The purpose of an appraisal is to determine the market value of the home you wish to buy.
Your loan amount is based on the value of the property. Even though you agree to pay a certain amount, the lender needs to independently establish a fair market value also. This protects the lenders interests in case you are unable to make the payments. The appraisal also protects you. It reaffirms that you are not paying more for a home than it is worth.
- What happens if the appraisal is lower than the sales price?
Most contracts include a clause that allows you (the buyer) to cancel the purchase and get your earnest money refunded if this occurs. In reality, most sellers agree to renegotiate in order to close the transaction, since they realize mortgages are based on the appraisal value or purchase price, which ever is lower. Most people need a mortgage to buy a home.
- What happens if the appraisal is higher than the sales price?
WOW! After closing you will have instant equity in your new home. This means that you got a terrific deal on your purchase!
- How is the appraisal done?
A certified/licensed individual who has been specially trained in this field performs the inspection. They will research the county records to determine the age of the home, and other tax and legal records pertaining to the home. Then they will inspect the home in person. This will include photographs and examining the general condition of the home. Is it structurally sound or barely standing, what type of construction, how old is the roof, etc. They will look at every room for condition, type of flooring, ceiling fans, upgrades, and measure square footage. They also look for recently replaced items, like the water heater, AC, appliances, how updated the décor is (carpet), does everything meet minimum property standard to include standards for health, safety, and structural soundness.
The appraiser will then research the market area, looking for comparable sales similar to your home. They will then compile all this information into a report.
* Please note: This is not a termite or a home inspection.
Lenders may need additional surveys or inspections if necessary.