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What you need to know about home appraisals in Los Angeles when qualifying for a mortgage
The appraisal is an important of the real estate transaction especially when getting a mortgage. We’ll cover some of the most important points here and in the video below:
- Why is the appraisal important when buying a home and getting financing?
- How does the appraisal impact a seller’s decision on which offer to go with?
- Why does a higher down payment protect a buyer in case of an appraisal issue?
- How can buyers overcome appraisal risk when buying a home?
- What can the buyer do if the appraisal comes back under value?
- What are some other real estate appraisal tips?
Why is the appraisal important when buying a home and getting financing?
The appraisal is important when buying a home or applying for a mortgage because the bank is using the appraisal value when determining how much they’ll lend you. That means if the appraisal comes in low, the buyer is potentially on the hook to bring in the difference between the agreed upon purchase price and the appraisal value. Bringing that much more cash could be a deal breaker for the buyer.
A hot housing market, like Los Angeles, often times comes with these appraisal challenges, because appraisers look at recent sales (aka “comps”) when appraising the property’s value…IF they’re looking at a sale from a few months ago, then they may have an outdated view of the market.
By not taking into account that things are moving so quickly that the “recent” sales they’re using as comps aren’t actually the market reality anymore. And so that can sometimes present a little bit of a challenge BUT one of the things that you can do is your appraiser should know that they can do certain time adjustments.
How does the appraisal impact a seller’s decision on which offer to go with?
If a seller has multiple offers within a similar price range, they’ll decide on other factors like how reliable the financing is for the various offers. That means the buyer that has the most down payment is at an advantage. Sidenote: this is why cash buyers have such an advantage…because their down payment is effectively 100%.
So for the buyers that require financing…if they are just barely scraping together the minimum down payment, a low appraisal can mess up the entire deal. THIS is why sellers might choose to go with another offer where a low appraisal is less of an issue.
Why does a higher down payment protect a buyer in case of an appraisal issue?
The reason why more down will help a buyer when it comes to appraisal issues is, if your plan was to put, I don’t know, let’s say 25% down and you have a shortage. You can put 80 or 20% down and still qualify for the loan or even. 15% down. So that doesn’t blow your deal. It might mean depending on the appraisal shortage, it might mean that the rate is slightly higher, but it’s still kicking.
The reason why more down payment will help you as a home-buyer when it comes to appraisal issues is it gives you more cushion if the appraisal comes in low. For example – if your plan was to put 35% down and you have a 5% appraisal shortage. You can put 30% down and still qualify for the loan (albeit at a higher loan to value). The more down payment you are bringing in, typically the more room you have to play in the event the appraisal comes in low. Of course loan programs vary so this strategy will depend on the maximum allowed loan to value (LTV) and there still could be an interest rate change as a result of an increasing LTV.
How can buyers avoid appraisal risk when buying a home in a hot market like Los Angeles?
Here’s how to avoid a low appraisal in a hot real estate market:
- The best way to outright avoid getting a low appraisal is to use a local lender who really knows the area and can make sure that the best appraisers are selected.
- Bring in a larger down payment so you can bridge a gap that a low appraisal causes. While this obviously can’t prevent a low appraisal, it will mitigate the consequences and avoid killing the deal.
- A similar option (that’s less preventative but still a way to manage potential appraisal risk) is having an appraisal gap coverage. That’s where you agree to cover the difference between the purchase price and the appraised value up to a certain amount.
What can the buyer do if the appraisal comes back under value?
Here’s what to do if the appraisal comes back low:
- Get a appraisal rebuttal. That’s where your lender (this is where having a great lender is critical) looks to see if there are any inaccuracies with appraisal like comps that the appraiser didn’t take into account.
- Increase the loan to value ratio. So instead of putting 20% down, you reduce your down payment AND with the remaining cash you cover the gap between the appraised value and the purchase value. This option will depend on the loan program terms and may involve a higher interest rate.
- If you did not waive your appraisal contingency, you can negotiate a lower price.
- And the last thing you can do is cancel the deal.
Other appraisal tips when buying real estate:
Here are some quick tips when getting an appraisal in Los Angeles or surrounding areas that make the appraisal go smoothly and also can avoid unnecessary repeat appraiser visits (which the home buyer pays for).
- Make sure that the smoke detector and carbon monoxide detectors are installed
- Check that the water heater has a safety strap
- Be respectful and not pushy or annoying with your appraiser (surprisingly this happens…and appraisers don’t like it!).
Good luck out there!