When you purchase a home and if you are obtaining a mortgage, your lender will require you to obtain a mortgage. (If you are buying a home and paying all cash, you also have the option to get an appraisal -- click here to read about obtaining a mortgage as a cash buyer.)
The home appraisal is different from the home inspection, and you may be wondering, "WHO orders and completes the appraisal, WHAT is the appraisal, WHEN does it occur, and WHY do I need one?"
If you are asking yourself these questions, you aren’t alone. They're very common, and as we have said throughout our site, we love it when our clients ask questions and get to know the process better. Most people know an appraisal will happen, but that's about the extent of their knowledge -- and that's okay. The appraisal, underwriting and title search process are a bit fuzzy to most people. We'll do our best here to answer most of your questions.
Who orders and conducts the appraisal? Your mortgage lender orders the appraisal through their Appraisal Management System (AMS), and it is a “blind” ordering process; in other words, by law, the lender does not know which appraiser was assigned to the property and cannot have any contact with the appraiser. This keeps the process fair for all parties -- the lender cannot have any influence on the appraisal value, hence affecting the ability for the property to appraise in order for you to get the mortgage.
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 to these questions, click here for a great article from the realtor.com on appraisals.
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. In Georgia, our real estate contract has a financing contingency exhibit that we use for all buyers who are obtaining a mortgage to purchase a home. That financing contingency exhibit -- regardless of whether you are seeking a conventional loan or FHA, VA, or USDA financing -- has an appraisal contingency built into it (there is even an appraisal contingency option for buyers paying all cash that is built into our All Cash Exhibit). In short, that appraisal contingency stipulates that, if the property does not appraise at or above the agreed-upon contract purchase price, the buyer then asks the seller to reduce the price to the appraisal value. If the seller cannot or will not reduce the price, and no other agreement can be reached by all parties agree that the buyer may terminate the contract with no penalty. The appraisal contingency protects the buyer in the event of a low appraisal, so the buyer is protected from potentially overpaying for the home.
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. In fact, this is a fairly common occurrence: it is the appraiser's job to justify the contract price (not to establish fair market value), so that the mortgage lender is assured that the value is correct and the buyer, at this price, is a good risk.
Finally, what happens when an appraisal comes in high (where the appraisal amount is over the purchase price) and does this happen very often? First off, no, it's not common; in fact, 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 (again, it's only the appraiser's job to justify the contract price, not to establish fair market value, so the home may very well be worth more than you're paying). However, when that appraisal value does come in over the contract price, buyers are often very happy as, essentially, you now know that you have instant equity, as we got you a great deal!
Still have questions? Reach out to us anytime at 404-994-2181 or Maura(at)BuySellLiveAtlanta(dot)com
