When you apply for a new mortgage or a refinance, your mortgage loan lender will require an appraisal before the loan can be finalized. The purpose of this appraisal is to ensure that the lender’s collateral is valuable enough to secure your loan.

Understanding the Lender’s Risk

A mortgage is a secured debt taken out against your home. If you fall behind in your mortgage payments, the lender has the power to foreclose on your home and sell it to recover the remaining balance. However, if the home isn’t valuable enough to cover the full amount you owe during a foreclosure sale, the lender must attempt to collect the rest of the debt from you. For this reason, lenders are not typically willing to close a mortgage on a home that appraises for less than the approved purchase price.

How Does it Work?

A real estate appraisal is an estimate of the home’s value. It is determined by a third party who has specialized training in the valuation of real estate. The appraiser will typically value the property using a cost approach, which means that he or she will calculate how much it would cost to rebuild from the ground up. The appraiser will also calculate the market value of the home by comparing it to other homes in your area that have sold recently. Both of these assessments will be included in the report.

What if the Appraisal is Too Low?

If the appraisal on the home you are purchasing comes back too low, your mortgage loan lender will likely deny the loan unless you can modify the terms. For example, the lender may approve the loan if you agree to increase your down payment by the difference between the agreed-upon purchase price and the appraised value. The lender may also approve the loan if the seller is willing to lower the purchase price to the home’s appraised value.

To learn more about appraisals or to apply for a mortgage, please contact Starboard Financial. We have offices in Arizona and Illinois, as well as loan officers nationwide who can serve all of your mortgage needs.