Appraisals
At some point after you have a ratified contract, your lending company will order what is called an appraisal to determine the value of your first home buying objective. This is not the same thing as the assessment your local municipality conducts annually on each parcel within the jurisdiction to determine its value for tax purposes, although the appraisal that is conducted when you buy a home can be used to dispute your assessment if you feel it is inaccurate.
An appraiser is similar to an inspector, except that his task is to gather a more general overview of the size and condition of the property and its improvements, and then to assign it a monetary value based on current market conditions. An appraisal usually costs a few hundred dollars. If you don’t pay for this yourself beforehand, the cost of the appraisal will be factored into your costs at the closing table.
Why Is The Appraisal Important?
What makes the appraisal such a key step in the home buying process is that your lender will use it as the letter of the law when it comes to the maximum size of your loan. Most lenders will never allow you to take out a mortgage in an amount greater than the home’s value. So if you have agreed to a purchase price of $250,000 in the contract and then the property (land and all buildings and improvements) only appraises for $220,000, your lender will say “okay, we’ll let you borrow $220,000; you’ll have to come up with the other $30,000 yourself.”
How Can I Avoid This Situation?
I know this might sound a little crazy, but don’t pay more for a home than it’s worth. Your agent can easily provide you with a list of comps - similar properties that were recently sold and their sales prices - for the purposes of comparison. If you do find yourself stuck up a creek, don’t lose hope! At least, not yet. There are a few different ways you can go here.
Borrow the Difference
Borrowing the difference from a family member is a possibility for some people. A wealthy uncle or benevolent grandparent who is willing to bestow the needed amount as gift funds may be able to help.
Get a Second Opinion
The appraiser may not have done his job by thoroughly considering all relevant improvements to the property, so you could try ordering a second appraisal from a different company or appraiser. You’ll have to pay for the second one out of your pocket, though, just like the first.
Seller Financing
Sometimes the seller will offer to pay part of the price for you, in exchange for you making payments back to the seller over time. This can be a good way to complete the sale, although if you opt for seller financing keep in mind that the seller can foreclose on you if you fail to make payment in a timely manner.
Renegotiating
Depending on how desperate the seller is to close the deal, you may be able to renegotiate the price of the sales contract after the appraisal has come in showing that the property is in fact not worth the price. Sometimes an official appraisal is what’s needed to convince the seller that they are charging too much.