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April 30, 2014

Why Your Appraisal Matters in a Home Purchase

It’s important to understand the major contingencies in a purchase agreement, and one of the most important ones is the appraisal.

All lenders will require that a licensed appraiser determine the value of the property. This appraisal represents an unbiased and objective value opinion. The appraiser studies recent comparable sales in the neighborhood, making adjustments for various attributes such as number of bedrooms, bathrooms, parking, remodeling and the like. In the end, he or she arrives at a value for the property, which will hopefully be at least what you’re paying. (The appraisal can sometimes end up being more than you’re paying, which is great for you but doesn’t affect the loan.)

The appraiser submits the appraisal document to the lender, whose underwriter reviews the material. If the appraisal is “at value” for the price you’re paying, the underwriter will approve the appraisal—or could require more time if they have any issues with the content. If the appraisal is under the value you’re paying, the bank won’t kick in the difference. It will then be up to the buyer to bring in more money, or potentially negotiate with the seller to reduce the price.

Your appraisal contingency will cover you if the appraised value comes up short. If you don’t have that contingency, you’ll be in a position to cover the shortfall with more cash, or your good faith deposit sitting in escrow can be at risk. Your contingency timeframe has to allow for the appraiser to visit the property, complete/submit the written appraisal to the lender, and the underwriter to review and sign off.

It is very important for you or your agent to consult the lender about how much time will be needed for this contingency. I’ve recently had lenders tell me that it will only be seven days for the process to be complete, yet that seven days seems to cover only the time for the appraisal to get to underwriting. That means the buyer will have to potentially remove the contingency prior to underwriting giving its blessing, and that is not ideal.

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