WHAT TO KNOW
Once you are under contract, the buyer’s lender will send out an appraiser to make sure the purchase price is in line with the property’s value.
Appraisals
help guide mortgage terms.
The
appraised value of a home is an important factor in the loan underwriting
process. Although lenders may use the sale price to determine the amount of the
mortgage they will offer, they generally only do so when the property is sold
for less than the appraisal amount. Also, 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.
Appraised
value is not a concrete number.
Appraisals provide a professional opinion of value, but they aren’t an exact
science. Appraisals may differ quite a bit depending on when they’re done and
who’s doing them. Changes
in market conditions also can dramatically alter appraised value.
Appraised
value doesn’t represent the whole picture of home prices.
There are special considerations that appraised value doesn’t take into
account, such as the need to sell rapidly.
Appraisers use data from the recent past.
Appraisals are often considered somewhat backward looking, because they use sold data from comparable properties (often nicknamed “comps”) to help come up with a reasonable price.
There are uses for appraised value outside of the purchase process.
For selling purposes, appraisals are usually used to determine market value or factor into the pricing equation. But other appraisals are used to determine insurance value, replacement value, and assessed value for property tax purposes.