Refinance appraisal vs. purchase appraisal: What’s the difference?

24th Nov 2020 Uncategorized

Home appraisals are common steps in both the home buying and home refinancing processes. Surprised? Yes, even current homeowners are expected to endure the appraisal process.
Since refinancing requires a financial institution to underwrite a brand-new loan, existing homeowners looking to take advantage of current record-low interest rates will need an appraisal to assess their home’s current value.
Refinance appraisal vs. purchase appraisal
If you’re ready to start the mortgage refinance process, the first step is to shop interest rates and it’s best to check with multiple lenders to see who is offering the most competitive rates and terms

What is a purchase appraisal?

A home appraisal is a process by which a lender determines the fair market value of a home. Appraisals are a lender-required process as the bank doesn’t want to loan more money for a home than it is worth. Yes, you’ll need a new appraisal even if you currently own the home and purchased it as recently as 2019.

An appraisal is typically ordered anytime a buyer is using a mortgage to purchase the home. If you are buying a home in cash, you don’t need one.

A low appraisal can be a headache for both the buyer and the seller, particularly in a home refinance situation.

What is a refinance appraisal?

Because a refinance mortgage is a new loan, the appraisal process is almost exactly the same as when you purchased the property. There’s less at stake during a refinance appraisal, since three parties (buyer, seller, and lender) aren’t anxiously awaiting the appraisal to reflect the sales price, but even during a refinance you still want the appraisal to accurately represent your home’s value.

An appraisal validates the amount of equity a homeowner has in the home, which impacts a cash-out refinance. Substantial equity can also snag a homeowner a better interest rate if the loan-to-value ratio (amount of loan vs. the current value of the home) is low.

With Credible, you can be confident you’ll find a rate that fits you best. Credible can show you daily mortgage and refinance rates for both 30-year fixed-term loans and 15-year fixed-term loans.

What’s the difference?

The only difference between a refinance and purchase appraisal is that as a homeowner you are able to attend the appraisal, and you can guide the appraiser to any upgrades you’d like to point out.

If you’re ready to investigate mortgage refinance options, be sure to shop with multiple lenders.

Can I get by without an appraisal on a refinance?

It is worth noting that there is a handful of refinance programs that don’t require an appraisal on a mortgage refinance.

  • The FHA Streamline: A refinance program for those with FHA loans. The “streamline” product name indicates fewer steps in the refinance process.
  • The USDA Streamline: A refinance program for those with existing USDA loans.
  • The Veterans Association Interest Rate Reduction Refinance Loan (VA IRRRL): A refinance product for those with VA loans.

In light of the COVID-19 pandemic, when every industry is working to reduce person-to-person contact, certain home and mortgage loans may qualify for an appraisal waiver. Again, not every home qualifies, but it is worth checking in with your lender to assess eligibility.

For purchases

  • Sellers can contest low appraisals by either paying for a second appraisal or asking lenders to do a “reconsideration of value.”
  • If an appraisal is deemed to be accurate, a seller can either lower the purchase price for the buyer or ask the buyer to make up the difference between the appraised value and purchase price in cash. In competitive markets, some potential buyers may do this if they have the cash on hand. In markets where finding a buyer is more difficult, a seller may be forced to lower the price.

For mortgage refinance loans

  • Homeowners with lower-than-expected appraisals can do their own leg work to determine if the appraisal was fair. Homeowners should start by studying the appraisal report and gathering supporting documentation for what they believe is missing or inaccurate and then contact their lender.
  • If the appraisal is determined to be fair, homeowners can either wait until they’ve built up more equity in the home (usually 20% is required) or do what’s known as a “cash in” refinance. “Cash in” means a borrower puts in a lump sum toward their mortgage at closing in order to get to the 20% equity mark. A homeowner may do this if the savings from the lower interest rate offset the cost of parting with cash upfront.

How do I prepare for a home appraisal?

Don’t sweat the appraisal. Instead, work to put your best foot forward and tackle the following best practices.

  • Thoroughly clean your home and yard. First impressions really are important, even to an appraiser.
  • Complete any minor repairs that can impact the value. Homes need constant care, and appraisers are there to assess the condition as it relates to the value of the home. Faucet leaks, non-working electrical (light switches or appliances), and loose or broken door handles can indicate age or wear and tear on a home, which could in turn lower the appraised value.
  • Make the appraiser’s job as easy as possible. As a homeowner, you are allowed to prepare a list of any improvements done to the home in advance. Be thorough and let the appraiser know of any and all cosmetic improvements, upgrades, and costly maintenance. You can also let the appraiser know about any comparable home sales in the area that justify (what you believe to be) your home’s value.