A home appraisal is an opinion of the home’s value based on recent sales (in past 12-months) within close proximity of your home. This opinion of home value is completed by a certified appraiser who will look at it from an unbiased viewpoint.
Why do mortgage lenders require an appraisal? Lenders want to make sure a home is worth money being lended as home becomes collateral. This means if you decide not to repay your loan, lenders can recoup their money by foreclosing and selling your home. Once you are in contract to purchase a home, your lender will contact an appraiser to complete a Uniform Residential Appraisal Report.
How do appraisers value the home? Appraisers will pull records for your home, make a visit to home (take pictures and notate any repairs needed) and then find very similar homes sold in your area. Appraisers will find three homes with similar characteristics such as: age, square footage, bedrooms, bathrooms, basements, garages, acreage, etc. They will adjust these three homes to match your home by increasing/decreasing value for each characteristic evaluated. Once appraisal is completed, appraiser will send Uniform Residential Appraisal Report to lender. Since you are technically paying for the appraisal (costs included in fees), you can request a copy from lender. To see a sample of a Uniform Residential Appraisal Report: https://www.fanniemae.com/content/guide_form/1004.pdf
What if appraisal value is MORE than purchase price? This means a home is worth more than purchase price and loan should go through for original purchase price in contract. On the other hand, this home may not have been listed at appropriate selling price, unless it was for a quick sale.
What if appraisal value is LESS than purchase price? Lenders may not lend you enough money to buy this home (typically lend 80% of appraised value). This means you will have to bring more out-of-pocket funds (i.e. cash) to the closing to fill the gap or renegotiate the purchase price with sellers. It is up to sellers whether or not they want to negotiate price. If sellers chooses not to negotiate, then additional funds will be needed to close or contract “dies” and the home is re-listed.
Overall, appraisals are an opinion of a home’s value for lending purposes and is part of the process when purchasing a home. If you are listing your home, your real estate professional can also provide a high level estimate of the value of your home through a Comparative Market Analysis (CMA) to determine listing price range. If you are buying a home, your real estate professional can review recently sold homes in area to determine an estimated value for offering a purchase price. For more information or to find a certified appraiser visit: http://www.appraisers.org