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According to NAR, 9% of contracts were terminated due to appraisal-related challenges. Home buying is a tedious process especially when calculating the right value of the house you buy.
During the appraisal process, you may come across two important terms: “appraisal amount” and “loan amount”. Understanding the difference between these two figures is crucial for home buyers.
Purchasing a home is likely the largest financial investment you’ll make in your lifetime. Navigating the various requirements around appraised value and loan amounts can feel overwhelming for first-time homebuyers.
What’s the difference between appraisal amount and loan amount? How does the appraisal value impact the mortgage you can qualify for? This guide breaks down the key rules and guidelines homebuyers need to know in 2023.
What is an Appraisal Amount?
An appraisal amount refers to the estimated market value of a home determined by a professional appraiser Appraisers evaluate the property based on factors like
- Location
- Square footage
- Age and condition
- Comparable home sales nearby
The appraiser will inspect the home in person and analyze these details to come up with a fair market value. Lenders require appraisals to confirm the property value supports the loan amount requested by the borrower.
What Does a Home Appraisal Involve?
A standard home appraisal involves
- An interior and exterior inspection of the property
- Taking measurements of all rooms
- Documenting condition and features
- Researching local market data and comparable sales
- Writing a detailed appraisal report
The appraiser will also rate the overall condition of the home as good, average, fair, or poor. This subjective rating factors into the final opinion of value.
How is a Loan Amount Determined?
The loan amount is the total sum of money borrowed from a lender to purchase the home. This does not include any down payment made by the buyer
Lenders determine the maximum mortgage amount to approve based on:
- The appraised value
- The borrower’s income, assets, credit score and debts
- The loan program and associated guidelines
These factors allow lenders to assess the risk of providing financing and the borrower’s ability to repay. The loan amount directly relies on the appraised value of the subject property.
Appraisal Amount vs. Loan Amount
The relationship between appraisal amount and loan amount is important for both lender and borrower.
For lenders, the appraised value verifies the property is adequate collateral for the loan. It prevents borrowers from getting loans larger than the home’s worth.
For borrowers, the appraisal amount limits the amount you can borrow to purchase the home. Your loan amount cannot exceed a certain percentage of the appraised value.
If the appraisal comes in lower than the agreed purchase price, the lender will base the final loan amount on the predetermined loan-to-value ratio in the purchase contract.
What is Loan-to-Value Ratio?
The loan-to-value (LTV) ratio compares the size of your loan to the appraised value. It is calculated by dividing the loan amount by the home’s appraised value.
For example:
- Home appraises for $200,000
- You borrow $160,000
- Your LTV is 80%
A lower LTV signals lower risk for the lender and requires less down payment from you. Many lenders cap purchase loans at 80-95% LTV.
What if Appraisal is Lower Than Purchase Price?
If the appraisal amount comes in lower than the agreed purchase price, your lender has two options:
- Reduce the Loan Amount
The lender will decrease the loan amount to fit within the predetermined LTV ratio. This protects them from lending more than the property value supports.
If your loan gets reduced, you’ll need to come up with extra cash for closing or negotiate a lower sales price with the seller.
- Request a Reconsideration of Value
In some cases, the lender may believe the appraisal inaccurately represents the home’s value. They can request a second appraisal or ask the original appraiser to reconsider the valuation.
This route is less common and not guaranteed to change the final appraised amount.
What if Appraisal is Higher Than Purchase Price?
If the appraised value exceeds the agreed purchase price, congratulations – you’ve negotiated a great deal!
Your loan amount will remain the same as originally planned. The higher appraisal does not increase the amount you’ve agreed to pay the seller.
How Do Appraisals Differ from Home Inspections?
Home appraisals and inspections serve different purposes:
Appraisal
- Ordered by lender
- Estimates market value
- Checks for deficiencies that impact value and safety
- Completed by licensed appraiser
Inspection
- Ordered by buyer
- Assesses physical condition in detail
- Checks for issues like leaks, repairs, useful life, etc.
