What exactly is a mortgage appraisal?

Both buyers and sellers have asked for explanations of mortgage appraisals.  Why are they so important?  Who pays for them?  When are they done?  How are they different from a home inspection?   Following are the answers.

What’s the difference between a home inspection and a mortgage appraisal?

Great question!  Both inspectors and appraisers come to the house and look around.  Both provide reports.  Both charge a fee.  But…  they are very different!

  • Inspection:  A home inspector is hired by the buyer to go over the home with a fine tooth comb and find any and all issues that either are or may be a problem in the future.  An inspector usually spends about 2-3 hours in the home.  He or she runs water to check for leaks, climbs up in the attic and out on the roof, performs water tests and radon tests and pest inspections, checks landscape grading and siding and … well, he basically checks everything.  The results are used by the buyer to determine whether to move forward with the purchase or whether to ask the sellers to fix safety or structural issues.  The inspector is not hired to tell a buyer what to do, but to point out pertinent facts.
  • Appraisal:  The mortgage appraiser is paid by the buyer (sometimes as part of closing costs, sometimes up front, sometimes at day of appraisal) but this is not an optional purchase; it’s part of the mortgage process.  The appraiser works for the bank, and he/she is responsible to do two major things — determine the market value for the home, and determine whether the specific mortgage company/mortgage type will “approve” the purchase of the home.  The appraiser usually spends no more than 1/2 hour to perhaps an hour at the home and takes a lot of pictures, and focuses only on a certain set of issues the bank has determined to be critical.

When is a mortgage appraisal done?

After a contract for sale is signed and submitted to the mortgage company, the mortgage application process gets underway.  Usually at some point between one to three weeks after formal mortgage application, the buyer’s agent will receive a call from the mortgage appraiser asking to set up an appointment.

What happens after the mortgage appraisal is completed?

The appraiser will submit his or her report to the bank.  There are about four huge stepping stones in any home purchase — the negotiation/offer process, the inspection, the contract signing, the mortgage approval and as part of that, the appraisal.  When the appraisal is submitted, the bank will then have information they require regarding the market value of the home, and the viability of the property condition.  The underwriting department will share that information with the buyer and decisions will need to be made about next steps.

Why is the appraisal important?

Market Value:  If the appraisal indicates the market value of the home is less than the accepted offer price of the home, the mortgage company will only provide a mortgage based on the appraisal price, not the accepted price.  For example, let’s say the negotiated price was $250K, the appraised market value is $240K, and the buyer was looking for 90% financing.  The buyer was originally expecting a mortgage in the amount of $225K ($250K times 90%), but after the appraisal, the bank will only provide a mortage of $216K ($240K times 90%).  The difference of $9K needs to be made up somewhere; either the seller agrees to reduce the price, the buyer comes up with the difference, the seller and buyer both contribute, or the deal falls apart.   A low appraisal value will impact the deal in some way.

Home Condition:    Different types of mortgages have different requirements regarding the condition of a home.  For example, an FHA mortgage is dependent on there being no chipping paint of any kind.  If there IS chipping paint on the outside or inside of the home, the appraiser will indicate this on their report to the underwriting department.  The underwriting department will then make the mortgage contingent upon getting the paint chip issue fixed.  Again, these issues could be show stoppers if the buyer and seller cannot come to agreement on who/how items will be fixed.  Assuming the issue is fixed, the bank will need to send the appraiser out again to ensure the work was done to their satisfaction.  This could add weeks to the process.

In summary

The mortgage appraisal is one of the most important steps required prior to getting to the closing table.  Both buyers, sellers, and their REALTORS(r) wait with baited breath for the results, and sigh in relief when the appraisal comes back with both thumbs up.

If you have any questions, feel free to contact me on 914-419-0270!


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