Bank Appraisals for Mortgage Financing
I have a lot of Buyers ask me about appraisals, and they have been a bit of a topic of conversation with my mortgage brokers and I recently, so I wanted to update everyone on their purpose.
An appraisal is different from an inspection. A home inspection is when you (the Buyer) bring in a professional home inspector to review the inside and outside of the home for any deficiencies, potential issues, etc that you might run into as an owner. You get a home inspection for your own peace of mind that the building/unit you’re buying isn’t a lemon.
An appraisal is something that has to do with your mortgage financing. Once you are pre-approved and submit a specific unit to the lender for consideration, they will likely want to bring in an appraiser to offer a third party opinion on the value of the unit. You want to see the appraiser’s value to be the same or higher than your offer price. If the appraiser’s value is lower than your offer price, the bank will only give you a mortgage on that amount. For example, if you are under contract to buy a unit for $1-million but the appraiser thinks it’s not worth any more that $975,000, you’ll only be able to get a mortgage on $975,000 and will have to have a extra $25,000 in cash to cover the difference. For Buyers with high down payments, this isn’t a big deal since a portion of their down payment will cover this difference. However, Buyers with low down payments might not have the extra cash needed to cover the difference.
If you submit a subject free offer and the appraisal comes in low, you have no other options but to find a way to finance the property somehow, or walk away from the deal (and lose your deposit in the process). If your offer is subject to financing and the appraisal comes in low, you can decide not to remove the financing condition and not follow through with the purchase. The problem? It can take a few days to a week for the mortgage lender to arrange an appraiser to view the unit and report back. In this highly competitive, “subject free” offer market, it’s unlikely that you can submit an offer subject to a week for financing.
Not every Buyer needs an appraisal – it’s a case by case basis based on what their financial situation is like and what the mortgage lenders require.
Personally, I have never had an appraisal come out being too low for any of my Buyer’s purchases, so it is a rare situation. Having said that, as prices keep increasing ad banks keep tightening their rules, appraisals might becomes a bit more important. You need to ensure that you’re working with a a highly qualified and connected mortgage broker so that you know all of your options. We have some great Vancouver mortgage brokers to refer!