You may ask yourself…why is an appraisal necessary? Appraisals are a crucial part of determining the true value of real estate. Most importantly, it is imperative that the true market value of a property is determined when any lending is involved. Throughout this blog you will read on why it is necessary and how it works so that you have a better understanding of the process and benefits.
Why is it necessary?
• When working with lenders they will require an appraisal on your home before
providing a loan.
• Mortgage lenders want to have that certainty of making sure the home or property
value matches the requested loan amount. For most loans, the home serves as the only
collateral for the mortgage.
How it works?
• Once the appraisal is complete, the lender will only approve a loan for a percentage of the property’s value, which was determined in the appraisal report. If this is a sale, then it will be a percentage of the sale price if the appraised value is at or above the sale price.
• If needed, the buyer then can make up the difference in the loan amount and the purchase price with cash, if they decide to move forward in the process. Sometimes, the seller will finance a portion of the price separate from a bank loan. However, this trend has decreased each year.
Banks go through all of this because they have the most money on the line. Before lending to a borrower, they want to know whether the property is worth the amount of money being borrowed to purchase it. Make sense? They also want to be sure that if for some reason the borrower stops making the necessary payments to the mortgage, the bank can then repossess (foreclosure) the house and sell it in order to collect the debt.
For instance, if the appraisal comes back for less than the contract price, then the bank has sidestepped making a loan for more than the market value. Remember, the appraiser’s client is the bank, not the homeowner, borrower or Realtor. The appraiser’s job is to value the bank’s potential collateral, not to facilitate a sale or refinance.
Other details that are examined from the lender are the borrower’s debt-to-income ratio,
credit score, etc. For example, if the borrower is fronting 50% of the cost of the home
that then means less risk for the bank. But if the borrower has a small down payment and
is borrowing 100% of the cost of the property, that is a high risk for the bank.
