How Does the Appraisal Affect the Home Loan?
For those new to the real estate market, an appraisal is a professional unbiased opinion of a home’s value. An appraiser’s report is based on several factors, including an in-person evaluation, the current market conditions, and certain aspects of the home like amenities and square footage.
A home’s appraisal comes into play whenever a mortgage is involved in the purchasing, refinancing, or selling of a property. Collateral for the loan is the home itself, which is why an appraisal is meant to ensure that the borrower is not overborrowing. In this way, the bank protects against any worst-case scenarios which may arise in the future.
What happens if the appraisal is lower than the offer?
Financial institutions base a home loan on the fair market value of the home at the time at which it was appraised. If the appraisal value is lower than expected, the transaction may be delayed or even canceled. In the event that a bank chooses to lend to a borrower when the appraisal is lower than the offer, the bank will rely on what’s known as the loan-to-value ratio or LTV, as agreed to in the proposed contract. The LTV is one figure banks use as a way to assess risk. Other factors include prime rate, credit score, and credit limits.
The most common and prominent of these figures is LTV. To find the LTV, lenders will compare the amount a borrower was hoping to receive against a home’s appraised value. The lower the LTV ratio, the more likely a borrower is to receive a loan from their financial institution. When the LTV is higher, a borrower may be asked to put more money down in an effort to decrease the risk to the bank.
How does an appraisal affect a sale?
Often, low appraisal estimates occur in “hot markets” where buyers feel pressured to offer above market value. As real estate economist Ken H. Johnson reported to Channel 10 News, “Miami metro, which is all the way up through Palm Beach County, is pricing out at roughly 30 percent above this long-term pricing trip.” Borrowers in this area are finding themselves with home appraisals under the amount they have offered to the seller. When this occurs, the home buyer may find themselves unable to honor their original offer for a property. Lower appraisals delay transactions, and in some cases, a seller may choose to move on to another buyer that can offer a higher price.
What can be done if an appraisal is lower than expected?
Although hardly a best-case scenario, borrowers still have a few resources available to them when an appraisal is lower than expected. Commonly, a home buyer will first attempt to negotiate with the seller. The buyer may present the appraisal report to the seller in hopes of convincing them to lower the price so that the sale could go through.
A borrower may also choose to appeal the appraisal, which is known as a “rebuttal of value”. This strategy involves an individual’s loan officer and real estate agent working together to find better comparable market data that would drive up the valuation of the home.
If a borrower believes that an initial appraisal was off the mark, either because they believe the appraiser was not familiar with the market or missed a key comparable property, a borrower may request a second appraisal.
A borrower may also choose not to engage in any of the above practices and simply walk away from the purchase, as an appraisal is also intended to keep buyers from overpaying for a property. In the case of refinancing, an appraisal also safeguards borrowers from taking out a loan for more than the fair market value of their home.
Speak to a Luxury Real Estate Expert
As a mainstay in Miami’s uber-competitive high-end real estate market since 1994, Miami Signature Homes President and top producer Mauricio J. Barba knows the ins and outs of complex real estate deals, including negotiating appraisals. Respected in his native community by clients and colleagues alike; he has logged top honors for elite performance in his field. Mauricio is connected worldwide but specializes in Coral Gables, Coconut Grove, Key Biscayne, Brickell, Village of Pinecrest, South Miami, Palmetto Bay/Falls area, and the Beaches.
The Miami Signature Homes team is relatively small compared to their sales volume. That has been important in keeping relationships with clients at a very direct level. Mauricio, Tania, Vicky, and Sebastian each maintain strong personal connections and professional relationships with all of their clients, many of which have been with the team for decades.
Because of this personal level of service, they devote individual attention and care to every home sale or search. Assistants are great, but Miami Signature Homes makes sure their principals are the people solely responsible for returning important calls or emails 24/7, 365 days a year.
If you’re passionate about white-glove treatment throughout one of the most important financial experiences of your life, call 305.439.8311.