Anyone applying for a home loan after signing a purchase contract may think that agreeing on the price of the home with the seller means that the sale will close as planned. In fact, the mortgage lender will require that an independent appraisal be done before a loan is approved. The reason is the appraisal value of the home will determine the maximum amount of a mortgage loan. The home value is the only collateral the lender has in the event the borrower defaults on the mortgage. The independent appraiser will review and document other home sales in the area as well as the condition of the home being appraised in arriving at a value. There may be adjustments up or down in arriving at the estimated value of the home. Here are some common facts and myths about appraisals:

Myth: The primary purpose for an appraisal is to make sure the buyer doesn’t pay too much for a home.
Fact:  While the appraisal provides valuable information to the home buyer and seller, the primary purpose of the appraisal is to protect the mortgage lender. Lenders will generally not loan more than the appraised value of a home.

Myth: If the appraisal value of the home is less than the purchase price, the buyer will not be able to purchase the home.
Fact:  The buyer can still purchase the home if the appraisal is lower than the agreed purchase price. The seller can reduce the purchase price and/or the buyer can increase the down payment, which means they will have to borrow less. An escrow account can also be set up and funded for repairs that will increase the value of the home after the repairs are made. In some cases the appraiser may reconsider the valuation if new evidence becomes available to support a higher valuation.

Myth: FHA loan appraisal requirements are much more extensive than non-FHA loans.
Fact:  The appraisal requirements for both FHA loans and non FHA loans are very similar.

Myth: The home buyer cannot see the appraisal report.
Fact:  The home buyer is entitled to a copy of the appraisal report obtained in connection with a loan application so long as the buyer has paid for the appraisal. Your mortgage lender will provide instructions for obtaining a copy.

Myth: A mortgage lender will always require that an appraisal be completed before making a loan.
Fact:  In certain situations, a mortgage lender may not require an appraisal, however a property inspection waiver will be offered at a nominal cost to the borrower.

Myth: A home appraisal is the same as a home inspection.
Fact:  A home appraisal is not a substitute for a home inspection. The appraiser formulates an estimated value of the home for the mortgage lender, while the home inspector determines the condition of the home and informs and educates the buyer about the major structural items and components of the home.

 

Selling a home has been relatively easy in prior years. The challenge typically was finding a new home to buy. Many sellers refused to sell their existing home until they found a replacement.

Buying first worked well for many sellers in years past as the risk of owning two homes for a long period of time was relatively low.

Now there is substantial evidence suggesting that the real estate market is slowing with supply now exceeding demand. If so, is it still a good idea to buy before selling?

First, consider the alternatives. If you buy first, you will know where you’re moving, what it will cost and when you can move. Families with small children often find it easier to market their old home after they have moved out. Their home can then be prepared for sale and kept that way with little, if any, effort.

The downside to this approach is that it’s expensive. You must come up with cash for a down payment and closing costs before your home is sold. Many homeowners do not have the extra cash in savings to accomplish this. Some homeowners may tap into their home equity before selling by using an equity line of credit.

House Hunting Tip: In a changing market, it’s wise to factor in a longer marketing period for the home you’ll be selling. You could get lucky and sell quickly. However, in a soft market, it usually takes longer for homes to sell. It’s far better to err on the conservative side than to be caught short of cash making mortgage payments on two homes.

The biggest risk you face in buying before selling is that your home doesn’t sell in the desired time frame and the market worsens. In this case, you could be forced to reduce your list price in an attempt to speed up the selling process.

An option may be to rent your old home until the market improves. But, keep in mind that to take advantage of the federal capital gains tax exemption on the sale of a primary residence (a $250,000 exemption for single sellers and $500,000 for married sellers who file jointly), you need to have occupied the property for two of the last five years.

Homeowners who can’t qualify to buy before selling, or who don’t want the anxiety of owning two homes, have other options. The most appealing is to buy the new home contingent on the sale of your home. Unfortunately, sellers of the most desirable homes usually don’t look favorably on contingent sale offers. A local real estate agent will be able to tell you if contingent sale offers are a viable option in your area.

If not, consider selling your home with an option to rent it back from the new owners for a time after closing. This will give you extra time to find a home to buy if you haven’t found one by the time your sale closes.

Typically the seller’s rent covers the buyer’s costs of ownership during the rent back period. This may be more than you paid to own your home, particularly if your home has appreciated substantially and the buyer is taking out a large mortgage.

The Closing: Renting your home back from the buyer after closing is done for convenience sake. If you want to pay cheaper rent, you can always move to a temporary rental until you find your dream home.