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After making an acceptable offer on the purchase of a home, one of the next steps is to get an appraisal.  This involves paying a qualified appraiser to come to the home and assess its value based on the house itself and similar homes that have sold, usually within the last six months.  The fee for the appraiser is typically paid by the buyer.  The appraiser lets the lender know what the appraised value is, and the lender then can provide financing so long as the home is appraised for the selling price or a greater amount.

Usually, the appraisal process is a formality.  Most sellers have done their research when pricing their home and priced it for what it is worth.  However, problems can arise.  Occasionally, a home does not get appraised for its selling price.  That poses a big problem for the buyer.

When applying for a loan, the lender approves a loan for a certain percentage of the home’s selling price.  For example, if the lender approves a loan of 80 percent on a $200,000 house, that means the buyer has to put down $40,000 for the down payment.  If the home only appraises for $190,000, then there is $8,000 not covered in the loan since now the loan is 80 percent of $190,000.  

There are some options for this situation.  One option is to ask the seller to reduce the selling price.  The sellers may go ahead and agree to this to get the transaction completed, especially if the appraised value is not too much less than the selling price.  If they are not willing to lower the price, another option is for the buyer to put more money down.  This makes up the difference between what the lender will finance and the selling price.

If all parties involved have enough time, they can try a different appraiser.  Appraising properties is not an exact science, so another appraiser may assess the house’s value at its selling price.  A final option is for the buyer to walk away.  Most contracts have a contingency regarding financing.  If the home does not appraise for the right value, the lender is unlikely to provide financing.  That is a legal out for the buyer, although it is typically not an easy solution.

A home may not be appraised at its correct value for a variety of reasons.  If the appraiser rushes through the job, he or she may miss some things like an addition or specialty feature that raises the value of the house.  Also, the appraiser may have trouble finding comparable houses.  These are homes that are similar that have usually sold within the last six months.  If the home values in the market escalate quickly, six months may not give an accurate picture.  Also, if the comparisons are not to truly similar homes, it can distort the appraisal.

Despite the potential for problems, most home appraisals work out fine for all involved.  The sellers and their real estate agent should know what the home is worth and have probably priced it accordingly, so the appraisal can come in at the appropriate price.

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