About a week to ten days into your loan process an appraisal will be ordered to verify the sale price that you are paying for the home you are buying. Let me clear a couple of things up about appraisals:
1) The appraisal is not a whole house inspection. A whole house inspection is performed to uncover any defects in the property that could be dangerous or costly to repair. The whole house inspection serves as a method of acquainting a home owner with the property he/she is buying and any issues they may expect that would need to be repaired. The appraisal is primarily for the purpose of establishing the value of the property. Most loans do have minimal condition criteria that the appraiser needs to take note of-USDA,FHA, and VA loans require a 100amp breaker box for instance, to comply with the loan. However, the appraiser is not an inspector in the sense that they are looking for problems or issues with the home.
2) The appraisal fee is a part of closing costs-however, even if the seller is paying closing costs on behalf of the buyer this fee falls to the buyer to pay as it is paid in advance of the appraiser performing his job. Regardless of the outcome of the appraisal the appraiser has to be paid. The cost of the appraisal is credited to the buyer at closing. With any real estate transaction, the buyer puts his appraisal money at risk. The money is non refundable.
3) If the seller has a recent appraisal that they had done in advance of selling their property you might want to consider it a marker of where the value of the property is, however that same appraisal can not be used for your purchase. Appraisals have to be in the name of the lender that is underwriting the loan. It is also possible that a different appraiser may have a different value depending on what has sold since the first appraisal was done or the use of different comparable properties.
4) Neither the lender nor the buyer has the option of choosing a specific appraiser. That changed with the mortgage loan fiasco. Lenders now have to order appraisals from appraiser pools known as appraisal management companies (AMC's). Each lender has one or more AMC and all appraisal orders are sent to the AMC. The appraisers affiliated with each AMC can choose to pick up the appraisal and perform the inspection and report. Then the report is sent back through the AMC to the lender and the buyer. The lender is not allowed to have any contact with the appraiser. While appeal processes exist for appraisals that seem to be off the mark, it is up to the individual appraiser to choose to change the report or not. In my experience, there is not much chance that anything will be changed on the report with regard to value or properties used to support the value of the home being purchased.
5) The value of a home is determined by comparing the subject property to other homes in a similar geographic area that have sold recently-normally 90 days is the optimum length of time for these sales. Each home that has been sold can have the sale price adjusted for the amenities it has or does not have compared to the subject property. From those calculations the appraiser will determine a market value. There is also a value placed on the property for the cost to build it new. However, the sales comparison value is the one that is used for lending purposes. If the property appraises for less than the sale price buyer and seller will have to go back to the negotiating table to see if they can reconcile the new price. If not, the transaction can not move forward unless the borrower has the funds to make up the difference between the appraised value and the sale price. This happens very seldom as most people don't care to overpay for a home and opt to withdraw from the transaction.
6) The appraiser may note some condition issues that require repair prior to closing the transaction. We see these requirements even on conventional lending. Lenders don't want to carry a lien on a property that has condition issues no matter how much money the buyer puts down.
The best advice on value that you can receive on a property that you are considering is from your buyer's agent. Your real estate agent can do a comparable market analysis to see if recent sales in the neighborhood will support the seller's price. If there is a question about that you may choose to move on to another property. (Another very good reason to work with a real estate agent-particularly with for sale by owners who may have priced their home based on emotion rather than concrete evidence of its true value.)
The appraisal is the step in the loan process that can take the longest as there is a finite number of appraisers. Some loans such as FHA and VA require the services of appraisers who are specifically trained in appraising for those programs. If the market is busy as in the spring and early summer getting the appraisal back can take longer. But most of the time the appraisal is back in a week from the time of the inspection.
The appraisal-an important part of the loan process-having an overview of how it all works should help ease the stress until that report is back and the transaction can move forward.
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