Buying a home? You’ll likely need to get it appraised before you receive the clear to close. If you’re wondering what is the home appraisal process, or why you should care, this article is for you. We’ll cover everything you need to know on both the buy and sell side of the appraisal.
Simply put, the home appraisal process is when a licensed home appraiser carefully reviews and inspects the home you’re looking to buy. The appraisers job is to provide a fair valuation on the property. This valuation is not the price the house is currently listed for, but what the house is worth in the eyes of a bank/lender. Getting a home appraised can help prevent overpaying for a property.
First and foremost, as the home buyer, you may be required to get the property you wish to buy appraised. Unless you’re paying for the house fully in cash, many lenders will demand the home gets appraised before they issue a loan.
Appraisals typically happen once an offer has been accepted. The mortgage lender will order the appraisal, and the results will be shared with all parties involved. Lenders will only issue a loan up to the appraised value of the home.
The home appraisal process doesn’t take long. Generally speaking, the professional appraisal will finish the job in just a few hours. Keep in mind, the appraisal is not the same as a home inspection. The appraiser will still carefully review the home, but their scope of view differs from what an actual home inspector will look for.
On average, a home appraisal costs between $200 and $700. There are a few variables that can influence the cost of the appraisal. Such variables include the size of the home. A home that is only 1000 square feet may cost $200 to appraise, whereas a home that is 3,500 square feet may be closer to $600 or $700. Additionally, the type of home may also influence the price. A one story condo may be less expensive to appraise than a 3 story colonial.
First and foremost, a home appraiser will inspect the quality of the home. Is the home in good condition, or does a lot of work need to be done to it? For example; are the hardwood floors in good condition, are there stains on the carpet, is the roof, gutters, shutters, and doors in good condition? Once the basics are inspected, the home appraiser will begin to look for value adding items.
Items that add value to your home are not necessarily essential, but are certainly appreciated by the buyer and can be rather expensive. These items include; decks, energy-efficient appliances or systems, fireplaces, a fence that surrounds your property line, interior trim work, and various updates/upgrades to the home.
If you’re looking to sell your home, there are various steps you can do to help your house appraise out, or increase the appraised value of your home.
If you’ve lived in the home for a while, there is a good chance you’ve done some work to the home. Perhaps you’ve replaced the windows, upgraded the electrical system, replaced the HVAC system, or added a deck. Getting all of your paperwork in order, and leaving that paperwork on the counter for the home appraisal, will help the appraiser get an understanding of what work has been completed.
Additionally, they’ll want to see the closed permits for the jobs completed, so be sure to have the permit information neatly organized as well.
It can be difficult to look past a cluttered home. A neatly organized home is always easier on the eyes, and makes the home look better. Not only does a neatly organized room look better, it’s also more practical. If your attic or crawl spaces are cluttered, and the appraiser can’t move around the mess, they may not be able to fully complete the valuation.
Before the home is appraised, you may want to complete some basic work yourself. If doors are damaged, you should replace them. If there is a huge stain in the carpet, consider renting a carpet cleaner to remove the stain. You don’t need to go crazy and replace the entire kitchen, but there may be a list of items you can complete yourself, without breaking the bank, that can help improve the appraised value of your home.
Your entire property will be appraised, not just the inside of your home. Make sure your grass is mowed and edged, add some mulch to the mulch beds, and plant some flowers. Dedicating a Saturday or Sunday to sprucing up the yard will likely pay dividends.
If the foundation is leaking water, if the roof needs to be replaced, or if the sliding door doesn’t open to the deck, get that fixed before it’s identified. Understandably, these are not cheap fixes, but it may make the difference between selling your home and not selling your home. Remember, a bank will not issue a mortgage for the listing price unless the house appraises for at least the listing price. If there are major damages with the home, it may not appraise for the price you were hoping for!
The house should have the right placement of smoke alarms. If there is a security system, make sure it works properly. These small details are often overlooked by the seller, but a professional quickly picks up on them and begins to deduct against the home's value.
Craftsmanship, build quality, and the condition of the home will all help increase the value of a home. Having a new roof, updated electrical, a well maintained and functioning HVAC system, and updated rooms will all help improve the home's value.
You don’t have to go nuts and redo your entire house before putting it in the market. There are plenty of small jobs one could do themselves that can help increase the value of the home. Adding updated lighting fixtures, faucets, replacing doors, and doing a thorough deep clean will certainly pay dividends.
