Congratulations! If you’ve gotten this far it means you’re under contract and have dropped off your first earnest money check. Now it’s time for the appraisal.
You may be wondering “What is an appraisal anyway and when does it occur?”
If you are, you aren’t alone. We get asked this question all the time after we’ve made an offer on a house, had the inspection done and made it through inspection negotiation. The rest of the process including the appraisal, underwriting and title are a bit fuzzy to most people. In addition, you might be wondering:
- Does the buyer or the seller pay for the appraisal?
- Who hires the appraiser?
- Who performs the appraisal?
- Who pays for the appraiser?
- How much does an appraisal cost?
- What happens if the appraisal comes in lower than the purchase price of the home?
These are all great questions! For answers click here for a great article from the National Association of Realtors on Appraisals filled with all of the answers you’re looking for.
So what do you do if you’re the buyer paying $400,000 for a home, but the appraisal only comes in at $350,000? Uh oh. You’ve got a problem and this article does a great job of explaining what your options are in that situation
But what happens if you’re the buyer paying $400,000 for a home and the appraisal value comes in right at the purchase amount price? Is this a good or bad thing? This is definitely a good thing as it means the bank will give you a loan for the full amount of the purchase price.
But what happens when an appraisal comes in high (where the appraisal amount is over the purchase price) and does this happen very often? No, it’s very rare for an appraisal to come in over the purchase price as the bank just needs to know that the property is worth the purchase price so they feel comfortable giving you a loan. Therefore, it’s not common for an appraisal to come in over purchase price. When it does, buyers are often very happy as, essentially, you now have instant equity as we got you a great deal! Occasionally though if your home comes in significantly over the purchase price (say $50K or $100K over the purchase price) it can cause problems. In this scenario where a home comes in significantly over the purchase price, sometimes the underwriter will wonder if there was something shady going on which allowed you to get such a great deal.
So, as the buyer, all in all it’s best when the purchase price comes in at or close to the purchase price.
Who orders the appraisal? Your mortgage lender is the person who orders the appraisal, but will call you to get your credit card at some point in the near future to pay for the appraisal if they haven't done so already. Generally the cost is somewhere between $350 – $500 and is considered part of your closing costs, even though you pay for it up front.
A few tips about the appraisal:
- You do not need to attend.
- The buyer’s Realtor does not attend either. Only the seller’s Realtor attends.
- Once you pay for the appraisal, it generally takes about a week before the appraiser comes out to conduct the appraisal. After that it usually takes another week or so for the report to be written. Expect it take about 2 weeks from when you pay for the appraisal until you receive the report.
- Once the report is written, it’s given to your mortgage lender. Your mortgage lender will then forward it to you and let you know whether the property appraised at the purchase price, below the purchase price, or above the purchase price.
- If the property appraised at the purchase price, nothing further needs to be done and the closing process will proceed forward as planned.
- If the property appraised for more than the purchase price, congratulations! That means we got you a great deal and you’ll have instant equity in your home on the day you move in!
- If the property appraised for less than the purchase price, we have a problem. That means the bank will only give you a loan for the appraised value. In this case, we then go back and renegotiate the purchase price down with the sellers, ideally to the appraisal price. If they won’t come down to the appraisal price, then you can choose to either walk away and get your earnest money back or bring the additional funds to closing. For instance, if the purchase price is $500K, but the appraisal only came in at $475K and the sellers won’t go any lower than $480K you have to decide if you’re going to bring an extra $5K on top of your down payment and closing costs to closing or walk away from the deal.
