If you’re like most buyers, you’ll rely on mortgage financing to help you secure a home. While the process may go very smoothly, some applicants encounter obstacles along the way. Fortunately, knowing what to expect can help you avoid unpleasant surprises—and pave the way towards a successful purchase.

Here’s what home buyers should know about bank appraisals…

The basics

After your offer has been accepted (but before your mortgage has been advanced), the property you’re buying will be appraised. Lenders take this step to ensure they’re not giving you a dollar amount that exceeds the value of the home you’re purchasing.

The process consists of having a qualified appraiser assess your future property. They’ll consider factors such as its features and general condition—and look at recent sold prices for very similar homes in the area.

Buyers often pay for their appraisal, either outright or as part of their mortgage commitment (the fee is typically somewhere between $200 and $400). That said, many banks and brokers will cover it for you.

Low bank appraisals

There’s a potentially challenging scenario that can happen during this process. It occurs when an appraiser values your home lower than your accepted offer. In these situations, buyers can find themselves in the position of having to make up the difference.

Let’s say you make an offer of $900,000, which the seller accepts. If the appraiser decides the home is only worth $850,000, your lender will give you a mortgage based on that value. If you put down 20 per cent and receive 80 per cent in financing, you’ll now get $680,000 (instead of the $720,000 you expected). That leaves you on the hook for $40,000.

Under these circumstances, your lender will assume that your down payment is lower than initially stated. If it drops below 20 per cent, you’ll need to buy CMHC (mortgage default) insurance. The amount will be a percentage of your loan, based on how much you put down. In a nutshell, a low appraisal can mean lead to more than one extra cost.

There are a few things you can do to try and remedy this situation, though doing so can be tricky. Finding another lender who uses a separate appraiser (and hoping they come to different conclusions) is probably the best of these options.

Taking the right steps

No buyer wants to find themselves in a sticky situation due to a low home appraisal. The good news is, there are a few steps you can take to protect yourself. The first is including a financing condition in your offer. This stipulation states that your purchase is contingent upon your ability to obtain your mortgage.

Ensing that you have extra money on hand in case this scenario (or some other unexpected obstacle) arises is another potential protective measure. It’s never a bad idea, especially for those who are risk-averse.

Lastly, working with a skilled local agent can help you avoid undesirable outcomes. A professional who knows the area where you’re buying can assist you in understanding the true value of your prospective property (which means you’ll be less likely to overpay). They may also be able to step in and point the appraiser towards highly-accurate comparables.

If you’re getting a mortgage, a bank appraisal will be part of the purchase process. Fortunately, it doesn’t have to be stressful. With a bit of planning and some expertise, you can reduce any risks associated with your loan!

For over 35 years, our clients have trusted us to minimize risk, offer unbiased opinions, and ensure their best interests are served. Contact us today to talk about your needs, by emailing us at info@christensengroup.ca or calling us at 416-441-2888 ext. 772.