How a Home Appraisal Can Affect Mortgage Approval in California

If you’re planning to use a mortgage loan to buy a house in California, there’s a good chance the property will have to be appraised. That’s because most banks and lenders require appraisals whenever a home loan is being used.

The appraisal can affect the buyer’s mortgage loan approval process in a couple of ways. In some cases, it can determine whether or not the loan goes through. And if the appraisal comes in lower than the purchase price, it might warrant another round of negotiations between buyer and seller.

So yes, it’s important.

In this article, we will talk about the purpose of the home appraisal, how the process works in California, and how it can affect the home buyer’s mortgage approval.

Purpose of the Home Appraisal

A home appraisal is a professional opinion of the value of a home. It is conducted by a licensed appraiser who considers factors such as the size, condition, location, and other features that might contribute value to the property.

The purpose of a home appraisal is to provide lenders with an independent assessment of the value of a property. Banks and lenders want to make sure they’re not lending more money than the property is worth. Having the home appraised gives them this kind of insight.

Here are some of the factors a California home appraiser might consider:

• Size: The larger the home, the more valuable it will generally be.
• Condition: A home that is in good condition will be worth more than a home that needs repairs.
• Location: The location of the home is one of the most important factors that will affect its value. Homes in desirable locations tend to be worth more than homes in less desirable locations.
• Amenities: Generally speaking, homes with amenities such as a pool, a garage, or a nice view will be worth more than homes that lack these amenities.

The appraiser will generate a report that includes their opinion of the property’s fair market value. The report will also list the factors they considered when determining the value of the property. This report is sent back to the mortgage lender that originally requested the appraisal.

How It Affects the Buyer’s Mortgage Process

As mentioned earlier, a home appraisal can affect the buyer’s mortgage approval process in several ways. It determines the loan-to-value ratio and can also tip the needle toward loan approval or denial, depending on the situation.

Loan-to-Value (LTV) Ratio

The home appraisal also plays an important role in determining the loan-to-value ratio. Lenders use the appraised value of the property to calculate this ratio. The LTV ratio represents the loan amount as a percentage of the property’s appraised value.

The LTV ratio partly determines whether or not a borrower needs to pay for private mortgage insurance (PMI). For a conventional home loan in California, PMI is usually required when the loan-to-value ratio rises above 80%. And it’s the home appraisal that determines this.

Loan Approval or Denial

If the appraiser determines that the home’s current market value is significantly lower than the purchase price or loan amount, it could interfere with mortgage approval.

Banks and mortgage lenders evaluate the risk associated with each individual loan. So a low appraisal might raise concerns about the property’s resale value in case of default or foreclosure. If the borrower is unable to negotiate a lower sale price with the seller (or come up with the difference out of pocket), a low appraisal could lead to loan denial.

Different Scenarios and Outcomes

Here are the different scenarios that can occur with a home appraisal, and how they can affect the mortgage approval process in California:

Favorable Appraisal

This is the best-case scenario for both the buyer and the lender. In this scenario, the appraised value is equal to or higher than the purchase price. So the lender will be willing to lend the full amount of the loan. This means the buyer can close on the property as planned, assuming everything else checks out okay.

Low Appraisal

This is the “less-than-ideal” scenario, from the home buyer’s perspective. In this scenario, the appraised value is lower than the purchase price. So the lender will only be willing to lend up to the appraised value. The buyer will have to come up with the difference between the appraised value and the purchase price, or ask the seller to reduce the price. If neither of these options pan out, the sale might fall through.

Options for Home Buyers

In a favorable appraisal scenario, there isn’t much for the home buyer to do. The loan process will likely move forward, and the buyer will be able to proceed to closing.

The low appraisal is a different situation entirely. If the appraiser determines that the house is worth less than the sale price, the buyer has a few options to consider.

1. Negotiate a lower purchase price with the seller.

This is the most common option for buyers who are faced with a low appraisal. The buyer can try to negotiate with the seller to lower the purchase price to match the appraised value. If the seller is willing to lower the price, the buyer can proceed with the purchase without having to come up with more money.

2. Pay the difference in cash.

If the buyer is not able to negotiate a lower purchase price with the seller, they could pay the difference in cash. But this isn’t an option for some buyers, for budgeting reasons.

3. Walk away from the deal.

If the buyer cannot negotiate a lower price or pay the difference in cash, they might have to walk away from the deal. If there’s an “appraisal contingency” in place, the buyers might be able to recover their earnest money deposit. Without such a contingency, they might lose the deposit.

As you can see, there is a close connection between the home appraisal and mortgage approval. A “low appraisal” isn’t always a dealbreaker, but it does complicate the situation. The best-case scenario, from a buyer’s perspective, is for the property to appraise at an amount equal to or higher than the purchase price.