Homebuyer’s long read
The appraisal: your copy, a low value, and what to ask
Why lenders order an appraisal, your federal right to a copy before closing, how an appraisal differs from an inspection, and the options to discuss if the value comes in below the price.
After your offer is accepted and you apply for a mortgage, the lender usually orders an appraisal. It is one of the services in Section B of the Loan Estimate, the services you cannot shop for, because the lender requires and arranges it. The appraisal can affect your loan amount, your mortgage insurance and sometimes whether the purchase goes ahead. This chapter covers your rights to see it and what to do with it.
What the appraisal is for
An appraisal is an independent estimate of the home's market value, prepared for the lender. The lender uses it to decide how much it is willing to lend against the property. Many loan terms depend on the ratio between the loan and the home's value, including whether mortgage insurance is required, as the CFPB explains for down payments under 20 percent. See mortgage insurance.
The appraisal is not an inspection. An inspection is for you, about condition. The inspections chapter explains how to use one.
Your right to a copy
Federal Regulation B, at 12 CFR 1002.14, requires a creditor to provide an applicant a copy of all appraisals and other written valuations developed in connection with an application for credit secured by a first lien on a dwelling.
The timing rule, as written in the regulation: the creditor must provide each copy promptly upon completion, or three business days before consummation of the transaction, whichever is earlier.
The regulation lets an applicant waive that timing and agree to receive the copy at or before closing, but the waiver generally must be obtained at least three business days before consummation. If you waive and the loan does not close, the creditor must provide the copies no later than 30 days after it determines the loan will not close.
The regulation also requires a disclosure telling you about this right. Read the disclosures you receive at application, and think carefully before waiving the timing. Three business days with the report is useful time.
Rules change; read the current text on the eCFR before relying on it.
Reading the report
You do not need to be an expert to check the basics:
- Property facts. Address, legal description, living area, bedrooms, bathrooms, lot size, garage. Errors here can affect value.
- Comparable sales. The appraiser compares the home with recent nearby sales. Look at whether they are genuinely similar in size, age, condition and location.
- Adjustments. Appraisers adjust comparables for differences. Look for any that seem out of proportion.
- Condition notes and required repairs. Some loan programs require certain repairs before closing. Note any the appraiser lists.
If you find a factual error, tell your lender in writing with evidence, such as a public record or listing details. Ask what process the lender uses to review it.
If the value comes in low
A low appraisal means the lender may lend less than you expected relative to the price. Typical options, which depend on your contract and loan:
- Ask for a review of factual errors or more relevant comparables, through your lender.
- Renegotiate the price with the seller, using the appraisal as information.
- Cover the gap with more cash, if you can do so and still keep savings after closing.
- Change the loan structure, such as a different down payment, and see how it affects mortgage insurance and the rate.
- Use an appraisal contingency to cancel, if your contract has one and you are within its deadline.
Your purchase contract controls options 2 and 5. Read it with your agent or attorney, and watch every deadline. See making an offer.
Also note that the CFPB lists an appraisal coming in higher or lower than expected among the reasons a locked rate might change. Ask your lender how the result affects your lock. See rate locks.
If the value comes in at or above the price
An appraisal at the price is good news for the loan, not proof that the home is a good buy. It does not tell you about the roof, systems or future costs. Keep your inspection and budget work separate from the appraisal.
Questions for your lender
- When will the appraisal be ordered, and who will schedule access?
- When will I receive my copy?
- If I find an error, how do I request a review?
- If the value is low, what loan options do you offer?
- Does the result affect my rate lock?
Keep it with your records
Keep the appraisal with your closing documents. It is a useful snapshot of the home's condition and features at purchase, and the CFPB notes that for PMI cancellation purposes the "original value" generally means the lower of the contract price or the appraised value at the time of purchase.
Regulations and lender practices change. Check the current regulation and ask your lender for its process.
Questions to take into the next conversation
- Ask your lender when the appraisal will be ordered and when you should expect your copy.
- Read your purchase contract for any appraisal contingency and its deadline.
- When the report arrives, check the property facts: address, square footage, bedrooms, bathrooms and lot.
- If the value is low, write down your options and their deadlines before talking to the seller.
Is the appraisal the same as a home inspection?
No. An appraisal estimates the property's value for the lender's decision. An inspection examines the condition of the home for you. An appraiser may note obvious problems, but an appraisal is not a substitute for an inspection, and a home can appraise at the price and still need expensive repairs.