncommon for buyers to consult with their real estate agent about renegotiating with the seller. In this scenario, there are three common outcomes:
- The buyer can agree to pay the difference. When the appraised value is less than the purchase price, it will change your loan-to-value (LTV) ratio. Since the mortgage lender will only calculate the LTV ratio based on the appraised value, the buyer will be required to bring a larger down payment to closing to cover the agreed upon contract price.
- The buyer can write a counteroffer at something less than the original contract price. In this scenario, some sellers will agree to reduce the purchase price. However, the seller is often not obligated to accept the counteroffer.
- The buyer of the home may not purchase it at all. In some cases, the buyer may decide to forego purchasing the home.
There are many things happening behind the scenes to move your loan throughout the mortgage process. A home appraisal report is just one of the many documents that will need to be collected in preparation for underwriting. While this is not a comprehensive overview of the home appraisal process, it does outline many of the main factors that go into determining a home’s market value.
Have a question about the appraisal process? Leave a comment below, and we’ll provide you with an answer.