The Role of the Appraisal
When you borrow money to buy a house, the money lender requires an appraisal – a neutral expert’s estimation of the home’s fair market value. The appraiser considers many factors, including the prices of comparable homes that have been sold recently as well as the condition, size and amenities of the property being appraised.
The lender requires an appraisal because it would be bad business to unwittingly lend more than the house is worth. In the vast majority of cases, everything is fine; the house is appraised at or above the sale price and the loan goes through.
Occasionally, the appraisal is for less than the home’s selling price. What happens next depends upon how much of a down payment the buyer plans to make.
If the buyer is going to make a sizable down payment, the lender might not care about the low appraisal. For example, if the sale price is $200,000, the appraisal comes in at $20,000 less than that, and the buyer is making a $100,000 down payment, the bank will let it slide. The risk is still low enough for the bank to close on the transaction.
So, why not get a second appraisal? Because everything takes time. In every real-estate transaction, time is of the essence. The process works differently when the down payment is small or nonexistent. If someone has $3,000 for a down payment on a $100,000 house, and the appraised value comes in at $95,000, that loan will not be approved. The bank won’t lend $97,000 for a house that an appraiser says is worth less than that, especially if the buyer can scarcely scrape up a down payment.
In the case where the appraiser has missed something, the bank usually goes back to the appraisal company to have them reevaluate. Perhaps it’s an obvious error such as not noticing that an addition was built onto the house. More likely, the problem stems from not finding the right “comps,” or “comparables” — prices of similar, nearby houses that were sold within the last six months.
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