1) An appraisal is an unbiased professional opinion of a home’s value. Appraisals are almost always used in purchase-and-sale transactions and commonly used in refinance transactions. In a purchase-and-sale transaction, an appraisal is used to determine whether the home’s contract price is appropriate given the home’s condition, location, and features. In a refinance transaction, an appraisal assures the lender that it isn’t handing the borrower more money than the home is worth.
2) Lenders want to make sure that homeowners are not over-borrowing for a property because the home serves as collateral for the mortgage. If the borrower should default on the mortgage and go into foreclosure, the lender will sell the home to recoup the money it lent. The appraisal helps the bank protect itself against lending more than it might be able to recover in this worst-case scenario.
When you’re buying a home and are under contract, the appraisal will be one of the first steps in the closing process. If the appraisal comes in at or above the contract price, the transaction proceeds as planned. If the appraisal comes in below the contract price, however, it can delay or derail the transaction.
Chances are neither you nor the seller wants the transaction to fall through. As the buyer you have an advantage, in that a low appraisal can serve as a negotiating tool to convince the seller to lower the price. The bank won’t lend you or any other prospective buyer more than the home is worth. In fact, a maximum of 80% to 97% of the value is typical, depending on the type of mortgage and the borrower’s qualifications.
As a seller, a low appraisal, if accurate, means you will have to lower your home’s price to get it sold. Holding out for an all-cash buyer who doesn’t require an appraisal as a condition of completing the transaction is unlikely to net you a higher sales price. No one wants to overpay for a home.
Unfortunately, recent distressed sales in your surrounding area can lower your home’s appraisal value. If you feel that your home’s value has been dragged down by the sales prices of nearby foreclosures and short sales, you may be able to convince the appraiser that your home is worth more if it’s in significantly better condition than those properties. Sellers should also know that federal guidelines intended to eliminate the inflated appraisal values that contributed to the 2008 housing crisis sometimes cause appraisals to come in below fair market value and can make low appraisals difficult to challenge.