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In our current economy, home loans can seem fraught with peril. Are you pre-qualified or pre-approved? What is your interest rate and is it adjustable or fixed? What are your monthly payments going to be? How will your taxes change with home ownership? Is your lender going to even stay in business? All of these questions come into play when deciding on a mortgage, and are important matters to discuss with your lender and real estate agent. But once you have found the house of your dreams, made an offer, had it accepted by the seller, and are in escrow, there is still one crucial real estate issue that can have a detrimental effect on the approval of your home loan: the real estate appraisal.
Even if you are pre-approved for your home loan by a lender, that approval is going to be conditioned on the property appraising at the purchase price. In years past, when the real estate market was booming and bidding wars for properties were common, the disparity in purchase price and appraisal was not such a deal breaker. If your property appraised for less than the purchase price many people could make up the difference with second mortgages, more cash down, or with private financing built into their home loans. Appraisers used to have more leeway to nudge an appraisal upward to meet the purchase price and help a deal go through. Lenders had confidence in real estate as an asset and skyrocketing prices in say, 2004, showed no signs of the downward trend that would place so many foreclosure signs on homes in 2009. But in today’s economy, many sellers are desperate to get out from under their own bad mortgages and need a certain price to avoid a short sale and possibly a foreclosure.
If a property doesn’t appraise at the value of the purchase price, it is often going to kill the deal. Appraisers today are much more stringent in their appraisals, and banks are much more likely to ask for a second appraisal if they have any doubts. No one wants to owe more for a property than it is worth, and technically the bank owns your home until you pay off the mortgage. The days of fair market value, meaning what a particular home is worth to a particular buyer, are over. Unless you are an all cash buyer, purchasing the home of your dreams is going to be nearly impossible if your property doesn’t appraise at the price you and the seller have agreed to. The home loans being given today are, in the end, being given carefully.
