An appraisal is an independent report ordered by your lender that supports the sales price of your home. The appraiser makes a physical visit to the property for an inspection, much like the home inspector. And while the appraiser also estimates the current condition of the property the appraiser does so to establish value. The lender must approve the appraisal much in the same manner as you are approved. You can have a preapproval from the lender but the property does not appraise. In this instance, the loan cannot close.
Prior to visiting the property, the appraiser looks up tax data and information from the MLS and compares similar priced homes that have recently sold in the area of the subject property. These recent sales are called “comparable sales” or “comps.” The appraiser looks for recent sales that have closed within the previous six months and sales within the previous twelve months in addition to recently listed homes. If the appraiser cannot find enough comps in the specified time frame, it’s possible the lender won’t approve the loan.
The lender bases your loan amount on the lower of the sales price or appraised value. If the appraised value comes in lower than the sales price, you have the right to alter your offer yet again. Remember however, your loan will be based upon the appraised value in such an instance. If the sales contract reads $374,000 and the appraiser says $370,000 there’s a problem. You now have three basic choices, walk from the deal and get your deposit back, reduce the sales price or come in with the $4,000 difference in value.
If the appraised value comes in higher than the sales price, no adjustment in your loan will be made and your agent has just found for you a home priced below market.