Karen L Highland
A home appraisal is an important step in the home buying process. It is an unbiased and objective evaluation of a property's value by a licensed appraiser. This information is used by lenders, buyers, sellers, and other parties involved in real estate transactions to make informed decisions.
The appraisal is typically conducted after the buyer and seller have agreed on a purchase price and signed a contract. It is usually ordered by the lender once the buyer makes an application for a mortgage loan. The appraisal is typically scheduled shortly after the loan application is submitted.
the appraisal process in MarylandPhoto byKaren Highland on Canva
Even though the concept of having an appraisal is a straightforward concept, there are a lot of nuances associated with appraisals. Traditionally, appraisals were all done in person, with the appraiser visiting the home with a clipboard of required information. Many changes have been made to within the appraisal industry and to the appraisal process since the real estate driven recession in 2008. As technology has become available, we are now seeing automated valuations, drive-by appraisals, and even no appraisals, called a Property Inspection Waiver, PIW. The times they are a-changing.
Regardless of the type of appraisal, it is always helpful to a homebuyer to understand as much as possible about the appraisal, as well as all the processes involved in buying a home. Here are some of the frequently asked questions homebuyers have about appraisals on Maryland properties:
Frequently Asked Questions Regarding Appraisals
1. What is the purpose of an appraisal?
The fair market value of the property is used by lenders to determine the amount they are willing to lend for a mortgage. This helps the lender assess the risk associated with the loan and ensure that the property's value is sufficient to cover the loan amount in case of default. The appraisal also helps the lender determine the loan-to-value ratio, which is the percentage of the property's value that the lender is willing to lend.
2. How is the value of a property determined during an appraisal?
The value of a property is determined during an appraisal by considering various factors such as the property's location, size, condition, and amenities. The appraiser will examine the actual property. They will then identify the condition as average, good, fair, or poor, which will impact the home’s value.
The appraiser will also take into account any improvements or renovations made to the property. They will use this information to compare the property to similar properties in the market and calculate its estimated value.
The appraisal will also consider recent sales of comparable properties in the area. What goes into determining a "comparable" home? The decision as to whether a home is similar includes,
- the proximity of the home, real estate is all about location
- the square footage,
- the lot size
- interior details, like number of bedrooms and bathrooms, footprint and layout
- home style
- home age
- condition, which includes upkeep and improvements
An appraisal typically takes into consideration the most recent sales of similar properties in the area, usually within the past six months. However, the exact number of previous sales considered can vary depending on the specific circ*mstances and availability of comparable properties. If the local real estate market is slow and experiencing fewer sales, then the appraiser will not have as many homes to consider in the evaluation.
3. How long does an appraisal process typically take?
The traditional appraisal process typically takes around 1-2 weeks. However, the exact duration can vary depending on various factors such as the complexity of the property, availability of comparable sales data, and the workload of the appraiser.
If the home is a high-end custom home, the appraisal can take longer than a typical timeframe. One of the reasons is finding an appraiser who is qualified.
Another delay can occur when mortgage rates are very low and a lot of homeowners are getting refinanced. This has been a common occurrence over the last few years, with historically low rates of 3%.
In the case of an automated home valuation, the process can happen almost instantly. As more data is kept, more homes are eligible for automated valuations.
4. What is an automated home valuation?
An automated home valuation in appraisals is a process where a computer algorithm is used to estimate the value of a property. This is done by analyzing various data points such as recent sales of similar properties, market trends, and property characteristics. The algorithm uses this information to generate a valuation report without the need for a physical inspection of the property.
It's important to note that automated home valuations may not always be as accurate as a traditional appraisal conducted by a certified appraiser. In such cases, the bank will certainly require a more traditional approach to the appraisal, as they are certainly interested in the accuracy of an appraisal. After all, they are looking out for their bottom line.
5. Who pays for the appraisal?
The person who pays for the appraisal can vary depending on the situation. In some cases, the buyer may pay for the appraisal as part of their closing costs, although it is paid for before the settlement, not at closing. In other cases, the seller may cover the cost of the appraisal. Additionally, in some situations, the cost may be split between the buyer and seller. It ultimately depends on the terms of the sale agreement and any negotiations between the parties involved.
6. Can I choose my own appraiser?
No. To avoid collusion between lenders and appraisers, the Federal Government mandates that an appraiser be chosen from a blind pool of appraisers when a buyer is purchasing a home. Even the lender doesn't get to choose an appraiser.
However, if a homeowner, or Realtor is contracting an appraiser to conduct an appraisal to ascertain a value for the home, the choice of appraiser is their's to make.
7. What happens if the appraisal comes in lower than the agreed-upon purchase price?
Buyers, as well as lenders, want to make sure that the home appraises at least at the sales price. If it doesn’t, it creates another round of negotiation “and the potential of not closing.” This is why we often refer to the appraisal as "the second sale".
When an appraisal comes in lower than the agreed-upon purchase price, it is called an appraisal gap. An appraisal gap can have several implications. First, the buyer may need to come up with additional funds to cover the difference between the appraised value and the purchase price.
