One of the common questions we get asked by our sellers is “What is a home appraisal?” and “why are they doing one on my home after it’s sold?” If you find yourself wondering the same thing read the article below.

What is a home appraisal?

An appraisal is done by a financial institute to ensure that the home’s value is in line with the amount of money the buyer needs for the mortgage. The lender doesn’t want to give a mortgage on a house that is greater than what the home is worth. They want the home value to be greater than their investment. If the buyer defaults the lender is then on the hook for recovering the mortgage amount. Therefore they want to ensure that they won’t lose money if they have to take over and sell the house.

Ex. The home you bought for $400,000 turns out to only be worth $300,000. If you default on the loan then the bank will have to take over the home & try to sell it. To get their money back they will have to sell their home for over $100,000 the bank is not going to want to be on the hook for the $150,000 difference.

What determines if one is required?

If a home buyer’s down payment is less than 20% the mortgage is insured by a mortgage insurance company. This means if the buyer defaults on the mortgage, it is the insurance company that will cover any losses. It used to be when a mortgage was insured an appraisal wasn’t necessary but with stricter regulation, some financial institution are doing appraisals.

When a buyer puts down 20% or more there is no insurance on the mortgage meaning the lender is taking 100% of the risk. Therefore, the lender always does an appraisal in this case.

Why is the buyer doing a home appraisal after they have waived financing?

If a buyer has a very large down payment there is very little risk for the lender that the mortgage value would ever exceed the value of the home. In this case, the financial institution may not feel it is necessary to have the appraisal before approving their financing. This is why sometimes an appraisal will be done closer to the closing date.

Some other reasons for an appraisal being after financing has been approved are; the buyer may have decided to put a larger down payment down or the buyer may have decided to switch financial institutes and the second lender wants to do an appraisal.

What if the appraisal decided the home is overpriced?

If for some reason the home did not appraise out the buyer would still be required to close on your house. The lender would most likely have them increase their down payment amount in order for them to get their mortgage.

Questions? Contact us!