Your Journey Home – almost there!
You're almost to the finish line. You've found the home of your dreams, secured financing, and your offer has been accepted. You've been thru inspections and negotiated any repairs with the home owner. Now all’s that left to do is pack and wait till the day of closing.
The next few weeks should be pretty quiet, but there will be several things going on.
Quickly, after inspections have been done and all repairs items negotiated, the bank will order an appraisal. An appraisal is an independent look at the property that the bank orders to determine the value of the property in relationship to the neighborhood. Your lender will require an appraisal as security for your loan. Don't confuse an appraisal with a comparative market analysis, or CMA. Your real estate agent probably used some version of a CMA when you were first considering making an offer on the property. Realtors use CMA’s to help home sellers determine a realistic asking price. Experienced agents often come very close to an appraisal price with their CMAS, but an appraiser's report is much more detailed--and is the only valuation report a bank will consider when deciding whether or not to lend the money. There are several ways that an appraiser will look at your new home.
Sales Comparison Approach
The appraiser estimates a subject property's market value by comparing it to similar properties that have sold in the area (within about a 1 mile radius). The properties used are called comparables, or comps. Since no two properties are exactly alike, the appraiser must compare the comps to the subject property, making paperwork adjustments to the comps in order to make their features more in-line with the subject property's. The result is a figure that shows what each comp would have sold for if it had the same components as the subject.
The cost approach is most useful for new properties, where the costs to build are known. The appraiser estimates how much it would cost to replace the structure if it were destroyed.
So What Does the Appraisal Mean to You?
Your personal loan approval is accomplished early in the loan process, but final loan commitment usually hinges on a satisfactory appraisal. The bank wants to be sure its investment is covered in case you default on the loan. If the property appraises lower than the sales price, the loan might be declined, but that isn't the only hurdle it must pass. Other facts on the appraisal can be a problem, too: if the appraiser notes some building defects, the underwriter can call for additional inspections. If during inspections a price reduction was agreed to, and it was noted that the price reduction was in lieu of repairs being made, the underwriter can request the inspection report and ask for any of the items to be corrected before closing. Those are just a few examples of negatives that could stall your purchase.
An Appraisal Isn't a Home Inspection!
Appraisers make notations about obvious problems they see, but they are not home inspectors. They do not test appliances, look at the roof, check the chimney or do any other typical home inspection tasks. Never count on an appraisal to help you determine if the home is in good condition.
If the Appraisal Comes in Low
Don't panic if the appraisal comes in low, because there are often steps you can take to make the deal work. If the appraisal uncovers other problems, remember that most problems are correctable. Try to keep your cool and work through issues one step at a time.
At the same time you are waiting for the appraisal the bank is finalizing your financial approval – there are still some loan questions that you will probably encounter. In your haste to pack … do not pack any important financial documents. TRUST ME, the lender will be calling and asking for some document that you know you have already provided. But even more important than that is … under no circumstances should you incur any new debt. While it may seem like a good idea to go out and buy that new refrigerator so it can be delivered the day of closing, it isn’t. I promise you the lender will pull your credit report 24hrs prior to closing. Any new expenses, especially big items, will become a disaster, and could derail the closing. My advice to buyer – especially to a first time buyer is if you cannot pay for an item in cash … don’t purchase it.
It’s getting close to closing time … so keep you cool and you will soon be in your new place.