Over the last few years, we have seen home prices drop and appraisals have been frustrating - especially for those trying to refinance. Now we are looking at home prices rising - what is going to happen with appraisals?
Appraisers look at homes that have sold and closed within 6 months and ideally within 1 mile of the subject property. That is the ideal -however, it doesn't always happen that way. As home prices increase, it will be harder for appraisers to find sales to use for comparisons. An appraiser uses at least 3, but typically 6 homes to compare to the property he is appraising. He needs the "comps" to be the same type of home and about the same square footage. He also wants the same number of bedrooms and bathrooms. If the home has more bedrooms or bathrooms, he will adjust the value accordingly.
So what does happen if your home doesn't appraise high enough? There are three options.
- The buyer brings in more cash and the down payment is adjusted to meet the new loan to value limits
- The buyer and seller re-negotiate the sales price
- The buyer does nothing and cancels the purchase agreement
Sometimes the real estate agent can find different homes that have sold that maybe the appraiser didn't use or didn't know about. There are some homes that are sold and not on the MLS - a listing that most appraisers use to find their comps. In that case, you may be able to get the appraiser to increase the value of the home.
As you are looking at new homes, make sure you talk to your real estate agent about the homes that are in the area and what they have sold for. We are seeing many multiple sales (more than one person putting an offer in on a home) and so people are paying more than the listing price. As this happens, it will be harder for an appraiser to come in with a value at the sales price. You will want to be prepared for a low appraisal in that situation.
Lenders do not have any say in who the appraiser is anymore. Most mortgage companies use an appraisal service and we are not allowed to talk to the appraisers. This can make it more difficult to deal with home values and appraisals in a rising market. The HVCC law wants to make sure that loan officers are not coercing appraisers into higher values to meet a purchase price.
Make sure you are informed and stay in touch with your loan officer and real estate agent. As soon as the loan officer gets the appraisal back, they should inform you of the value and if there are any problems. By doing that, you will know if you have an issue! If you do, make sure you work with your realtor and loan officer to come up with the best solution for you.