Once you are under contract, your lender will send out an appraiser to make sure the purchase price is in line with the property’s value.
Appraisals help guide mortgage terms
The appraised value of a home is an important factor in the loan underwriting process. Although lenders may use the sale price to determine the amount of the mortgage they will offer, they generally only do so when the property is sold for less than the appraisal amount. Also, the loan-to-value ratio is based on the appraised value and helps lenders figure out how much money may be borrowed to purchase the property and under what terms. If the LTV is high, the lender is more likely to require the borrower to purchase private mortgage insurance.
Appraised value is not a concrete number
Appraisals provide a professional opinion of value, but they are not an exact science. Appraisals may differ quite a bit depending on when they’re done and who’s doing them. Also, changes in market conditions can dramatically alter appraised value.
Appraised value does not represent the whole picture of home prices
There are special considerations that appraised value does not take into account, such as the need to sell rapidly.
Appraisers use data from the recent past
Appraisers are often considered somewhat backward looking, because they use sold data from comparable properties (often nicknamed “comps”) to help come up with a reasonable price.
There are uses for appraised value outside of the purchase process
For buying purposes, appraisals are usually used to determine market value or factor into the pricing equation. But other appraisals are used to determine insurance value, replacement value, and assessed value for property tax purposes.