Most borrowers applying for a mortgage need to use the property in question as collateral to secure the loan. Obviously, the lender wants to make sure the property is worth at least as much as the loan.
QUESTION: How do lenders determine how much a property is worth? My cousin’s mortgage application was declined because the lender said the property was not worth as much as the seller was asking.
ANSWER: Most borrowers applying for a mortgage need to use the property in question as collateral to secure the loan. Obviously, the lender wants to make sure the property is worth at least as much as the loan.
Lenders determine the property’s value through a process called an appraisal. An appraisal is an estimate of a home’s value. A third party does the appraisal to ensure objectivity. It is usually done as part of a mortgage application – either for a purchase mortgage, a refinance or an equity line of credit.
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 must pay for it. Appraisals usually cost somewhere between $300 and $600.
Appraisers come up with 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, the appraisal will support what a borrower wants to borrow. Sometimes, however, as in your cousin’s case, they do not.
If the appraisal comes back lower than what the borrower has offered to pay for the property, the lender will probably reject the application. You can either walk away from the deal, or if you suspect the appraisal is not an accurate reflection of the home’s value, you can appeal the appraisal.
A third option is to use the appraisal 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 only other option is to increase your down payment enough so that the low appraisal will support the mortgage you need to purchase the property.
Linda Goodspeed is a longtime real estate writer and author of “In and out of Darkness.” Email her at: firstname.lastname@example.org.