WHAT IS AN APPRAISAL
What’s an appraisal?
An appraisal is an estimate of value. It’s a way for the lender who’s giving the loan to make sure that they’re not loaning more than the property’s worth. The intent is to protect the lender. In reality, it protects the buyer too.
Here’s how: If you’re buying a house for $200,000, and it only appraises for $190,000, then the bank thinks it’s only worth $190,000 and won’t make a loan based on the $200,000 purchase price. Even if you’re only borrowing $150,000. Either the seller’s going to have to come down in price, or you’re going to have to come up with additional cash. See, the lender planned on having a certain equity cushion (loan to value, or LTV). In this case, the ratio was 150,000/200,000, for a LTV of 75%.
If you have a financing contingency and an appraisal contingency, then you’re protected against buying an overpriced house.
The appraisal itself consists of a licensed appraiser coming to the house, looking it over, and comparing it to other comparable houses that have sold. There’s some subjectivity in it. The fun part is that even though you’re going to pay for it, neither you nor the bank get to pick the appraiser.
To be safe, you’re going to want to make sure that any offer you make on a house has the proper contingencies (protections), and appropriate timeframes. Little mistakes can be very costly, so make sure you understand the terms, and make sure you’re working with a Realtor who knows what they’re doing.