- Completed by home inspector
Appraisals focus on safety and structural soundness. Inspections offer a deeper analysis of the home’s functionality and components.
Tips for a Smooth Appraisal
Follow these tips to help your appraisal go smoothly:
- Make all repairs before listing your home
- Declutter and clean before the appraiser visit
- Gather past inspection reports, contractor invoices, HOA docs
- Point out recent upgrades like a remodeled kitchen
- Follow up quickly if issues are found on the appraisal
Proper preparation and condition can help maximize your home’s appraised value.
Key Takeaways
-
An appraisal establishes a home’s market value while the loan amount dictates the mortgage size.
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Appraisals impact loan amounts – a low appraisal means lenders will decrease the amount approved.
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Loan-to-value ratio compares the loan and value – most lenders cap LTV at 80-95%.
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If the appraisal is low, be prepared to bring extra money to closing or negotiate with the seller.
Understanding how appraisals and loans interact will help you navigate the home buying process with clear expectations. Consult trusted real estate and lending professionals for guidance tailored to your unique financial situation.
Appraisal Amount Vs. Loan Amount
The lender uses appraisal to set your loan amount. Appraisal reflects the house’s true worth, preventing you from getting stuck with a loan that’s too big and protecting the lender from giving out too much money.
While a low appraisal may not preclude securing a loan entirely, the lender will base the final loan amount on the pre-determined loan-to-value (LTV) ratio established within the purchase contract.
What is the Appraisal Amount?
The appraisal amount refers to the value assigned to a property by a professional appraiser. The appraiser evaluates the property based on various factors. Some of which are location, size, condition, and comparable properties in the area.
However, the primary purpose of the appraisal amount is to ensure the property’s value and the loan amount requested by the buyer.
Appraisal Came In LOWER Than Sales Price (WHAT HAPPENS NEXT AND WHAT TO DO)
FAQ
Is appraisal based on loan amount or purchase price?
Does appraisal need to be higher than loan amount?
What happens if a home appraisal is lower than the loan amount?
What is the meaning of appraisal value amount?
How does an appraisal affect a mortgage loan?
Mortgage Loan Amount An appraisal directly affects the amount of mortgage you’re loaned, because your lender gives you a home loan based on the appraisal’s estimate of the fair market value of the home. It keeps the lender from lending you too much money, and keeps you from borrowing more than you need for a particular home.
Should I pay cash if my appraisal comes in low?
If you’re buying a new home and the appraisal comes in low, your mortgage lender won’t lend you more than the appraised amount. You can opt to pay cash to cover the difference between the appraised value and the loan amount, or you can negotiate for a lower sale price or decide not to move forward with the purchase.
What is the difference between listing price and appraised value?
Unlike the listing price, the house appraised value may not be what sellers are asking for their home. Lenders will only allow a loan amount based on how much the home is worth on the appraisal report. As you can imagine, it’s in the seller’s best interest to try to get the home appraised for a value that matches the selling price.
How does an appraisal affect financing?
Let’s throw out a few different scenarios to highlight how the appraisal impacts financing when getting the house ready for an appraisal. If the home is being purchased for $400,000 and the loan amount is 380,000 then the initial LTV is 95% ($380,000 / $400,000). The final LTV is set when the appraisal arrives and determines the value.
How do appraisals affect a loan to value (LTV)?
Appraisals can impact the Loan to Value (LTV). The LTV is determined by taking the loan amount and dividing it by the property’s determined value. Example: a $400,000 valued home with a $380,000 mortgage has a 95% LTV. Different mortgage loan programs have different LTV requirements.
What happens if a home appraisal comes in above appraised value?
Since your agreed-upon price is $150,000, and your lender won’t lend more than the appraised value, you’ll have to make up the difference or work with the seller to see if they can reduce the asking price to the appraised value. What happens if the appraisal comes in above the purchase price of the home? You’re in a good situation if this happens.