Jillian White, SRA designated Chief Valuation Officer at Better with over 15 years experience as an appraiser, explains how we’re changing the appraisal process to help first-time homebuyers get their dream homes.
The appraisal. For many homebuyers, it can feel like a looming black box at the end of the homebuying process, threatening to derail the whole thing. At Better, we don’t think it should be that way, which is why we’ve been working hard to change how appraisals get done. But before I get to that, let’s briefly talk about the traditional appraisal process.
What is an appraisal?
An appraisal is an estimate of a property’s value. Appraisals are done by a neutral third party, who physically inspects the property to assess its condition – things like the walls, flooring, interior finishes, and any renovations that have been done. In addition, the appraiser considers the location, square footage, room count, and age of the property, and compares the value to similar homes that have recently sold in the area.
Why do appraisals matter?
Appraisals are crucial to the mortgage process. Lenders use them determine how much the property (which is technically the collateral for your loan) is worth. If the appraised value turns out to be lower than the price you negotiated with the seller, the lender may not be able to give you the full amount that you need – which means the sale could fall through. This often happens in competitive markets, where scarcity and bidding wars can lead to inflated home prices.
You may be wondering why the appraised value matters so much to lenders. Why can’t they just loan you the amount of the home price? As a comparison, it might be helpful to think about items that can have big changes in perceived value – like antiques, trading cards, or Beanie Babies in the nineties. Interested buyers may bid heavily on those items online or at auctions, causing the price to increase dramatically. However, an expert might appraise an item’s actual value at a lower amount, which then informs the size of that item’s insurance policy. In the same way, lenders are more concerned about the actual, versus inflated value of your property, since it’s technically the collateral for your loan in the event that you’re unable to repay it.
The traditional appraisal process puts borrowers at a disadvantage
Appraisals are typically ordered by a lender after you’ve negotiated your offer, signed a contract with the seller, and started the mortgage process. If the appraisal comes in lower than the sale price, you may not qualify for the size of the loan you need.
If this happens, you do have some options – none of which is ideal. You could try to renegotiate with the seller (which may be difficult in a competitive market). On the financing side, you could increase your down payment, or change the terms of the loan (which could result in a higher rate or larger monthly payments). If none of those options is feasible, you may have to walk away from the sale – something you’re legally allowed to do because of the “appraisal contingency” that was likely part of your contract with the seller.
As you may have figured out already, the appraisal process puts borrowers at a disadvantage because you don’t have all the information going into negotiations with the seller. Plus, sellers know a low appraisal could result in a lost sale. That’s one of the reasons they prefer cash offers – they know the buyer can pay, no matter what the appraisal value is.
A better appraisal process puts you in control
At Better, we’ve worked to change the appraisal process so our customers in competitive markets can know the appraised value of a home before they put in an offer. This gives you the option to compete with cash offers and waive the appraisal contingency in your contract. Plus, if you’ve also gotten a fully underwritten Verified Pre-Approval from Better, you may also consider waiving the financing contingency. Talk to your Loan Consultant first if you’re considering this option. The icing on the cake? Once your underwritten offer is accepted, Better can close in as little as 14 days.
So, why doesn’t every lender do this? The truth is, appraisers are in high demand. That means their services are costly, and it can involve long wait times to get an appraisal completed. Also, most lenders hire appraisers through Appraisal Management Companies (AMCs), so there’s an additional middleman that can bottleneck the process.
At Better, we’ve committed to investing alongside our customers in the home buying process. In select competitive markets, we’ve set up our own third-party panels of appraisers instead of using AMCs. Early in the process, we order an appraisal. The appraiser appraises the property you're interested in even before you make an offer – all you need to give us is the address. And even in high-demand markets, the amount you pay in appraisal fees is capped at $500, and we cover the cost up front. If the appraisal comes back low and you’re unable to go through with the offer, you won’t have to pay the fee.
Ready for a better home buying process?
We’re here to help. At Better, we’ve streamlined the mortgage process and eliminated all unnecessary fees, including commissions for loan officers – which means they can focus on making sure your homebuying process goes as smoothly as possible. Schedule a free call with one of our licensed Loan Consultants, or get started on your mortgage journey here.