A mortgage is a puzzle, and an appraisal is one of the most important pieces
There are so many things that go into funding a mortgage, whether that’s collecting the right documentation, finding the right lender, or making sure that everything is getting done before closing. But one of the most important parts of any mortgage is the appraisal. An appraisal for a mortgage is like any other appraisal, but for a much larger product – a trained professional will examine the subject property of your mortgage, evaluate its condition against similar properties that have recently sold, and ultimately assign a value to the home.
But why do I need an appraisal?
The reason that nearly every mortgage proceeding requires an appraisal is fairly straightforward: it protects the borrower and the lender. The lender that provides mortgage funds is taking a risk by loaning the money secured by the property, and the borrower is taking a risk by borrowing that money. If there is a significant mismatch between the value of the mortgage and the value of the home, the terrible situation of owing more than the property is worth can happen; also known as being ‘underwater’. Neither party in a mortgage wants this to happen. For a borrower this can be financially devastating to them and their family, especially considering that for most people their home is the biggest purchase they’ll ever make. Lenders also don’t want this to happen, as if a borrower defaults on their mortgage due to the home being underwater, they can lose a significant amount of money having to then re-sell that property. By requiring an appraisal, the lender ensures that they do not offer a loan greater than the worth of the property and that both they and the borrower are protected.
But if I’m buying a property, wasn’t the value decided by the amount I paid for it?
Unfortunately the answer here is ‘no’. Unless a property has been professionally appraised, the market value of the home is somewhat up in the air. If there is significant competition from other buyers wanting to purchase a home, it can artificially inflate the value of the property, which then makes it significantly harder to fund a mortgage that matches the sale price of the home. Lenders will almost always lower the funds they’ve offered to match the same loan-to-value ratio they initially expected, so this is not an ideal situation to be in as a borrower. Working with a mortgage broker can help you navigate this process, which is why we always encourage it!
What do I do if the appraisal is lower than the sales price of the home?
Depending on the wording of your offer contract you may be able to renegotiate the sale price of the property, or walk away from the purchase entirely. In some cases the appraiser may have made a mistake, and a different appraiser will provide a more accurate appraisal that reflects the real value of the subject property. Situations like this are why we always advise borrowers to work with a mortgage broker, as they have the experience to guide you through this unfortunate situation if it happens, and will do whatever they can to get your deal funded.