Buying a house typically requires getting a loan, and the loan process can be somewhat confusing to many borrowers. One aspect of the home-loan process you should be prepared for involves the effects the appraisal can have on the loan you are getting. No matter how much money you are approved to borrow, the appraisal of the home you are buying will generally control the amount the lender actually gives you.
Why an appraisal is needed
Lenders will not issue loans on properties without appraisals being completed, and this is because they want to make sure the properties are worth the amount of money they are offering in loans. Because of this, getting an appraisal completed before the house closes is a necessary step you will have to go through. This is something you will have to pay for, and it will reveal the current market value of the property you want to buy.
How the appraisal can affect your loan
An appraisal can affect the loan you get in several ways, but the main way is that it typically controls the amount of money the lender will give you for the property. Depending on the type of loan you are getting, the lender is likely to only offer you a loan equal to a certain percentage of the property's value. This percentage is usually 80%, but it can vary. You, the borrower, will be required to come up with the rest of the money on your own, and this is called the down payment.
If the appraisal amount comes in at the price you were paying for the house, it will not affect your loan at all. If the appraisal amount comes in at an amount less than what you were paying for the house, this can present a problem. This will cause the bank to lend you less than what it was originally going to give you, and this will leave you stuck having to pay a larger down payment on the house.
The options you have in this situation
If this happens with the house you want to buy, you have several options. The first option is to come up with more money to put down on the house. The second option is to back out of the deal, and you should have no problem doing this if the contract had an appraisal contingency in it.
The process of buying a house and closing on it with a mortgage loan is not simple or fast. If you have questions about this or would like to get preapproved for a loan, contact a lender today.