Alternatively, the buyer and seller can negotiate a new purchase price that aligns with the appraised value. In some cases, the seller may be willing to lower the price, while in others, the buyer may need to walk away from the deal if they are unable or unwilling to cover the difference. It's important to note that the specific actions taken will depend on the terms of the purchase agreement and the willingness of both parties to negotiate.
9. How often do appraisals come in lower than the purchase price?
The frequency of appraisals coming in low varies. Appraisals depend on ups and downs of the local real estate market, the specific property being appraised, and the accuracy of the initial pricing. It is not possible to provide an exact number.
When values are increasing rapidly, there is a tendency to encounter more appraisals that are lower than the agreed-upon purchase price. Remember, appraisals are a measurement of the past six-months of values. If home values are increasing rapidly, it may be challenging for appraisers to find recent sales that support the higher value.
8. Can I challenge the results of an appraisal?
Yes, a buyer or a seller can challenge the results of an appraisal. If you believe that the appraisal was inaccurate or unfair, you can provide additional information or evidence to support your case. This can include recent comparable sales data or any improvements or upgrades made to the property.
The process for challenging an appraisal can vary depending on the specific circ*mstances and the guidelines set by the appraisal organization or regulatory body. It is recommended to consult with a real estate professional or an attorney for guidance on how to proceed with challenging an appraisal.
9. Are there different types of appraisals?
The process also is different depending on the type of loan the buyer is getting. The different categories of loans generally fall under Conventional, FHA, or VA loans, and they each have varying guidelines and processes.
An FHA appraisal is a specific type of appraisal that is required for properties that are being financed through an FHA loan. It is conducted by an FHA-approved appraiser and follows specific guidelines set by the Federal Housing Administration.
The purpose of an FHA appraisal is to determine the market value of the property and ensure that it meets the minimum property standards set by the FHA. These standards include factors such as safety, security, and livability of the property. The FHA appraisal also takes into consideration the condition of the property and any necessary repairs or improvements that may be required.
An appraisal for a VA loan is similar to an FHA appraisal in that it is a specific type of appraisal required for properties being financed through a VA loan. However, there are some differences. For example, a VA appraisal focuses on determining the property's value and ensuring it meets the VA's minimum property requirements. The appraiser will also consider any repairs or improvements needed for the property to meet these requirements. Additionally, the VA appraisal may include a review of the property's condition and potential hazards, such as lead-based paint or termites.
A conventional loan is a type of mortgage loan that is not insured or guaranteed by a government agency, such as the Federal Housing Administration (FHA) or the Department of Veterans Affairs (VA). This means that the lender takes on more risk with a conventional loan compared to a government-backed loan.
Conventional loans typically require a higher credit score and a larger down payment compared to government-backed loans. Additionally, conventional loans often have stricter income and debt-to-income ratio requirements. However, conventional loans offer more flexibility in terms of loan amounts and property types that can be financed.
10. Can I use a previous appraisal for a new loan or refinance?
In some cases, you may be able to use a previous appraisal for a new loan or refinance. However, it ultimately depends on the lender's requirements and the specific circ*mstances of your situation. It's best to consult with your lender to determine if a previous appraisal can be used.
Of note, an appraisal for an FHA loan typically remains valid for a period of 120 days. This is why some people make the effort to challenge an FHA appraisal that comes in lower than the agreed-upon purchase price. The seller is often motivated to do so, because if that particular buyer backs out of the purchase, the seller is still stuck with that valuation for the length of time. However, it is important to note that the lender may require a new appraisal if the loan does not close within that timeframe or if there have been significant changes to the property.
Recent Changes and the Future of Home Appraisals
Freddie Mac and Fannie Mae have set the standards for appraisal guidelines, and recently have set about to modernize the industry, revising the process, guidelines and forms. There is concern over the outdated process, which they believe, serves up too many inaccurate comps, has a lack of diversity, and abides poor training.
As technologies increase and digital data increases, the industry is being challenged to overhaul it's technology and move towards a digital appraisal process. The FHFA, Fannie Mae and Freddie Mac believe that automation technology, combined with greater appraiser training and hybrid appraisals known as bifurcated appraisals, could improve the process, saving time and money.
In Conclusion
There are many benefits to homebuyer education on the appraisal process. Understanding appraisals can help buyers make informed decisions about the value of a property and negotiate the purchase price. The knowledge can also help buyers understand the potential risks and limitations of relying on an appraisal when determining the value of a property. Additionally, knowing about appraisals can help buyers understand the factors that can affect the appraisal value, such as market conditions and property condition, and how these factors can impact their financing options.
Did you enjoy this information about the appraisal process in Maryland real estate? See other real estate articles on NewsBreakfor more timely tips and advice. Karen often writes about general real estate, moving, and home upkeep and home improvement. If you are a buyer, feel free to search for homes in Maryland. Take 15 seconds to find out what your home may be worth.
