Hot topic of the day is how banks are currently rejecting a huge volume of deals. I've come across at least five buyers (not mine thankfully) that have had their financing rejected.
One of the key reasons comes down the banks mitigating their risk which brings me to appraisals.
There’s a lot of confusion about the difference between the role of an inspector and an appraiser.
So here’s everything you need to know about the appraisal process (in 10 minutes or less).
If you buy a home with a loan, the bank will send an appraiser. Unlike an inspector, the appraiser's sole purpose is to protect the bank’s investment in your home. The bank wants to know that the buyer isn’t overpaying, so if the buyer ever defaults on the loan, the bank can foreclose on the home and recover its investment.
To determine the home's value, the bank’s appraiser will compare properties, similar to yours, that have recently sold in your neighborhood.
These are called comparables, or “comps” for short. In addition to comps, the appraiser will also consider things like the home’s condition, age, and size to determine its value. Once the value has been determined, you’ll receive an appraisal packet with all of the details.
Here are the 4 main components of an appraisal:
#1 A Walk-Through (Or Drive-By)
The bank’s appraiser will walk through the entire house to get an idea of the overall condition. They’ll also confirm the tax records and note any upgrades done to the home.
#2 Home Details
After the appraiser completes the walkthrough, they’ll compile all the details of the house into their appraisal software. They’ll enter important details like square footage, room count, bathroom count, and measurements.
#3 - Comparables
The appraiser will find comparable homes that have sold recently in the area. They’ll note all of the similarities to your home and include pictures from the MLS.
#4 - The Evaluation
The most important part of the appraisal packet is the evaluation. This evaluation is the amount that the appraiser deems the home is worth. This dollar amount will be sent to the bank, the buyer, and the seller so all parties know how much the bank is willing to lend.
If the appraisal comes back higher than the agreed-upon price, the buyer will have peace of mind that they aren’t overpaying for the home. But the seller may not be so happy - and attempt to back out of the deal to get more money.
On the contrary, if the appraisal comes back lower than the agreed-upon price, then the buyer may feel like they’re the ones getting the raw end of the deal - and demand that the seller lowers the price - which means less money in the seller’s pocket.
The ideal scenario is to agree on a price that aligns with the home's fair market value, so it’s a win-win for both parties involved. This is why it’s so important to have a great real estate agent on your side. A good Realtor® can price the home correctly, to begin with, and communicate the value to the appraiser throughout the appraisal process.