Congratulations! Your home has a buyer, and you are now under contract. If your buyer is securing a mortgage, the lending company will require an appraisal of the property in order to proceed. The National Association of Realtors defines an appraisal as an opinion of value for sale price decisions. There are several reasons why an appraisal is an important part of both the selling and buying process. Here’s what it’s all about:
An appraiser’s role. A certified appraiser will begin to determine your home’s value by doing an inspection of the property. They also will research current listings, recent sales data, and municipal records to make comparisons with similar properties in order to determine the home’s appraised value.
Determining mortgage terms. The buyer and their lender are particularly interested to see if the purchase price is in line with the property’s value. This helps them determine the amount of mortgage they will offer. According to the NAR’s Guide to Understanding Appraisals, the loan-to-value ratio is based on the appraised value and helps lenders figure out how much money may be borrowed to purchase the property and under what terms. If the LTV is high, the lender is more likely to require the borrower to purchase private mortgage insurance.
Appraisals are not definitive. While the appraiser is giving a professional opinion, the amount may differ depending on the timing and the individual doing the evaluation. Changing market conditions may be a factor. Changes in market conditions also can dramatically alter appraised value.
There are additional purposes for doing an appraisal. While they are done primarily for mortgage purposes, they are also useful to both a seller and buyer when researching assessed value for property taxes and estimating home values for insurance purposes.