When you buy a home, your mortgage lender will want to know whether the house you are buying is worth the amount of money you have agreed to pay. The lender needs to evaluate the house to discover anything that might negatively or positively impact the home's fair market value. To determine a home's value, lenders require home appraisals for all borrowers.
Federal banking regulations require that the lender order the appraisal. The regulations are a result of the savings and loan scandals in the late 1980s. Federal law entitles you to receive a copy of the appraisal from your lender.
The following are four common questions Massachusetts first-time homebuyers ask about real estate appraisals and the answers to those questions.
A real estate appraisal sometimes referred to as a home appraisal, is an estimate of a property’s value. Property value is based on such factors as location, amenities, structural condition, square footage, number of bedrooms, number of bathrooms, and recent sales of similar nearby properties. Appraisals are conducted for single-family homes, condominiums, and multi-unit dwellings. An appraisal is not a home inspection.
A licensed appraiser conducts the real estate appraisal. The appraiser will do a walk-through of the property, noting anything that might alter the home’s value. The appraiser will sketch out the floor plan for the home, take photos of the property and look for any safety violations. If there are any such violations, the issues might need to be fixed before the lender approves the loan. The type of loan sometimes determines whether an issue needs to be corrected. For example, FHA and VA loans have unique requirements.
Appraisers in Massachusetts are licensed. Licensed appraisers are governed by statutes and regulations, and they must take approved courses and a test to obtain their license and continuing education to maintain their license. The role of the appraiser is to provide an objective, impartial and unbiased opinion about the value of the home he or she has appraised. The appraiser's opinion might be that the appraised value of the home is less than the agreed-upon contract price. See Appraisal Gap Clause.
Most lenders will collect the cost of the appraisal from the homebuyer upfront. Even if the appraiser's fee isn't collected beforehand, the cost will be passed on to the homebuyer as a closing cost for most loan programs. Appraisals typically cost between $375 and $500, but appraisers will charge additional fees if they need to make multiple visits to the property for any reason. Lenders must disclose appraisal and other fees in the Loan Estimate, which is a three-page form that potential borrowers receive after applying for a mortgage.
Typically the mortgage lender orders the appraisal as soon as it receives the signed purchase and sale agreement in Massachusetts. Sometimes the situation requires the lender to order the appraisal sooner. In Massachusetts, it is important that the homebuyer receives a satisfactory appraisal prior to the loan commitment date.
If in the opinion of the appraiser the home's value is less than the agreed-upon purchase price, the homebuyer's financing could be in jeopardy. Either the lender will deny the loan or will require the homebuyer to increase the amount of their down payment by the difference between the agreed-upon price and the lower appraisal value. If the homebuyer does not have the available cash to increase the amount of the down payment, the buyer will need to cancel the transaction before the loan commitment deadline.