If you were looking to make investments in the home before listing it, be sure to spend that money wisely. Don’t replace the appliances if the roof is leaking. If the siding is chipped or falling off the house, be sure to address that before you add ceiling fans to the bedrooms. Updated kitchens and bathrooms are certainly a huge selling point in any market, and will help increase your home's value.
If the home is in bad condition, that will certainly negatively impact the appraised value of your home.
For instance, if your hardwood floors are cracked, discolored, or if there are boards missing, that will be a red flag. If the yard is overgrown and not maintained, that will also negatively impact the home's value.
Buyers and appraisers understand not every home is brand new construction. However, it’s hard to look past a leaky roof or a cracked window.
In the event you do not agree with the results of the home appraisal, you do have the opportunity to dispute the appraisal.
The first thing you’d have to do is receive a copy of the appraisal. Figure out what negatively impacted the home's value, and verify the information is correct. For example, if the report suggests the HVAC is dated, but you just replaced the system in recent years, you have every right to bring that up and dispute the claim.
If the appraiser failed to identify the upgrades or improvements in the home, you can also call attention to all the changes you’ve made and the money you spent.
Home appraisers aren’t perfect. There certainly can be a margin of error on the report. In the event you believe the report is off base, you can request a second appraisal.
What happens if the home appraisal is less than the sale price? That happens all the time. If the home buyer is fixed on this home and would happily over pay for it, they’ll still have an opportunity to do so. The bank will only provide a mortgage for what the appraised value is. If the appraised value is less than the asking price, and the buyer still wants the home, they’ll have to make up that difference with cash.
This is rare as people generally don’t want to overpay for something. More commonly, the seller will need to lower their listing price to be aligned with the appraised value of the home.
Our Mortgage Learning Center features blogs on a wide range of mortgage and refinancing topics.
Getting a home appraised is looked at as an unavoidable step in the home buying process. Although many people are intimidated with the appraisal process, as a home buyer, you ultimately want to get this done.
A home appraisal is designed to provide a fair, unbiased, valuation on the home. The listing price is not always the appraised price. In many cases, the appraised price may be lower. Without knowing the true value, you may overpay for a home.
As a home seller, there are various steps you can take to help increase the value of your home. Many steps can be completed on a tight budget, and most of them won’t take a great deal of time.
If you find a property that you’re highly interested in buying but are concerned that the seller might choose another offer over your own, you may consider making a deposit in escrow to show that you’re committed to your offer. This deposit is called an “earnest money deposit,” and is a great way to back up your offer in a competitive housing market
Read our blog written specifically for homebuying beginners here.
Earnest money is typically deposited in an amount between 1 and 2% of the purchase price. It shows that you’re serious enough about your offer to give that money to the seller if you back out without good reason during the closing process. Earnest money isn’t a requirement, but it’s strongly recommended and shows your commitment to the seller.
Earnest money is delivered to a third party in an escrow account when you sign a sales contract or purchase agreement. If you purchase the home, the money is refunded to you or can go toward your down payment. If you back out for a reason that isn’t outlined as a contingency in the contract (which we’ll cover more in a minute), the seller will get to keep the earnest money.
As an example, say that Nathan wants to purchase a $150,000 condo. Since he’s buying in a competitive market and wants to make his offer stand out, he decides to indicate in his offer that he will make a deposit of 2% of the sale price ($3,000). When his offer is accepted, Nathan wires the money to an escrow company.
If Nathan’s home inspection covers a serious issue like a dangerous crack in the foundation, he can back out and receive his money back. If he decides to move forward to close on the property, the earnest money will either be refunded to him or will go towards his down payment. However, if Nathan were to find another property that he was more interested in, he would have to forfeit the $3,000 in earnest money in order to withdraw his offer.
Be sure not to confuse earnest money with the down payment on a house. The down payment money is brought as a cashier’s check to closing, and the amount depends on both the property type and the kind of financing used. Nathan might be able to use his earnest money as part or all of his down payment, but this isn’t a requirement.
As you can see from the example, a buyer may want to make a higher earnest money deposit when they are committed to buying or are shopping for houses in a highly competitive market. The minimum amount is 1% of the sale price, which is typically just a few thousand dollars at most.
Your real estate agent will be a great resource when it comes to deciding an earnest money amount and will use their expertise on local trends and competition to help you write your offer.
