Whether you’re purchasing a new home or want to complete a refinance of your current mortgage, it’s important to understand the role of the home appraisal and how it can impact the outcome of your mortgage application.
After you submit an application, your lender may require an appraisal, which is simply an unbiased determination by an accredited independent appraiser of the market value of the property your lender will be financing.
When you purchase a home, your lender wants to be sure that the home’s selling price is an accurate representation of the home’s condition and neighbourhood, and that you are not borrowing more than what the home is worth. The lender also wants to be sure the property meets its lending guidelines.
When you refinance your mortgage for debt consolidation or to access funds for other needs, the appraisal will be used by the lender to determine the amount of funds that you can borrow since you can only refinance a set amount, up to 80% of your home’s appraised value.
When switching your mortgage to a new lender at renewal to get a better rate or terms, the appraisal is required to verify the property’s value.
To complete the appraisal process, an appraiser typically visits the home to get the information needed. The appraiser will also analyze market comparables and then provide the lender with a written opinion of the property’s value. If the appraised value is sufficient, your mortgage approval is finalized assuming all other conditions have been met. The cost is often passed along to you, typically forming part of your closing costs.
What’s important for you?
In many bidding war situations, some buyers are paying over asking but the appraiser may determine that the property has a lower value, which could affect your financing and require you to increase your down payment, particularly if you are right at 5 or 20% down.
A hot housing market also means that appraisers are very busy so be careful with quick closings. It may not be possible to get the appraisal done in time.
The lender is the appraiser’s client, not you, so the appraisal is sent to the lender and only discussed with them.
When a realtor gives you an evaluation of a property’s value, that should not be considered an appraisal for financing purposes.
A home inspection is not the same as an appraisal. A home inspection is often a condition of a purchase and is done to protect the homebuyer. A qualified home inspector assesses the physical condition of the home and its major systems to help you determine if everything is in good working order, and what repairs are needed and by when.
As always, please get in touch at any time if you have any questions regarding a home purchase, refinance, or a switch at renewal. It’s always a good idea to get advice well in advance of the mortgage financing process so you know what to expect and are fully prepared.