Appraisals for lending purposes can have a major effect on you whether you’re purchasing or refinancing a home. When buying a home, the mortgage appraisal indicates whether you are paying a fair price, getting a “deal,” or possibly paying over fair market value. Successfully refinancing a home, particularly if it’s a cash-out refi, depends on the fair market value (FMV) as determined by the appraisal. If your appraisal comes in lower than expected you may face some critical decisions as a result.
When Purchase Appraisals Come in Low
When purchasing a home, you’re usually hoping the appraised value matches or exceeds the sale price you’ve agreed upon. Should the purchase appraisal come in below the contract sale price, you may have to ask your lender to increase your mortgage amount, which may be challenging. You could also try to renegotiate the selling price down to match the appraised value, which the sellers will not want to do, however, they may be convinced to lower the price if they believe the appraisal was accurate. You could also choose to pay the difference between the appraised value and the sale price, if you have it, to complete the purchase and not miss out on the opportunity of purchasing the home.
What’s ‘Loan to Value’ Got to Do with It?
Loan-to-value (LTV) and appraisals are interrelated. Loan-to-value is the percentage of your mortgage to your home’s fair market value. For example, if your home is valued at $300,000 and your mortgage balance is $240,000, you have an 80 percent LTV. In another example, suppose you agree to buy a home for $250,000 and are approved for an 80 percent mortgage — $200,000 — but the appraisal indicates the home is only worth $240,000. Your lender may then reduce its loan approval to $192,000. If you can’t negotiate the price down to $240,000, you’ll have to bring another $8000 cash to the closing table.
When Refinance Appraisals Come in Low
Should an appraisal indicate your home is worth less than you thought, you may be unable to refinance your property. For example, you believe your home has an FMV of $400,000 and your current mortgage balance is $280,000 — an LTV of 70 percent. This should be no problem for a refinance. However, the appraisal indicates your home is worth only $340,000. Your current $280,000 loan balance now increases the LTV to 82 percent. Your mortgage lender may not approve you for a mortgage over 80 percent. As a result, you may need to bring in $8000 cash to make the refinance work or cancel your application.
FMV Appraisals and the Real Estate Market
Appraisers generally use three to six recently sold, similar homes in your market area to establish your home’s current FMV. In a “hot” real estate market, with consistent and rapidly rising home values, you seldom have appraisal issues with purchases or refinances, since your home’s value is usually on the rise as well. However, in “down” markets, your home, once worth a certain value, may now have a much lower FMV. It’s not uncommon to see significant reductions in value during a “down” market especially if the downturn is for an extended period of time thus allowing foreclosures and short sales to come into play.
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Tri-County Appraisals specializes in appraisals for divorce, bankruptcy, estate, date of death, tax appeals, pre-listings, and more throughout the greater Fort Collins area. For more info contact us at (970) 999-1500, visit our website at FortCollinsAppraiser.com, or email us @ firstname.lastname@example.org.