Faith Morrow
The home-buying process can be complex and varies from person to person. However, the appraisal is a critical step in the loan approval process. The appraisal is typically ordered by the buyer's lender once their initial loan application package has been submitted and is under the early stages of underwriting review. The appraisal process itself usually begins 2 to 3 weeks after formally applying for a mortgage. The appraisal is used to assess the value of the property and determine the interest rate, required down payment, and whether the buyer will be approved for the loan. Once the appraisal is completed, the lender reviews the loan file and assesses the risk level associated with the loan. The buyer then receives an approval or denial based on those findings.
| Characteristics | Values |
|---|---|
| When does the appraisal happen? | The appraisal is ordered by the buyer's lender once their initial loan application package has been submitted and is under the early stages of underwriting review. The timing can vary slightly from lender to lender, but it usually begins approximately 2-3 weeks after applying for a loan. |
| Who orders the appraisal? | The buyer's lender or bank orders the appraisal. |
| What is the appraisal process? | The appraiser calls to schedule the appraisal (1-7 days later), visits the home (1-7 days later), submits the report (1-7 days later), and the review process is completed and the appraisal report is submitted to the lender (1-7 days later). |
| What is the appraisal used for? | The appraisal is used to assess the value of the property, determine the interest rate, required down payment, and whether the loan will be approved. |
| What happens after the appraisal? | The mortgage underwriting process begins, where the lender reviews the loan file and assesses the risk. If the appraisal comes in below the contract price, the loan transaction is interrupted, and borrowers no longer qualify for that amount. |
What You'll Learn
The appraisal process can take a while
The appraisal process is important because it helps the lender determine the relationship between the property's fair market value and the loan amount that the borrower might be approved for. An inaccurate appraisal can affect the amount of equity available to the borrower or how much they might pay for the property. The appraisal also helps determine the interest rate and the required down payment. If the appraisal comes in under the contract price, the borrower will either need to pay the difference in cash or negotiate with the seller to lower their price to keep the current term loans. The borrower can also dispute the appraisal if they believe something was evaluated unfairly or with bias.
The mortgage underwriting process usually follows the appraisal. The loan file moves on to the underwriter, who reviews all the documents and determines whether the borrower can proceed to closing. The underwriter assesses the risk level associated with the loan and gives an approval or denial based on those findings. The underwriting process can take anywhere from 2 weeks to 45 days.
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Lenders use appraisals to determine interest rates and down payments
The appraisal is a critical step in the loan approval process. Lenders use appraisals to determine the loan amount a borrower qualifies for, by assessing the property's value. This value is determined based on current market conditions and the relationship between the property's fair market value and the loan amount. Lenders use this appraisal to determine interest rates and down payments.
Lenders order an appraisal to assess the property's worth and ensure they are only lending what the borrower needs. The home serves as collateral for the loan, so if the loan amount exceeds the property's value, the lender risks losing money if the borrower defaults or faces foreclosure. Therefore, lenders have a vested interest in obtaining an accurate valuation through the appraisal process.
The appraisal process can be lengthy, and its timing may vary. It typically begins 2 to 3 weeks after formally applying for a mortgage loan. Obtaining an appraisal can take days or weeks, and the entire process, from scheduling to submitting the report, can take up to a month. Lenders strategically time the appraisal to avoid unnecessary delays in loan approval.
The appraisal affects the mortgage loan application, and if the appraisal value falls below the contract price, it can interrupt the loan transaction. In such cases, borrowers may need to pay the difference in cash or renegotiate the price with the seller. A low appraisal value can be advantageous for borrowers as it ensures they do not pay more than the property's worth. However, it can also lead to difficulties in obtaining approval for the desired loan amount.
Lenders use the appraisal to determine the interest rate and required down payment for the loan. A higher appraisal value may result in a lower interest rate and a smaller down payment. Conversely, a lower appraisal value may lead to a higher interest rate and a larger down payment. Therefore, borrowers should understand how lenders use appraisals to determine these critical aspects of their loan.
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A low appraisal can affect the loan amount
A low appraisal can have a significant impact on the loan amount and the entire home-buying process. When a property's appraisal value is lower than the agreed-upon sales price, it can delay or hinder the buyer's ability to secure a loan that covers the full purchase price. This is because lenders use the appraisal value as collateral to determine the loan amount, ensuring they do not lend more than what the house is worth.
In such cases, buyers may need to renegotiate the purchase price with the seller, who may be incentivized to lower the asking price to keep the sale on track. If the seller is unwilling to do so, they may offer concessions, such as covering closing costs to free up cash for the buyer. Buyers can also explore options to increase their down payment, such as tapping into their cash reserves or seeking down payment assistance programs. However, if the buyer needs the loan to cover the full asking price, they may need to consider alternative sources of funding or walk away from the sale, especially if the purchase agreement includes an appraisal contingency clause.
