How to Understand Your Home Appraisal
WHAT IS AN APPRAISAL?
A home appraisal is an estimate of your home's value. It's simply a professional appraiser's opinion of what he/she thinks your home may be worth. Mortgage lenders base your loan amount on the LESSER of the appraised value or the purchase price.
HOW DOES THE APPRAISER DETERMINE VALUE?
Appraisers are usually required by the lending guidelines to compare your home with similar homes that have sold within the past 6 months. Then, they make adjustments based on the differences in comparable sales. Consider this example:
- Your Purchase Price: Assume you sign a contract to purchase a home for $800,000.
- Comp 1 sold for $730,000: However, it doesn't have a finished basement compared to your home which does. So, the appraiser adjusts the sales price up by $80,000 to $810,000. This means the appraiser thinks Comp 1 could have sold for $810,000 if it was more like your home.
- Comp 2 sold for $720,000: However, it only has a 1-car garage, compared to your home which has a 2-car garage. So, the appraiser adjusts the sales price up by $60,000 to $780,000. This means the appraiser thinks Comp 2 could have sold for $780,000 if it was more like your home.
- Comp 3 sold for $800,000: However, it's a little larger than your home. So, the appraiser adjusts the sales price down by $20,000 to $780,000. This means the appraiser thinks Comp 3 could have sold for $780,000 if it was more like your home.
- Conclusion: In this example, the appraiser thinks your home is worth $790,000 based on the comparable sales and all the adjustments outlined above.
WHAT IF YOU DON'T AGREE WITH THE APPRAISER'S OPINION?
Tough luck! No, seriously. Although you and I are entitled to our own opinion on the matter, the mortgage guidelines require the loan amount to be based on the LESSER of the appraised value or the purchase price. For more details on some options that may be available to you, see my article titled: What if Your Appraisal Comes in Low? This is probably one of the most important financial transactions of your life. My commitment is to communicate and strategize with you every step of the way!