APPRAISALS - WHY THEY ARE NEEDED
Prior to getting pre-approved for a mortgage your bank will check YOU.
Your bank will do a thorough credit check on you and ask for supporting documents confirming your job, salary, passive income, or investments elsewhere. Your bank will analyze your debt to income ratio. This is a calculation compares your income and/or savings against your monthly/ annual expense. Because a credit check is involved, any college loans or debt, car loans, or credit card debt will be considered to weigh you down.
Once you’ve decided on which bank you’ll be taking out a mortgage with, and you’re officially “in contract” on the apartment or townhouse of your dreams, an appraisal will be ordered.
The Bank checks the asset it is lending money ( giving a mortgage) to buy:
The Bank needs to furthermore check that the real estate/asset it is lending money to borrow (in the form of a mortgage) exists. Furthermore, not only does it have to exist but it has to a mathematically proved value. An appraiser tests the contract price in which both parties have agreed upon FOR the bank. An appraisal/valuation is an estimate of a property’s value, as determined by an independent third party appraiser or valuation services. It helps the bank make sure the value of the property matches the requested loan amount. A bank wants to be sure of the asset it ifs lending against. Often times your bank will charge you a fee to have the appraisal report done.
Things an appraisal will not account for are:
Closing Cost Credits: To make a deal happen, a developer and their sales team will agree upon a contract price on paper and then give a credit at closing to the buyer. This allows historical sales data to be skewed but gives the buyer a discount to purchase the property for less.
Mortgage Tax Credits: The sponsor will receive a rebate for taxes they’ve paid on their loans to finance the building and development project itself, up until the unit was sold to a buyer. The tax credit percentages vary by state, but are generally in the amount of 20 percent to 40 percent of the total mortgage interest.
Thinks an appraisal may include:
The value of outdoor space, a deeded parking spot or extra storage in comparison to the interior living space of the apartment you are buying.
Outdated renovations or an apartment in disrepair that is not livable.
Any open permits that have not been closed
Any renovations not filed with the Department of Buildings such as a change of room count. (Converting a dining alcove into a second bedroom or nursery and not filing for the change of room count could be an issue.)
You bank will share the appraisal report with you directly prior to closing. At that time if the appraisal report shows that the home value is less than what you’re in contract to buy the asset for, you can attempt to renegotiate. In 2020, new development is projected to be valued for less than asking price.
Contact me to learn more about the strategies you can do to protect yourself when buying with a mortgage in 2020.