As we discussed, earnest money will either go towards a down payment if you close on the home or can be refunded if you decide to withdraw your offer for a reason outlined as a contingency in the buyer’s agreement.
There are several different types of contingencies that might be included in the agreement signed by you and the seller.
The home inspection contingency allows a buyer to withdraw earnest money if inspection findings reveal a problem with the property that costs too much to repair or that would make the home a bad purchase
Read our blog covering 8 budget-friendly DIY home improvements here.
An appraisal contingency ensures that the buyer can withdraw their offer and earnest money if their lender appraises the house and determines that it is worth significantly less than the same price.
A financing contingency is an important protection for the buyer that allows them to withdraw their offer and earnest money if they are unable to receive financing for the home. It also provides them with a predetermined amount of time in which they can look for financing.
Depending on the buyer’s finances, they may want to include a sale contingency, in which they can withdraw their offer if their current home or property doesn’t sell in a given time period.
Earnest deposits can range anywhere from a small amount to thousands of dollars. It’s important to take the right steps to protect your money in case you do want it refunded.
Escrow companies exist so that neither the buyer nor the seller has possession of cash or assets while a house is in the middle of the sale process. If you were to give earnest money to the seller and then ask for a refund if, for example, your first home were unable to sell, there’s more room for conflict than if the money is held by an objective third party.
Make sure that every relevant contingency is included in your buyer’s agreement. If you choose to forfeit contingencies, do your research beforehand to make sure you’re willing to take the chance of losing that deposit.
Your responsibilities don’t stop with a signed contract. Protect yourself by staying on track with next steps: securing the financing for the home and scheduling a home inspection. Delaying these processes or failing to be through might result in a loss of your earnest money or in making rushed decisions later on.
Make sure that every contingency and term is included in an agreement that is signed, in writing, by both you and the seller. It might seem simple to make promises and agreements in person or over the phone, but having written documentation will guarantee your financial security and will keep a record of the process.
Our Mortgage Learning Center features blogs on a wide range of mortgage and refinancing topics.
Making an earnest money deposit is only one aspect of making an offer on a potential home. Working with a real estate agent ensures that you have help in deciding when earnest money is important and how much to offer as a deposit. Since market trends can change depending on property type and area, it’s important to find an agent who is specifically experienced in the kind of home you’re looking for and in your neighborhood of interest.
A bridge loan is a short-term loan a borrower may use while a more long-term financing contract is finalized. Bridge loans are common in real estate when someone needs to buy a new house before their existing house has sold.
These short term loans typically come with a higher interest rate. Additionally, many banks will require some sort of collateral from the borrower before the loan is issued.
We’ll cover everything you need to know about bridge loans below.
Although bridge loans may also apply to the business world, they are more commonly associated with real estate transactions. As the name suggests, these loans are designed to bridge the gap, and fill the cash constraints, someone may feel when they are both buying and selling a home at the same time.
Someone wishing to get a bridge loan first needs to find a lender who offers this financing program. The first place to check would be with your existing mortgage company.
Once you find a lender who offers bridge loan financing options, it’s time to get all the paperwork needed for the lender. Lenders will want to know the details of your existing property. For example, lenders will want to know how much you owe on your existing property, when you plan on selling it, and what price you plan on selling it for. Additionally, they’ll want to know the details on the property you’re looking to purchase.
Lenders will of course pull an up to date credit report, and will require you to provide them with proof of income. With all of this information, a lender can successfully calculate the financial ratios they use to determine if you qualify for a bridge loan, and how much loan you qualify for.
Securing financing via a bridge loan doesn’t take too long! Generally speaking, you should be able to have your loan finalized within 30 days. Hard money lenders can typically finalize a loan even quicker
We wrote a whole blog explaining ways to speed up the mortgage process, read it here.
Bridge loans can be more challenging to qualify for since you typically need to have a good to excellent credit score (740+ credit score) to qualify - but all lenders have their own unique qualifications. One of the most important variables a bank will review during your application process is your debt to income ratio.
This variable is increasingly more important on bridge loans as the borrower will be paying for two mortgages at the same time.
Banks want to be fully confident adding another mortgage payment to the borrower will not cause them to default on any existing loans. One's income needs to be high enough to provide them with the financial breathing room and stability through the double financing period.
Below is a comparison table of bridge loan qualifiers vs a traditional home loan.
