Today, we’ll talk about appraisals, what they are and how they’re used. When a bank lends someone money for a mortgage, they want to make sure it will be a good investment for them.
As a buyer, even if you are approved for a larger amount, the bank still won’t lend you the money if they don’t think the house is worth enough to cover the mortgage. Working with an experienced broker can make all the difference when it comes to pricing your home or making an offer on one.
What are appraisals?
First, let’s talk about what an appraisal is and how it’s used.
When someone makes an offer on your home, and they’re getting a mortgage from the bank to do so, in most cases the bank will require an appraisal of the home before they’re willing to lend the buyer the money. They want to make sure that in the event that the buyer can’t make their payments, that they could reasonably sell the home in order to recoup their loan amount.
So something that started happening more often early on when prices started going up quickly in our area is that someone might make an offer of $600,000 on a home that was listed at $500,000. In this case, the bank may come in and say that this home is only worth $550,000. And they’re not willing to accept the risk for the difference, which means the buyer has to pay an additional $50,000 as their down payment for the bank to accept this loan.
When the bank appraiser assesses the property at a much lower value than the offer, the buyer would need to make a much larger down payment on the home than they had been planning to make to keep the loan from faulting. This would then cancel the sale, and the seller would have to try and get one of their other potential buyers back to the table.
And that applies even if the buyer was pre-approved for a larger amount, the bank still won’t lend you the money if they don’t think the house is worth enough to cover. Suffice to say this causes a lot of stress when this happens.
The good news
The good news here is that banks have adjusted very well to the increasing prices and fully understand what homes are valued at in this new market. So what we’re seeing now is that it’s super rare for a bank to evaluate a property lower in cost of sales.
This is #AskPete. If you have any real estate questions, feel free to send them and I will get you the answers. Or stay up to date on the latest tips for real estate buyers and sellers by clicking the YouTube button below: