What's the Home You're Buying Really Worth?
How do you know whether the home you’ve got your heart set upon is priced reasonably?
There is one built-in protection for borrowers (first-time home buyers and otherwise) with FHA home loans that keeps the process within a certain degree of reality, price-wise.
It’s true that you, as the buyer, can compare similar real estate listings and see how much the same type of property is selling for elsewhere. This is one way to help yourself feel better about the home’s sale price, or help you to move on to a more reasonably priced piece of real estate.
But the FHA appraisal process is something built into the home loan approval journey, and that is a type of borrower’s protection against exaggerated prices. Make no mistake, the appraisal is not a tool for the borrower, it is designed to help the lender.
But this lender’s tool also provides the borrower with an “out” if the appraised value does not meet or exceed the sale price.
If you are at the appraisal stage of the home buying process, you have likely committed in some way to purchasing the home assuming all goes well in the transaction.
But if the appraisal comes back and the value of the home-the fair market value, not the seller’s asking price-is lower than the price tag?
The borrower cannot be forced to close the deal on the home in such cases. This is because FHA loan rules would require the borrower to pay the difference between the asking price and the appraisal in cash-it cannot be financed. The FHA home loan “escape clause” does not allow the borrower to lose earnest money in such cases.
The FHA appraisal is designed to tell the lender that the home meets the minimum FHA loan requirements in a physical sense, and also to give a fair market value computed on the condition of the home but also comparing it to similar houses in that market.
If the appraisal comes in lower than the sale price, buyer and seller can renegotiate the deal. Your seller may offer to contribute cash toward your closing costs to encourage you to buy, which can help offset your down payment requirement.
You are not forced to walk away from the loan if the appraised value is lower than the sale price. A borrower who wants to pay the difference in cash is permitted to do so, so this situation is not always a lose-lose depending on circumstances.
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