Loan TypeCredit Score NeededDTI (Debt-to-Income) PercentageInterest RateBridge LoanGood to excellent - 740+ credit score is ideal, but all lenders can have different requirements.Because a person taking out a bridge loan is considered a temporary loan until their home sells, many bridge loan lenders will allow applicants with a DTI of 50% or less to be considered.Rates vary by applicants and timing, but are usually higher than the current mortgage rate.
Applicants can expect rates of 8.5-10.5% or more.MortgageVarying credit score is needed depending on your loan type.
Some mortgage loans can accept applicants in the 580 range while most conventional loan lenders prefer a credit score of 620 or higher.Depending on their mortgage you apply for, the DTI requirement can change by several percentage points.
Preferred DTI is around 43%, but some lenders can provide financing for applicants with DTI up to 50%Mortgage rates vary by time and applicant.
The current mortgage rate is between 4.9% - 6.5%+
Bridge loans provide the borrower with a great deal of convenience. In the finance or lending world, convenience comes at a premium. The interest rate on a bridge loan is directionally aligned with the interest rate on conventional lending, however, bridge loans will have a higher interest rate by a few percentage points.
The higher interest rate makes sense from a banking perspective. Banks need to take on risk to issue these loans, and they are short term in nature. In order for a bank to make as much money back as possible, and justify the risk in lending, they simply need to charge a higher interest rate
What's the difference between an interest rate and APR? Don't know? Read our blog all about it here.
The actual borrowing amount may vary between different lenders, however, as a rule of thumb most bridge loans will allow one to borrow up to 80% of the home’s value.
Bridge loans are certainly a powerful tool made available to the real estate industry. Now with a better understanding of what this tool is and how it works, let’s dive into some pros and cons.
Many borrowers appreciate a bridge loan for the following reasons.
Bridge loans provide individuals with flexibility. They can buy a new house before their existing house sells. This not only adds convenience, it can also help someone move into their dream home. In a competitive real estate market, that dream home may not be available for long.
Some bridge loans do not require the monthly payment for a few months. If you happen to secure lending from a lender who doesn’t require immediate monthly payments, you’re in luck. You’ll be able to buy the house you want without the immediate financial pressure two loans could have on your finances.
Generally speaking, securing financing via a bridge loan can be done in a shorter period of time. Instead of waiting on a HELOC, or other financing options, lenders who issue bridge loans are well aware the borrower needs the loan now and plans accordingly. This urgency comes at a premium, which we’ll discuss below.
There are three major drawbacks of a bridge loan.
You may be wondering, are bridge loans a good idea? Unfortunately the answer isn’t yes or no. A bridge loan is a great financial tool to have in your tool chest, but it certainly comes at an increased cost and risk. If you need the money quickly to move into your dream house, a bridge loan may be the only option.
However, a bridge loan is not the only option when it comes to buying a new home while you wait on your existing home to sell.
Is there an alternative to a bridge loan? Absolutely. Instead of choosing a bridge loan, many people choose to go with a home equity line of credit, a home equity loan, or even a 80-10-10 loan.
A home equity line of credit, also known as a HELOC, is very similar to a credit card in how they function. A borrower is approved for a specific amount or credit limit, but the borrower does not need to use the full amount. A borrower will only pay interest on the debt they used, and they can draw against their credit line in various increments.
Another common option would be a home equity loan. This is very similar to a home equity line of credit, however, the money is given in one lump sum. Some of the major advantages are; there are lower closing costs associated with home equity loans. Additionally, home equity loans have lower interest rates and even offer extended repayment terms.
A 80-10-10 loan option is when someone has enough cash to cover a 10% down payment. Instead of financing 90% of the home in one mortgage, the buyer will choose to take out two mortgages. The first mortgage is for 80% of the home value, and the second mortgage is for 10%. Therefore, the buyer is able to avoid paying private mortgage insurance, and can use this option if they are unable to make a larger down payment as their existing home hasn’t sold yet.
Our Mortgage Learning Center features blogs on a wide range of mortgage and refinancing topics.
A bridge loan is a financial instrument that provides financing to individuals as they secure a longer term financing option. In the real estate world, these loans are common when someone is selling their existing house, and buying a new house, simultaneously.
Bridge loans provide the borrower with money in as little as a few days, resulting in tremendous flexibility. This flexibility comes at a premium, and one should expect to pay a high closing cost, and interest rate, on this short term loan.
There are other financing options available in the marketplace. Home equity lines of credit, home equity loans, and even 80-10-10 loans should all be considered before deciding if a bridge loan is the right option.
