Bank appraisals are nothing new. These vital assessments are a requirement of any lender who decides to give you a home loan. Unfortunately, under some circumstances, they have the potential to throw a major wrench in a buyer’s plans.
If you’re preparing to purchase a home, here’s what you should know about bank appraisals…
What is a bank appraisal?
Once the offer you make on a home is accepted, your lender will have the property appraised by a professional. The idea is to ensure that the amount you’ve bid doesn’t exceed the property’s appraised value. If it does, it could greatly increase the chances that you’ll default on your mortgage (at least in the eyes of a lender).
By looking at very recent comparables, an appraiser can get a strong sense of a home’s value. Under normal circumstances, they’d also do an in-person assessment—but during the pandemic, a digital one will suffice!
The risk associated with an appraisal
Here’s the challenging part. If the appraised value of the property you’re buying comes in lower than your offer amount, you could be in trouble.
The truth is, your lender will only approve you for a mortgage based on your appraisal amount. Let’s say that’s $850,000. Meanwhile, your seller has accepted your bid of $900,000. Now, you’re in a position of having to make up the difference. If you’ve been given a loan for 80 per cent of the value of the home, that’s a sizeable chunk of change.
If this happens, your lender will assume that your deposit amount will decrease as well. It’s important to note that if your down payment was 20 per cent and this pushes it below that amount, you’ll now have to purchase CMHC insurance.
One option you have if this happens is looking for another lender. Appraisers sometimes come back with different numbers. If you find someone who values your home higher, it could make all the difference.
The changing landscape
Right now, skyrocketing demand is leading to a new bank appraisal issue. Sold prices are rising so quickly that appraisers are struggling to catch up. As a result, we’re seeing far more appraisals coming in below the amount that the buyer has offered.
In this climate, the best thing you can do is be prepared. Try to have some extra money in the bank in case you need it—or at least have a family member in mind who may be willing to help you out if need be.
Of course, the most important step you can take to ensure you’re prepared is finding an agent who has their finger on the pulse. During the interview stage, feel free to ask about bank appraisals—and the steps that the professional in question has taken to protect clients in the past.
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