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Home Buying and The Appraisal Process | What You Should Know

Posted by  on  24-02-2020

During the first two months in 2020 we have already seen homes in the GTA, Ottawa and Greater Montreal selling for over asking due to market conditions based on inventory supply vs demand.

Are people OVER paying for properties? Hard to say: the Market conditions are unusual. 

But what happens if the bank insists on a home appraisal and it comes in LOWER than the offer?

If the home appraises for less than the agreed-upon sale price, some important things to consider:

  1. If you have a huge down payment it may not matter if the appraisal comes in 5% less than your offer but your down payment is 40% there is no effect on lending but you do have some thinking to do.
  2. A home appraisal is really about protecting the lender, nothing about protecting the buyer. After all, no consumer wants to pay $300,000 for a home that’s worth $275,000. So it is “possible”  that an appraisal can keep a homebuyer from making a poor decision or at least allow the home buyer to think about whether they wish to proceed
  3. Lenders use the appraisal value to determine your loan-to-value (LTV). Unless the seller agrees to lower the price, you will have to increase your down payment to get the same mortgage and interest rate but as in #1 above … if there is a big down payment and a small fluctuation versus the appraisal, then there is no effect on lending.

When your home appraises for less than its purchase price, there are a few potential outcomes:

  • Seller and buyer renegotiate a new, lower home sale price
  • Buyer increases the down payment to meet new LTV and down payment minimums
  • Seller and buyer cancel the home purchase contract

Parts of the Appraisal Process

  • Neighborhood characteristics (Is it urban, suburban or rural? Is it growing or stagnant? What’s the neighborhood like? What is the school system like?)
  • Home trends in the area (Are home prices increasing or declining? Does it take more than six months to sell a home?) BIG NOTE: this is what can bite homebuyers in a rapidly appreciating market, there just have not been enough homes sell at the higher prices yet.
  • Land use in the area (Is it mostly multifamily, single-family, commercial, etc.)
  • Zoning classification and description
  • Available public or private utilities
  • The home’s exterior materials and condition
  • The condition of the driveway and garage surfaces
  • The home’s interior materials and conditions
  • Three comparable sales from (usually) the last 90 days to six months: HERE IS THE KEY POINT: maybe the upward trend has not established itself yet

How to Avoid Issues During Home Buying and Appraisal Process

When buying in a market like this things may be moving too fast for appraisers and lenders to keep up. If there is a ton of competition for a home it is hard to know whether comps in the neighborhood will support the new pricing. Be smart, and know that there may be options for you if you work with the right people.

We invite you to connect with us at Butler Mortgage to go over your home purchase goals, discuss mortgage types and solutions. It’s not just that we have the lowest rates on offer but after 25 years and $10B of mortgages we deeply understand all residential mortgage issues

Our mortgage advisors provide independent and unbiased advice PLUS we can guarantee your rate is the very lowest available


Get a Mortgage Quote (No Obligation)

At Butler Mortgage, we offer a no-fee, no obligation mortgage approval and mortgage quote that help simplify the entire process. We do a lot of the heavy lifting, shopping and contacting multiple lenders on your behalf. And, we can do all of this over the phone.

If you are in the market for a home purchase, mortgage renewal, mortgage refinancing, debt consolidation, CONTACT US any time and let’s start the discussion.


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