Mortgage Glossary

Appraisal

Lending institutions usually require an appraisal to be done to confirm the property value, and to make sure that it is the kind of property they will mortgage - for example, some lenders will not finance hobby farms or heritage designated homes.

It is not part of the appraiser's function to look for structural problems. For that task, you need a building inspection.

The appraiser will consider the size of the property (both land and buildings), the location of the property and the condition of the main house to determine a 'replacement value'. She or he will then compare the property with a few recent sales of similar properties in the same area.

The appraiser will arrive at a dollar figure that, in his or her professional opinion is a fair market value for the property. It is not unusual for the value to be the same as the purchase price of the property.

If the appraised value is higher than your purchase price, you know you have made a good buy.

Problems can occur if the appraised value is lower than the purchase price and you are making the minimum possible downpayment. In most cases, the lending institution is obligated to lend mortgage money based on the lower of the purchase price or the appraised value.

When the appraisal is below your purchase price, you have 4 choices:

renegotiate your purchase price,
collapse the deal,
come up with the difference between the appraised value and the purchase price - over and above the equity you already have, or
pay for another appraisal to be done by another firm. Sometimes different firms will arrive at different prices, but this is a gamble.
There are occasions when you may be willing to pay higher than the appraised value - for example, when there is more than one offer at the same time, the vendor will choose the 'best' offer. Or perhaps this is the house of your dreams and you are willing to pay extra to buy it.

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