What is a home appraisal?

A home appraisal is an unbiased professional opinion of a home's value that is used in real estate purchase, sale & refinance transactions. In a purchase transaction, an appraisal is used to determine whether the home's contract price is appropriate given the home's condition, location, and features. 

Since the home serves as collateral for the mortgage, lenders want to make sure that homeowners are not over borrowing on a property. If the borrower defaults on the mortgage and goes into foreclosure, the lender recoups the money it lent by selling the home. The appraisal helps the bank protect itself against lending more than it might be able to recover in this worst-case scenario.

As a home appraisal primarily protects the lender's interests, the lender orders the appraisal via a qualified, impartial, licensed or certified appraiser who is familiar with the local area who has no direct or indirect interest in the transaction. 

A property's appraisal value depends on recent sales of similar properties, current market trends, home's amenities, number of bedrooms/ bathrooms, floor plan, square footage, lot size, location and condition of the property. The appraiser completes a visual inspection of the interior & exterior and notes any conditions that might adversely affect the property's value, such as needed repairs.

Fannie Mae's Uniform Residential Appraisal Report for single-family homes is the most common format used for an appraisal. The appraiser needs to describe the interior & exterior of the property, neighborhood, and nearby comparable sales. The appraiser then provides an analysis and conclusions about the property's value based on their observations.

The report includes a street map showing the appraised property, comparable sales, exterior building sketch, explanation of how the square footage was calculated, interior and exterior pictures of the home, street, front exterior pictures of each comparable property, market sales data, public land records & public tax records, that the appraiser uses to determine the property's fair market value. An appraisal costs several hundred dollars, and generally, the borrower pays this fee.

Once you’re under contract, the appraisal is one the first steps in the closing process. If the appraisal comes in at or above the contract price, the transaction proceeds as planned. If the appraisal comes in below the contract price, it creates and issue and can delay or derail the transaction.

As the buyer, a low appraisal can serve as a negotiating tool for you to lower the price so the transaction can move forward. The bank will only lend you or any other prospective buyer what the home is worth. While appraisals are meant to help buyers avoid overpaying for homes, a seller may feel that a low appraisal is not justified and be reluctant to drop the contract price. If that’s the case a good solution may be to get a second appraisal for another opinion.  Appraisers is an estimate of value and appraisers can make mistakes. At the end of the day, remember you and the seller both likely want to transaction to move forward.

What Is Homeowners Insurance?

Homeowners insurance is a type of property insurance that covers a private residence, designed to protect an individual's home against damages to the house itself or to possessions in the home. Homeowners insurance also provides liability coverage against accidents in the home or on the property.

Mortgage lenders require homeowners to carry homeowner’s insurance, the biggest reason being that your lender will want your home rebuilt in case of catastrophe. Your lender's mortgage is collateralized against the home. Without the home, the mortgage has little value. By requiring homeowners to carry insurance to cover at least the replacement cost of the home, the lender and you are both protected from disaster.

Homeowners insurance policies broadly cover these six types categories:

Dwelling: Covers damage to the home, and attached structures
Loss of Use: Covers living expenses while your home is in repair
Personal Liability: Provides financial protection against lawsuits from damage or injuries which occur on your property
Personal Possessions: Covers lost or stolen goods
Medical Payments: Covers medical bills of a person injured on your property
Other Structures: Covers damage to non-attached structures 

Your homeowner’s insurance policy may include some or all the above. The more coverage you keep, the higher your annual premium.

The cost of your homeowner’s policy depends on a few things like age of your home, construction type, proximity to services, coverage amount and deductible amount. 

For added savings, some insurers offer multi-policy discounts to their customers. This means that if you insure your automobile and home with the same insurer, you may be eligible receive a discount on both policies. The contingency period is a good time to shop carriers.  

Have more questions about buying a home in California? Join our Facebook Group: Professional Real Estate Advice for California Home Buyers & Sellers or reach out via email at hello@inhaus.io

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