An appraisal is a licensed appraiser's opinion of what a home is worth, written up for the lender. The appraiser visits the home, measures it, notes its condition and compares it with recent nearby sales of similar homes. The lender then bases your loan on the lower of the appraised value or the contract price.
On most purchases the appraisal lands at or near the price and nobody thinks about it again. It matters when it comes in low, because the loan shrinks and the difference has to be settled somehow.
How each program uses the appraisal
FHA. The appraiser also checks that the home meets HUD's minimum property requirements for safety, security and soundness, such as a working roof, safe electrical and no peeling paint on older homes. Required repairs become a condition of the loan. An FHA appraisal is generally good for 180 days.
VA. VA or the lender issues a notice of value based on the appraiser's report. If the value is trending below the price, VA's Tidewater process gives the agent a chance to send more sales before the report is final.
Conventional. Fannie Mae measures loan-to-value against the lower of the price or the appraisal. Some Conventional loans skip the appraisal through an appraisal waiver, which Fannie Mae now calls value acceptance, based on its own property data.
An appraisal is separate from the four-point and wind mitigation inspections many Florida insurers ask for. Those look at roof, wiring, plumbing and storm protection for the insurance policy.
When the value comes in under the price
A buyer signs at $350,000 with FHA, 3.5% down. The appraisal comes in at $340,000.
| If it appraised at $350,000 | Appraised at $340,000 | |
|---|---|---|
| Largest FHA base loan, 96.5% | $337,750 | $328,100 |
| Buyer's share at a $350,000 price | $12,250 | $21,900 |
Keeping the price at $350,000 now costs the buyer $21,900 toward the purchase, which is $9,650 more than planned. The buyer has four ways forward:
- Renegotiate to $340,000. The down payment drops to $11,900, and the buyer actually brings $350 less than before.
- Meet in the middle at $345,000. The loan stays at $328,100. The buyer brings $11,900 plus the $5,000 gap, or $16,900.
- Challenge the value. Your agent can send comparable sales the appraiser missed, and the lender can request a reconsideration of value.
- Walk away. FHA's amendatory clause lets the buyer cancel and keep the earnest money when the appraisal comes in below the price. VA contracts carry a similar clause.
Sellers often agree to option 1 or 2, since the next buyer's appraiser is likely to land near the same number. The question page what happens if the appraisal comes in low covers the negotiation in more depth.
Getting ready for the appraiser
The buyer usually pays for the appraisal when it's ordered, and it shows on the Closing Disclosure as paid outside of closing. The seller controls access, so ask your agent to confirm the utilities will be on and the attic and electrical panel reachable on appraisal day. A list of recent nearby sales from your agent, handed to the appraiser, can help support the price.
The price check tool shows how a lower price changes your cash and payment. To plan around a tight appraisal before you write the offer, call AAA Capital Funding at 888-601-8344.