When consumers are in the market to buy a home, financial factors are often top-of-mind. This includes everything from monthly payments and interest rates to the difference between the appraisal and market value of homes they are considering buying.
In a dynamic real estate market, understanding bank appraisal versus market value is critical when it comes to setting expectations for home ownership and securing the necessary mortgage funding.
In some cases, funding for a mortgage can fall through if a home’s appraised value is significantly lower than its market value.
This is not ideal, so it’s important to learn about home evaluation differences early in the buying process.
Before beginning the process, buyers should take some time to learn the differences between an appraisal and market value for home buyers and consider how these differences can impact the process of getting a home mortgage.
What is a Bank Appraisal?
Among the many types of home valuation, a bank appraisal is one of the most complex and technical.
During the bank appraisal process, a third-party professional real estate appraiser thoroughly inspects the home, noting factors such as square footage, location, interior design, age, and even landscaping.
At the same time, the appraiser conducts research to assess the current housing market in the area, comparing prices on similarly sized and aged properties within a specific period. Using this information, the appraiser determines a value for the home, known as the appraisal value.
Most lenders require an official appraisal of a home before buyers are offered a mortgage, and they will not offer loan amounts that are any higher than the appraisal amounts.
The idea is that the bank determines how much the property is reasonably worth, outside of other forces, including the individual negotiations between buyer and seller. This allows lenders to ensure that losses can be recovered if the buyer defaults on the loan.
What is Market Value?
Although a home’s bank appraisal value is highly technical and specific, its market value is a bit simpler to understand. Market value is the price buyers are willing to pay for a home. Market value is not the same as listing price, as buyers sometimes offer amounts above or below that figure.
The market value of a home is less exact than an appraisal, and many factors go into determining the amount.
Minimally, this includes trends in the larger housing market, such as supply and demand, as well as more local considerations, like the selling price of similar homes in the area and the property’s specific features and amenities.
Because so many of these factors relate to people — both buyers and sellers, a home’s market value is more volatile than its appraisal value.
Additionally, in a tight market, competing buyers may bid up the price of a home beyond its appraised value in an effort to secure the property — a phenomenon that was quite common during the housing boom of 2020-21.
How Bank Appraisal vs. Market Value Affects Getting a Mortgage
Once buyers understand the difference between appraisal and market value, it’s clear why paying attention to both of these values and the mathematical difference matters so much. If a home’s appraisal value is below its market price, buyers will need to cover that gap in cash, as banks may not loan buyers any more money than the home’s appraisal value.
This serves as a simple means for the bank to protect its investment in the event of a default. Regardless of how many people may want a home at any given time, thus increasing the asking price, banks only consider an appraisal value when issuing a loan.
For first-time home buyers, it’s particularly important to understand that they will be responsible for making up any difference between appraisal and market value, as it may require saving more cash before entering a tough homebuying market.
Alternatively, taking market conditions into account when coming up with a budget for buying a home is important, now more than ever for all buyers.
When those who require a mortgage compete against buyers with cash, the buyers with cash possess significantly more leeway when it comes to paying market value because appraisal no longer matters.
Home Mortgage Loans Through HRCCU
For most people, buying a home is the most significant financial investment they will ever make, which is why it is so important to take all aspects of this purchase into consideration, including appraisal versus market value.
Buyers need a trusted partner in the lending business, and the mortgage professionals at HRCCU are perfectly suited to the job.
Whether someone is buying their first or fifth home, HRCCU is here to help you understand all the financial aspects of a home purchase and to support you in finding a home you want and can afford. Contact us today to start the mortgage pre-qualification process.