A low appraisal can also affect the buyer's equity in their new home, potentially resulting in a higher interest rate and mortgage insurance requirements. It is important for buyers to be aware of their options and seek guidance from their real estate agent to navigate the process effectively.
While a low appraisal can complicate matters, it serves as a protective measure for both the buyer and the lender. Buyers are safeguarded from paying more than the appraised value, and lenders mitigate their risk by ensuring the loan amount aligns with the collateral value.
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The buyer can dispute a low appraisal
A low appraisal can be frustrating for all parties involved, including the buyer, the seller, and the real estate agent. Buyers can take several actions if they receive a low appraisal. Firstly, they can request a copy of the full appraisal report and review it for any discrepancies or errors, such as missing features. They can also examine the comparable homes ("comps") used by the appraiser in terms of square footage, features, neighbourhood, and condition. If there are any inconsistencies or errors, the buyer's real estate agent can take the lead in pushing back on the low appraisal by requesting a correction or revision. The agent can submit proof of the oversight and work with the lender to get the closing back on track. However, this may delay the closing, and the buyer might have to pay for an additional appraisal.
If the buyer has a strong case, they can also petition the lender for a second appraisal. While this may cost the seller money, it could potentially validate their asking price. Nevertheless, it is important to note that a second appraisal may not result in a higher valuation, and the buyer's lender might not change their stance even with a different opinion. Another option for the buyer is to increase their down payment or make a down payment they had not initially planned to make. This can help bridge the "appraisal gap" between the appraised value and the asking price.
In a buyer's market, where the buyer holds more negotiating power, they may be able to renegotiate the purchase price, especially if the seller is highly motivated to sell. On the other hand, in a seller's market, where sellers have more leverage, they may be less inclined to lower their price in response to a low appraisal. If the buyer cannot come up with additional cash and the seller refuses to reduce the price, the buyer may have no choice but to walk away from the deal. If the purchase agreement includes an "appraisal contingency" clause, the buyer can back out of the transaction without losing their earnest money deposit or facing legal consequences. However, if there is no such clause, the buyer may forfeit their deposit and face potential legal action.
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The underwriting process follows the appraisal
The underwriting process is a critical phase in the mortgage and home-buying journey, and it typically comes after the appraisal. Here's an overview of the underwriting process and how it follows the appraisal:
The Underwriting Process:
The underwriting process involves a thorough review of the loan file by a mortgage lender's underwriter. The underwriter ensures that all necessary documents are present and assesses the risk associated with the loan. This risk assessment includes evaluating the borrower's credit report, debt-to-loan ratio, collections history, and other factors. The underwriter ultimately decides whether to approve or deny the loan based on these findings.
How the Underwriting Process Follows the Appraisal:
- Appraisal Timing: The appraisal is typically ordered by the lender after the purchase agreement is signed and during the early stages of underwriting review. It can take days or weeks for an appraiser to visit the property and complete the inspection.
- Appraisal Purpose: The appraisal determines the property's market value and helps the lender assess the loan amount the borrower may qualify for. It ensures that the borrower is not taking on more debt than necessary, as the home serves as collateral for the loan.
- Appraisal Results: If the appraisal value meets or exceeds the sale price, the process moves forward into the underwriting stage. However, if the appraisal comes in lower than the purchase price, the borrower may face challenges in getting approved for the desired loan amount, leading to potential renegotiations.
- Underwriting Conditions: During the underwriting process, borrowers may receive conditional approval, indicating that certain issues need to be addressed or explained before final approval. This could include providing additional documentation or resolving specific concerns.
- Final Approval: Once the underwriter is satisfied with the borrower's information and documentation, they give the green light to close the deal. This final approval paves the way for the closing stage of the home-buying process.
The underwriting process is a detailed evaluation that ensures the loan is suitable for both the borrower and the lender. By following the appraisal, the underwriting stage ensures that the loan aligns with the appraised value of the property and that the borrower can proceed to the closing stage with confidence.
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Frequently asked questions
Yes, an appraisal is a critical step in the loan approval process. Lenders use appraisals to determine the relationship between the property's fair market value and the loan amount.
The appraisal is typically ordered by the buyer's lender once their initial loan application package has been submitted. The buyer pays the appraisal fee.
If the appraisal comes in below the contract price, the loan transaction is interrupted, and borrowers no longer qualify for that amount. In this case, the buyer might have to pay the difference in cash or negotiate with the seller to lower their price.
If you suspect your appraisal is inaccurate, you can request reconsideration of value or file a complaint with the lender. You can also contact the lender's primary federal regulator if your concerns are not addressed.
