What To Know About Offering More Than Appraisal Values
In spite of fears that mortgage rates would rise dramatically in 2021, they are currently hovering right near historic lows. It does not take a rocket scientist to know that low mortgage rates make buying a house a tremendous value that can save you a ton over the life of the home loan. This fact is not lost on potential home buyers around the country. In nearly every market, home buyers are going toe-to-toe with one another to try and secure the house of their dreams. This intense competition between buyers is causing an astronomical amount of bidding wars over houses for sale on the market. In turn, these bidding wars are driving up home prices to record levels. While it might be tempting to make a bid that far exceeds the appraised value of the home, it can actually complicate your ability to get a mortgage.
The Role of Appraisals in Buying a House and Getting a Mortgage
Getting an appraisal is an important step in buying a home, especially if you are looking to pay for the house with a mortgage. Simply put, an appraisal is a determination of a home’s value made by a licensed, third-party professional. Typically, appraisals are required by lenders before they approve a mortgage and the cost of the appraisal has to be paid for by the buyer. Lenders require appraisals because they want to make sure that the mortgage amount is in line with the value of the house. In the event that a borrower falls behind on their mortgage and the lender has to foreclose on it, they want to make sure it is worth the amount of the loan. Matching the mortgage amount to the appraisal value is a way for lenders to make sure they are not taking on excessive risk when issuing a home loan.
Methods for Determining the Appraisal Value of a House
There are several different methods that can be used to determine the appraisal value of a home. Different lenders and different appraisers will use different formulas. Many will use a combination of these approaches. Let’s take a look at some of the more common approaches to determining the appraisal value of a house:
Sales Comparison Approach. This is the most common method for determining the appraisal value of a home. It merely looks at the price of comparable homes that have recently sold in the market or are currently listed.
Income Approach. The income method for determining an appraisal value is built upon the idea that a home is an income-generating asset. This method looks at how much income the house would be able to generate if it was rented out. Typically, the valuation determined based on projected income is then compared against the value as determined by sales comparison.
Replacement Cost Approach. The replacement cost method is helpful for properties when it is hard to determine their value through the other two approaches. If a home is truly unique or is not in a market where there are any comparables, it is hard to use the other two methods. In that instance, the replacement cost method estimates how much it would cost to rebuild the same home at today’s costs with the exact same materials. This approach also factors in such things as depreciations, as well as property values.
Workarounds for a Low Appraisal Value when Buying a Home
Although getting an appraisal value can complicate your home purchase, it does not mean that all hope is lost. There are several actions you can take to save the deal and still get approved for your mortgage.
Make Up the Difference. If your appraisal comes in lower than your offer, then an easy solution is to merely pay the difference between your offer and the appraisal. Remember, your lender will only provide a mortgage for the amount of the appraisal. You can always make up the difference between the mortgage amount and your offer if you have the cash to do it. This prevents changes to your mortgage and still allows you to make the bid you need to buy the house of your dreams.
Renegotiate the Offer. Another option you have is to renegotiate your offer with the seller. Unfortunately, this puts you at risk of losing the home altogether. Chances are you will be in a bidding war with other buyers. If one of them is able to get an appraisal that lists the home at a higher price than you, then they will be able to secure a mortgage for a higher amount. The seller will take this larger amount every time. Also, this leaves you vulnerable to another buyer who is willing and able to make a cash offer. For them, appraisal value does not prevent them from making an outlandish offer because they do not need approval from a lender. However, there is always a chance that the seller is facing this problem with other buyers and they might be willing to work with you.
Why Low Appraisal Values Can Impact Your Mortgage
Home appraisals are not an exact science. In fact, it is quite common for appraisals to come in lower than a home is really going to sell for. This is especially true in a seller’s market like today where buyers are trying their hardest to outbid each other. In the event that an appraisal comes in lower than the asking price for a house or lower than the bid it would take to buy it, you will run into issues with your mortgage. Now, if you are in a position to make a cash offer for a house, then a lower appraisal value does not necessarily concern you. If you are comfortable with the long term value of a home, then you can proceed with the deal regardless of the appraisal. Low appraisal values are really just an impediment for buyers who are looking to get a mortgage to finance their home purchase.
Home appraisals that are lower than the asking price of the house or lower than you want to bid can complicate your mortgage and the sale if you aren’t willing to adapt. Lenders will deny the loan because the low value would hurt the loan-to-value ratio, also known as LTV. Again, they want to match the value of the home with the amount of the mortgage.
Final Thoughts
Buying a home in a seller’s market requires flexibility and adaptability. When the seller has all the leverage and you are still beholden to the demands of your lender, you should expect complications. In a market like today’s, persistence and patience is necessary to overcome obstacles and buy the house of your dream. It is also important to work with an experienced, independent mortgage broker who understands today’s real estate market. An experienced mortgage broker works with hundreds of trusted lenders, which gives them the flexibility to find solutions when problems arise. Having options and trusting the professionals you work with can go a long way toward navigating a market where sellers have the leverage.
