Home appraisals have a lot of influence during your loan application. So much so that they can potentially shape the outcome of your application, be it approved or rejected.
Given their significance, all home buyers should fully understand the appraisal process and what it involves.
What is a home appraisal?
You might be familiar with the term when selling homes, but home appraisals also play an important role in your home-buying journey.
They’re often called property valuations and involve a qualified valuer assessing the property you want to purchase to determine its fair market value.
This valuation then serves as a key factor for lenders when assessing your application. It helps them determine whether the property’s value aligns with the loan amount you have requested as the buyer.
Ultimately, the home appraisal process helps your lender determine the loan-to-value ratio and the risks associated with lending to you.
How does the appraisal process work?
Property valuations generally encompass these five steps:
1. Engagement of valuers
After receiving your home loan application, your lender will engage the services of a licensed valuer to complete the appraisal.
A valuer is an independent professional trained to evaluate several factors affecting a property’s value. These factors include:
- Location
- Size
- Condition
- Recent sales data of comparable properties
2. On-site inspection
Your designated valuer will thoroughly inspect the property, both internally and externally.
This inspection will help assess the features, condition, and potential factors that influence the property value. E.g., recent renovations or structural issues.
3. Market analysis
A property valuator will perform a comparative market analysis by comparing your potential property to recent sales data of similar properties in the area.
4. Generate report
After the on-site inspection and market analysis, the valuer will generate a comprehensive appraisal report to detail their findings.
This report will include all relevant information about the property, the methodology used for the valuation, and the final estimated value.
5. Lender review
Your lender will review this appraisal report and determine whether the property’s value aligns with the loan amount you have requested in your application.
What should buyers know?
Beyond the basics, there are some nuances to the home appraisal process that all home buyers should understand.
1. Timing and coordination
Timing is crucial when it comes to scheduling the appraisal. Your mortgage broker should work closely with the lender and real estate agent to ensure the appraisal is scheduled promptly.
To ensure this runs smoothly, all parties involved should coordinate effectively to avoid delays in the approval process.
2. Cost considerations
Home buyers are typically responsible for covering the cost of the appraisal. The exact fee can vary depending on the size and complexity of the property. You should be aware of and factor this fee into your home-buying budget.
3. Impact on financing
The results of your appraisal can have a significant impact on the financing options that are available to you.
If the appraised value falls short of the agreed-upon purchase price, you may need to reconsider your financing strategy.
This may involve renegotiating with the seller, paying a larger deposit, or exploring alternative finance options.
Understanding appraisal contingencies
Many purchase agreements include appraisal contingency clauses. These can allow buyers to back out of the deal or renegotiate the terms if the property appraisal comes in less than the agreed-upon purchase price.
You must have a clear understanding of this contingency and all other facets of your purchase agreement before submitting your application.
Options for appealing the appraisal
There may be instances where a buyer believes the appraisal undervalues the property or overlooks certain factors that could help boost its value.
It is possible, under certain circumstances, to challenge the report’s findings. If you believe your appraisal is inaccurate, consult your mortgage broker, real estate agent, and lender as soon as possible.
Final tips
- Provide all relevant information to the valuer, such as recent renovations or upgrades, as well as any unique features that can enhance its value.
- Take the time to understand your appraisal report. Pay close attention to the valuation methodology and any factors that may have influenced the final estimated value.
- Be realistic about the outcome of your appraisal.
The appraisal process is a crucial step in your home loan journey, helping by providing your lender with essential insights into the property’s value and mitigating risks for lenders and buyers alike.
By understanding how this process works and following our tips, you can navigate this phase of the application process with confidence.
* This blog is intended for general informational purposes only. For personalised advice tailored to your unique financial situation, please contact NMC Finance.
