For home buyers,
getting to the finish line can seem daunting at the onset. Talking legal
jargon, having your credit scrutinized, or fighting a bidding war; the
headaches can be numerous. For the most part though, these trials are
just part of the package and your Real Estate Agent is a professional
who can help guide you through the steps to make them as painless as
possible.
There is however one
big thing that can make or break your deal and that your Agent will
need your help in addressing. This is the home Appraisal.Home appraisals
are typically required by your mortgage provider as a way of insuring
the value of a home in the case of a loan default. Typically a mortgage
provider will offer a certain percentage of financing based on the
appraised value of the home. This is known as the loan to-value-ratio. A
typical loan-to-value ratio for residential purchases is 80%, meaning
the home buyer has put down 20%of the home cost and is financing the
other 80%.
So what happens if
the price of a new home varies from the appraised value used by the
mortgage provider? This can prove to be a tough situation because you
may be required to fork over more than you had expected for a down
payment in order to consummate the deal. Your Mortgage provider won’t
provide more than the agreed upon loan-to-value ratio, meaning you will
be responsible for the difference.
Ex: A home in
Charlottesville is listed for $275,000. You make an offer for $268,500
having worked closely with your Real Estate Agent to establish an
offering price based on current homes on the market and the recent sales
prices. Say the offer is accepted but your mortgage provider’s
assessment of the property’s value is only $262,500. At this point you,
as the buyer, have a $6,000 dilemma.
Although this may seem like a steep bump in the road -especially considering closing costs - there are a number solutions.
First and foremost,
Your Real Estate Agent is a professional and should have the foresight
to include a financing contingency in your purchase contract. A
financing contingency is basically a walk-away clause. It should state
that if the buyer is unable to obtain financing for the agreed purchase
price, that the buyer can terminate the contract and have their earnest
money deposit returned.
A financing
contingency should state that if the buyer is unable to obtain financing
for 80% (or the remainder % after down payment) of the agreed purchase
price the buyer shall retain the right to terminate the contract.
Writing a contingency based on loan-to-value ratios is a safe way to
insure that the purchaser is only paying at closing, the percentage of
the purchase price that they agreed originally.
A good thing to
remember is that that your contract can be negotiated.Should your
appraisal come in lower than expected, the buyer can choose to
re-negotiate with the seller in order to preserve the deal. Instead of
losing a buyer, the seller may be willing to lower their selling price
to better conform to the financing options established by the appraisal.
In the case of
Federal Housing Administration Loans (known as FHA loans), appraisals
are carried out by specific FHA assessors and remain valid and ‘locked
in’ for a period of 6 months. This ‘locked in’ value means if a seller
is unwilling to negotiate on a low FHA appraisal, they will have to wait
for a purchaser with a whole different loan package or wait six months
fora re-appraisal.
Your Agent is an
expert at comparative analysis and can use this skill to help establish a
property value separate from a professional assessment.This alternative
valuation is based on current listings and prior sales in and around
the subject property’s neighborhood. This comparative analysis can be
used to argue for an appeal of the assessment. In this case, your agent
will pull together comparables and offer them to the lender who then
asks the appraiser to consider the new information and to alter their
assessment accordingly.
This should be the
first attempt before considering an additional, separate appraisal.
Where you are already obligated to pay for an appraisal to satisfy your
mortgage provider’s requirements, you will have to pay for additional
assessments and the result may not be too different. Again this is a
point where you may find it better to negotiate with the
seller,informing them that additional appraisals may only drag out the
closing process rather than solidifying a better price.
The appraisal
process could make or break your home purchase. For sellers it could
mean the difference between closing in May vs September, or finding a
buyer at all in a slow market. To insure your dreams manifest as
expected, stay aware of the possibilities and talk with your Agent about
how to best manage a low appraisal. Sellers have a big role to play in
this as well and getting them on board with the whole process could be
crucial.First impressions can be everything and a clean, well maintained
appearance can help add value to a home at appraisal or when
negotiating a sale price.
The appraisal
process may seem like just another box to check off, but in reality it
is most of the most important steps. Taking the appropriate steps to
protect yourself from a low appraisal is crucial. Having to pay extra on
top of your down payment could leave you without money for closing
costs. When it comes time to re-sell the home in question, a
low(initial) purchase price from a low appraisal could mean a low
re-sale price for you in the long run. For sellers an appraisal gone
wrong could mean a deal gone South, so encourage all parties to get
involved should the appraisal come out lower than expected.
