How Lenders Determine the Value of a Home

When borrowing for a home purchase, to refinance a mortgage or a when applying for a home equity loan, lenders determine the property’s value through a process called an appraisal. An appraisal is an estimate of a home’s value. To ensure objectivity, the appraisal is done by a third party. The lender requires the borrower to get an appraisal to make sure the value of the home will support the loan. Although the lender requires the appraisal, the borrower often must pay for it. Appraisals usually cost somewhere between $200 and $400.

Appraisers calculate the value of a home by comparing the home to recent sales of comparable properties in similar locations, and then adjust for differences in the properties. While all appraisals must adhere to certain standards, at the end of the day they are really a subjective analysis of a property’s current value. As such there can be mistakes, especially in markets where prices are changing rapidly or the quality of homes differs widely.

Generally, when borrowing for a home purchase, appraisals will support the amount you want to borrow. Sometimes, however, they do not. If the appraisal comes back lower than what you have offered to pay for the property, the lender will probably reject your application. You can either walk away from the deal, or if you suspect the appraisal is inaccurate, you can appeal the appraisal. A third option is to use the lower appraised value to renegotiate a lower purchase price with the seller. If neither the lender nor the seller budges and you still really want the home, your last option is to increase your down payment enough so that the portion of the home’s value being financed by the mortgage meets the lender’s requirements.

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