What if the appraisal is too low?
Appraisals are playing a much more important role in whether homebuying deals go through.
This post comes from Jeff Brown at partner site MainStreet.
It was only a few years ago that the appraisal was little more than a technicality on the path to obtaining a mortgage. Now it can be an immovable roadblock. So what can a buyer and seller do to minimize the chances a low appraisal will block a loan?
The trick, says HSH Associates, a mortgage data firm, is to make sure the appraisal is accurate -- and to understand just what the lender wants to know.
When home prices are rising, appraisals aren't much of a problem, because if trouble arises there's a good chance the homeowner or lender will be able to sell the property for enough to cover the mortgage debt. Lax lending standards made the appraisal even less of a problem in the housing boom a few years ago.
Now standards are tight, and lenders worry that another dip in home prices could weaken the home's value as collateral. Foreclosures and other "distressed" sales make price forecasts nearly impossible. (Post continues below.)
To make matters worse, HSH says, many lenders have taken to using appraisal management companies, which sometimes hire appraisers who don't know local markets well enough. In a nervous environment, appraisers may prefer to err on the safe side, setting prices too low.
Sellers and buyers who want to play defense should start by understanding that lenders are not primarily concerned with the home's sales price, HSH says. More important to them is to be sure the appraised value exceeds the loan amount, since that's what the lender has at risk.
If the appraisal falls short, the buyer's simplest option is to increase the down payment to reduce the loan amount below the appraised value.
Of course, the buyer can also use a low appraisal to try to renegotiate the sales price. Most sales contracts provide for canceling the deal if the buyer cannot get a mortgage of a specified amount, and sellers only hurt themselves by holding out for prices that appraisers won't support.
Buyer and seller should also do their own research by studying recent sales of comparable homes on sites like Zillow.com.
In addition, the seller should alert the appraiser to factors like improvements that make the home more valuable than the comparable sales data suggest, HSH says, and sellers should be on hand during appraisals to answer questions.
The buyer, who typically pays for the appraisal, has the right to review the paperwork and should do so. Make sure, for instance, that the comparable sales used by the appraiser to calculate values are really comparable. Good comps involve sales from recent months of similar homes nearby.
But even if all those criteria are met, a home might not be really comparable. A home on a noisy corner might be worth less than an identical home in a quieter spot a few doors down.
If all else fails, the buyer can request a second appraisal, HSH says. It suggests that the buyer prod the lender to select an appraiser who specializes in the local market.
More on MainStreet and MSN Money:
Well written article with a lot of accurate information. Being on both sides of buying/selling market, everyone knows that as a seller, you want your comps high, where as buyer is hoping for low comps. Each side can do their homework first, by coming into the offer process armed with their own set of comps. Most realtors do their homework when showing a house to prospective buyers, along with comps for the house/area.
Again, very informative article.
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