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An important, but often overlooked, part of buying a home is the appraisal. Unlike a home inspection, which helps you decide if you want to buy a home or not, a home appraisal is a way for lenders to determine the value of your property. Just because you’ve been pre-approved for a mortgage doesn’t mean your lender will approve your purchase, especially if they think you overpaid! Read on to learn more about what a home appraisal is and why it’s required by most lenders.
A Conditional Offer
One of the most common conditions included in an offer to purchase is a financing condition. Once your offer has been accepted by the seller, you’ll want to contact your lender as soon as possible to request a home appraisal. You can shop around for lenders willing to cover the appraisal fee, however, home appraisals typically cost between $250 and $350 – a minimal closing cost, when you think of what it could be worth. Just make sure your lender performs an appraisal before you waive the financing condition.
A Requirement
A mortgage is likely the largest loan you will ever take out, so your lender will want to do its due diligence before approving your mortgage. The home appraisal provides the lender with the reassurance that your property is worth the selling price. Even though you might be willing to pay $550,000 for a house, your lender might say it’s only worth $450,000. And in the event that you default on your mortgage, your lender wants to know that they would be able to sell your home and recover the amount loaned to you.
Appraisal Methods
The two most common appraisal methods lenders use to calculate the value of residential properties are: the direct comparison approach and the cost approach.
The direct comparison approach compares three or four similar properties that have recently sold in your neighbourhood. This is similar to when homebuyers look at comparables to determine a reasonable offer price, or when sellers use comparables to determine a listing price. Factors such as the lot size, building type, house age, livable floor area and room count are all considered.
If you’re purchasing a new house from a builder, the cost approach will most likely be used to determine your home’s value. The cost approach looks at how much it would cost to rebuild your house if it were destroyed. By adding the cost of construction, subtracting any depreciation and adding the value of the land, your lender can get a rough estimate of what your home is actually worth.
What To Do If You’ve Overpaid
If you’re been pre-approved for a mortgage of $400,000, but your appraisal says a particular property is overvalued and is only worth $350,000, you’ll have to come up with the extra $50,000 yourself. Your other option is to dispute the appraisal, which involves requesting a copy of the appraisal and sitting down with your realtor to look for any errors or omissions. If that doesn’t work, you can pay to get a second appraisal done. Finally, you can also look into switching lenders.