What’s a home appraisal? And why might I need one?

These days, when you’re arranging a new mortgage, it’s become common for the mortgage lender to request an appraisal of the property.  People often ask if it’s the same thing as the home inspection.  It’s not. What the lender wants is a market value evaluation by an accredited appraiser.  The appraiser is a third party, not someone connected with the bank or the mortgage broker. He or she provides the lender with a written opinion of the property’s value.

An appraisal can differ from what your realtor estimates

Keep in mind that when a realtor gives you an evaluation of a property’s value, this isn’t considered an appraisal for financing purposes. Bidding wars in the hot housing markets in some parts of Ontario, especially the GTA, mean some buyers are offering way more than the asking price when trying to buy a home. The mortgage lender needs to know how much the home is actually worth. An independent appraiser evaluates the property based on how much similar properties have recently sold for. This is a different number from how much they’re listed for. As well, the appraiser may make a “market timing” adjustment based on recent market activity.  It may mean that the appraiser determines that property has a lower value than what it sold for. This could affect your mortgage financing.

Are home appraisals required for a refinance, or just a home purchase?

In the case of a refinance, you’ll almost always need an appraisal. This is especially true in the case of re-advanceable mortgages, such as a Home Equity Line of Credit. The lender wants to know that the value of the property is rock solid, since you can access the available funds at any time.  As well, you can only refinance up to 80% of your home’s appraised value.  So, if you’re trying to maximize the amount of equity you can take out, you need to know exactly how much your place is worth.

The home appraisal may affect your financing…  And your financing condition

For more info on how an appraisal relates to the financing clause in your offer, this post about “Conditional on Financing” can help.

You can also check out my latest blog posts about the other aspects of buying and financing a home purchase.

And as always, please get in touch at any time if you have any questions.

Photo [c] Thanakorn Lappattaranan for vecteezy.com