The Ultimate Mortgage Appraisal Process for First-Time Homebuyers

You’ve spent months looking for a house and finally got a great find. After making an offer over the asking price, your offer was accepted, and you were thankfully able to get through the home inspection with minimal issues. But now it’s time for the mortgage appraisal, and you have no ability to directly communicate with the appraiser! What are they going to say about the value of your new home to your lender?

This process can be nerve-wracking for first-time home buyers — what if the appraisal value comes in below your offer and you have to shell out additional cash at the last minute to get your mortgage?

We spoke to a real estate expert to put together a comprehensive guide to get you through the appraisal process in your homebuying journey.

First: What’s a mortgage appraisal?

It takes work to determine the true value of any financial asset, and a home is no different. Anytime a seller sells a home to anyone besides a cash buyer — that is, anytime a buyer uses a mortgage to purchase a home — the lender will require an appraisal to determine the value of that home so they can confirm they’re not lending more than it’s worth.

Mortgages are secured loans, which means if the borrower stops making payments on the loan, then the lender can take possession of the house. In this way, the buyer’s mortgage is backed by an appropriately valued collateral — the house itself.

Getting a mortgage appraisal follows a standardized process, during which an independent, licensed appraiser inspects the interior and exterior of the home, in addition to other factors, before producing an analysis, which includes a professional opinion of the final value of the home.

Here’s how the mortgage appraisal process works.

Step 1: The appraisal is ordered and scheduled

The appraisal takes place after the inspection and is usually ordered through an independent third party like an appraisal management company, so there should be no contact between the appraiser and the buyer or seller.

Lenders generally work through an appraisal management company (AMC) or maintain a list of approved appraisal companies, which in turn work with a pool of individual appraisers.

In a busy market with a finite number of appraisers, it can take a few days to get the actual appraisal scheduled, and additional days or weeks for the appraisal to be completed.

“In my experience with my buyers and sellers, it’s really the waiting that’s the toughest part,” says top Spokane agent Steven Silbar, who has a track record of selling homes 43% quicker than other agents in his area.

The time involved in completing the appraisal makes picking the right lender all the more important.

“As you’re interviewing your lenders, don’t just look for the lowest rate. Ask them about their appraisal order and review process so you can have assurance that they can get through it quickly and not slow down the transactions,” says Silbar.

“I’ve seen some buyers get put into a tough position because they couldn’t close in the timeframe on the offer.”

For example, if the appraisal process results in a closing window extension from 30 days to 45 or even 60 days, it’s better to know that upfront and write a longer closing window into your offer.

Step 2: The appraiser conducts research

Prior to the walkthrough, the appraiser will note the address of the home and whether it’s rented, owner-occupied, or vacant. They will also take a look at the sales contract, which will inform them how much you offered on the house, or they will note that they didn’t have the contract in front of them.

Other contributing factors include the location of your home and the property values of nearby homes. Trends in neighborhood property values can notably influence the appraisal value of your home.

Step 3: The appraiser walks through the house

During the walkthrough, the appraiser assesses several factors before issuing their final judgment on the value of the home.

The condition of the home, including the interiors and the exteriors, is one of the primary factors that influence the appraisal value. The number of rooms and the availability of windows and closets play into the value, as do health and safety issues, such as the condition of the HVAC and electric systems, as well as possible hazards like peeling or chipping paint.

Safety issues, such as lead in the paint, are particularly relevant when the buyer is taking out an FHA or VA loan; in these cases, the appraiser may provide an appraisal value conditional upon the seller making repairs to address issues uncovered during the walkthrough.

Is the house liveable in its current condition? If not, the appraisal value will come in lower. On the other hand, improvements or upgrades made to the home — including those on ancillary structures like sheds, garages, decks, and pools — can increase the appraisal value of the home.

Step 4: Comps and prior sales

The appraiser will then find comparable recently sold homes (or comps) and evaluate whether this home’s sales price tracks to theirs.

These comps usually have to meet certain criteria to be included in the comparison pool, including being near the exact location as the home being appraised, having the same number of rooms, having comparably similar square footage, and being of comparable age.

If relevant, the appraiser may also include prior sales of the subject home in their evaluation.

Step 5: The formal report

Finally, the appraiser will compile all their research into a report that’s typically based on the Uniform Residential Appraisal Form and deliver it to the lender, with a copy also given to the buyer.

Here’s where the final appraisal value is reported. This document will include photographs of the home, explanations of how the value was calculated, and other information, such as market sales data, and any public land or tax records that were considered in the evaluation process.

Step 6: Last steps to finalize your loan

Was the appraisal at or above your offer price? You’re good to go!

However, although this happens less than 10% of the time, there’s a chance that your appraisal value will come in below your offer price.

In this relatively rare scenario, you still have a few options. You can renegotiate with the seller to reduce the price, find a new lender whose new appraisal might yield a higher value, request a reexamination by the original appraiser based on additional data (such as more relevant comps), or you can request a new appraisal altogether. Note, though, that you’ll be on the hook to pay for any additional appraisals — even if you go with a new lender.

If these options don’t work out, you may have to resort to paying more for your home to cover the appraisal gap. This is most common in markets where home prices are rising too fast for comps (which are based on sales that can be as stale as six months old) to keep up with the reality.

“In Spokane, which is one of the hottest markets in the country, what’s happening here is we’re seeing multiple offers on every single listing — sometimes, five to twenty or more offers. For buyers to be competitive, they have to escalate well above the list price,” says Silbar.

“And a new addendum that’s come into play in almost every single transaction is the additional down payment in case of low appraisal.”

If possible, and if it really is your dream home, you may elect to pay more than the appraisal value for your new home; backing up your higher offer with an increase in your down payment can be one method to try to win the offer.

Why use a top agent to buy a house?

Although agents are not directly involved in the appraisal process, they are your guide and representative throughout your entire homebuying journey. They can help you understand how much to offer and what your options are if the appraisal doesn’t align with your offer price. And in case of a low appraisal, a top agent can advise you in your options to reduce the stress of any renegotiation.

Header Image Source: (Paul Hanaoka / Unsplash)