Dear Real Estate Adviser,
I found a home that I want to buy. Do I need to have it appraised before I can get a loan? Also, because the house needs some work, do we need to tell the bank we want to negotiate a lower price?
-- L. Kim
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The lender will want to order an appraisal to determine the real value of the home, independent of its listing or negotiated price, to compare against what you've agreed to pay. The lender does so to make sure the house is actually worth the money it may be lending you.
Appraisal comes after the price is set
The appraisal is done post-haggling -- after the contract is signed. The appraiser will look at a number of things to determine value, including the home's condition, age, living space, taxes, neighborhood, views, future marketability and the selling prices of nearby, comparable homes, or "comps," among other factors. You'll also have to foot the bill for it, either directly or by having it rolled into your mortgage. Typically, such appraisals cost anywhere from $250 to $550. Bankrate's past few closing costs surveys, in fact, say such appraisals average just over $400 apiece.
First an inspection, then an appraisal
Very soon after you negotiate a price and sign that contract, it would behoove you to get the house inspected before the appraisal date to not only give you an idea of what may be wrong with it, but to share with the appraiser to help determine the most accurate valuation. If the place is in worse shape than you thought, you can back out before the appraisal occurs. (It usually takes more time to arrange appraisals than inspections.) Your contract will have various contingency deadlines that you need to understand in order to act accordingly. Your agent, who I hope gave you a market analysis before you made your offer, should help you with this, too.
What happens with the appraisal?
Once the appraisal is complete, the bank or another appraiser will typically review it. For example, if it's a Department of Housing and Urban Development deal, an independent HUD appraiser might be called in for this. Alternatively, some big banks now use statistically based automated valuation models to crunch all the data. These can be less detailed (and less nuanced) than personal appraisal reviews.
If the appraisal comes in relatively low compared with the cost of the home, or the house is deemed hazardous or risky in any regard, the bank might kill the deal, regardless of your creditworthiness -- even if you were prequalified (conditionally approved for a mortgage amount). You can always try negotiating with sellers to narrow the gap and then resubmit the adjusted sum to the bank. In many instances, by the way, there are local banks that can "finish" loans denied by the biggies, particularly if you are paying 20 percent down.
Here's hoping your offer and the bank appraisal will "square." Good luck!