People buy their homes for a number of reasons. Affordability, stability, and comfort are some of the most important factors. However, appreciation must also be considered when you’re thinking about buying, selling, or refinancing a home.
Understanding home appreciation is essential for homeowners. Knowing how home appreciation rates work and what they are in your neighborhood can help you to make the best choices for your financial security.
In real estate, appreciation refers to the increase in value of a piece of property over time. An increase in appreciation for a home can stem from several factors. Some of these factors have nothing to do with the home itself, but instead, they relate to the area around the home.
For example, increased job opportunities and growth in an area can help to increase average home appreciation in an area. When a new factory is opened nearby, there may be increased demand for homes in the area so that workers can enjoy a quick commute. This increased demand can lead to higher sale prices for the neighborhood, even if the homeowners haven’t changed anything about the homes that they’re selling.
However, homeowners can also affect their home’s appreciation. The best way of doing this is by investing in your home and making improvements.
Average home appreciation rates are the rates at which homes increase in value for a given period of time. These rates will vary over time, but typically, they do not shoot up drastically. The rate of appreciation depends largely on location.
This is because the land on which your home sits is the one thing that cannot be changed about your home. When there is increased demand for homes in your local area, average home appreciation rates go up.
There is one factor in particular that can affect appreciation rates in locations across the United States: the economy. In a strong economy with greater spending, house prices tend to go up. However, the state of the economy is not the only influencer. Inflation can have the ability to increase and decrease the value of homes, as well.
Because inflation can affect the loans that potential home buyers may qualify for, they can also change the size of the pool of potential buyers, which can affect the balance of supply and demand in the market.
In the United States, the average appreciation rate for a home is between 3 - 5%. In the last 25 years, the average appreciation rate for a home in the United States was 3.9%.
There is a limited supply of land in any given area. The land that your home sits on becomes more valuable over time, as there are fewer building sites available. This is especially true when the land around you has been developed into restaurants, retail spaces, suburban tracts, and more. In areas that become more desirable over time, average home appreciation goes up.
Home appreciation rates inform homeowners about what they can expect to sell their homes for at any given time. Higher appreciation rates mean that a homeowner can expect to sell their home for more than what they bought it for. Lower appreciation rates lead to properties that decrease in value.
A positive appreciation rate is something all homeowners should strive for. When you’re able to sell your home for more than its original purchase price, it can make it possible for you to upgrade to a larger home, pad your savings account, or help you to pay off debts with the excess.
Appreciation is best understood as a percentage.
If you would rather avoid calculations, the U.S. Federal Housing Finance Agency has a House Price Calculator that can assist you in determining your home appreciation value.
Because you can’t control the local market around you, for homeowners, the only way to keep home appreciation rates high is to maintain your home and keep it up to date.
To enjoy a high appreciation value, homeowners can do projects such as these:
Maintaining your home’s exterior keeps it looking fresh and clean. It may seem simple, but even just a fresh coat of paint can help to enhance your curb appeal and protect your investment.
When they’re looking for a home, buyers usually want something that is updated to modern standards. Keeping the interior of your home clean, operational, and up-to-date can add thousands of dollars in value when it’s time to sell.
Energy efficiency is another valuable factor home buyers look for. Increasing your home’s efficiency can lower your gas and electric bills. Homebuyers are often willing to pay more for energy-efficient homes, as they understand that they’ll pay less in monthly utilities with an upgraded home.
Smart homes make life easier, which has made them popular among buyers. Adding more advanced technology like newer thermostats and security systems can add value to your home.
Square footage is one of the biggest selling points for a home. Adding square footage is not the easiest way to add value to a home, but adding structures like a deck or a guest house will almost always add thousands of dollars in value to your home.
You cannot always control what goes on around your home, but keeping your home up-to-date, looking good, and functioning properly will add value and increase appreciation.
Our Mortgage Learning Center features blogs on a wide range of mortgage and refinancing topics.
So what is home appreciation? It’s the increased property value of your home over time. Because the trend for homes in the United States is currently about 3-5% in appreciation, this means that most homeowners will see their home’s value increase in the long run. However, to maximize home appreciation, homeowners need to do their part.
For more information about home appreciation for your specific property, contact one of our agents today! We can help you to understand the current value of your home and the ways that you can increase that value.
*Does not apply to third party fees and closing costs.
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