In: Finance
why do lenders hire appraisers
Lenders appraise properties in order to determine the current market value. They do this to ensure that they are not “over investing” with the loan, by putting up more money than the home is worth. They also want to know the potential resale value in case they have to foreclosure on, repossess, and resell the property later on.
Here’s another way to look at it. Lenders appraise home because they need to protect their investment. If you take out a loan for 20% of the purchase price, that means the lender is going to pay the remaining 80% of the purchase price. They are the majority shareholder, so to speak. So they want to make sure that, in the event of a default and foreclosure scenario, they don’t end up with a home that is worth less (in the current market) than the amount they have invested in it.
Appraisals are a prudent business practice and a requirement for nearly all mortgage loans these days.
Technically, Lenders Don’t Appraise Homes – They Hire an Appraiser
Let’s get specific here. Lenders don’t actually appraise homes before lending money to a buyer. They hire a licensed home appraiser to do the appraisal, once a purchase agreement has been signed by both the buyer and seller. The appraiser will then give a copy of the valuation report to the lender, so that they can make a financing and underwriting decision on both the property and loan.
If the property is valued at or above the mutually-agreed-upon purchase price, the deal will likely move forward. If the lender’s appraiser decides that the property is worth lessthan what you’ve agreed to pay for it, you have hit a snag. In the latter case, the loan might not move forward unless (A) the homeowner lowers the sale price, or (B) the buyer pays the difference. Scenario ‘A’ happens more often than scenario ‘B.’