Determining Market Value
If you are obtaining a loan to purchase a home, you will first need to complete an Application with the Lender. A Loan Officer or Loan Consultant (they have a number of titles) will take your application which will be turned over to a Loan Processor. The role of the Loan Processor is to obtain all of the documents required in order for the Lender to approve the loan. For example, they will likely request documentation of Income (W-2’s, 1099’s, etc.), Assets (Bank Accounts, Investments, etc.) and Expenses (Loans, Credit Cards, etc.).
One more document that is required by Lenders is a Home Appraisal. An Appraisal is performed by a licensed professional who will prepare a detailed report of the home’s value. The Appraisal is usually the last document the Loan Processor needs to complete the “File”. Once the “File is complete it is turned over to Underwriting, which is the Department that makes the decision on loan approval.
Why does the Lender order an Appraisal? They want to make sure the home is worth the price on the purchase contract as their loan is based on that. The Home is the Lender’s “collateral” if the Buyer defaults on the Loan. How is an Appraisal performed? The Appraiser compares the home to other recently sold homes in the same area. They add and subtract the value of features that differ from the home being appraised to determine the market value of the home they are appraising.
For example, if the home being appraised has a swimming pool but the comparable home that was sold does not, then the value of the home that was sold will be increased to compensate for that. Let’s use an example with amounts to make it clearer:
Sales Price of Comparable home: $190,000 (No Pool)
Approximate value of a Pool: $10,000
Adjusted Value with a Pool: $200,000
The Appraiser would report that the value of the home with the pool is $200,000. This is just one example of a difference in homes that the Appraiser will have to account for. Other common adjustments include Living Space (larger homes sell for higher prices), Garage (2 car, vs. 3 car, etc.), Condition and Location, to name a few.
What if the Appraised Value is less than the Purchase Price? As a Buyer, you do not want to overpay for the home and you may cancel the contract and receive a full refund of your Earnest Money; however, the Seller will often lower the price to the Appraised Value. In that case the Buyer can proceed with the Purchase at the new sales price.
What if the Appraised Value is Higher than the Purchase Price? Congratulations, you have purchased a home at a price below its current value! The Seller cannot change the Purchase Price and must go forward with the sale.
Once your Lender has received the Appraisal, they are usually ready to approve the loan. The Loan Processor turns the file over to Underwriting for their analysis & approval. Underwriting is a group of loan professionals that make the final decision on loan approval. They may request additional information as they go through the file but once approved the file is sent to another department that prepares a package of documents for the Buyer’s signature.
These “Loan Documents” are then sent to the Escrow Company for Signing.
Cash Buyers – Important: The Appraisal is not a required step in purchasing a home when payment is in Cash. A Buyer can include an Appraisal as a condition on a Cash sale, but it must be written into the Purchase Contract prior to submitting it to the Seller for approval.
Pre-Closing Walkthrough: As a last step before Closing, the Buyer is entitled to a “Pre-Closing Walkthrough”. The purpose of the Pre-Closing Walkthrough is to:
- Ensure that the home is in substantially the same condition as when the Purchase Contract was accepted; AND
- Check to make sure any repairs the Seller agreed to make have been properly completed.
If there are problems with the home’s condition or repairs, the Seller is given an opportunity to complete them prior to closing.
In the vast majority of Walkthroughs there are not any discrepancies. The Seller is usually very committed to the sale and want to move forward with their own plans. They do not want to do anything that could interfere with the closing.