Once the purchase agreement is accepted and signed, and the inspection is removed, the mortgage process will start. The mortgage company will order an appraisal and collect any remaining paperwork they need.
The appraisal will get sent out to an appraisal company, where that company will assign a licensed appraiser to appraise the value of the property. The appraiser will schedule an appointment and go and view the property, take measurements, and some photos. They will use this information to compare it to other recent home sales to come up with a fair market value for your house. This usually happens through our automated showing system.
An appraiser will come up with their valuation and this may be different than the purchase price. If it is at or higher than the purchase price, that’s fine. If the appraisal comes in lower, then we have an issue. There are a couple of methods to resolve this issue.
1. The buyer can come up with more cash to cover the difference. Sometimes the buyer will have enough cash to cover the difference and pay it themselves so that we can continue the purchase the way it was written. Oftentimes the buyer won't have the cash, or will claim they don't and try to make it a seller problem (that the price was too high). Sometimes this is true, and sometimes there are bad low appraisals.
2. We can try to negotiate the price down to the appraised value with the buyer. This is usually the goal, especially if the house is primarily targeted to FHA buyers because an FHA appraisal sticks with the property for 6 months. This means if the buyer walks away, any other buyer with an FHA loan within 6 months, will have to stick with that original appraisal.
3. We can try to appeal the appraisal. Appraisers are not willing to admit that they are sometimes wrong. This is fighting an uphill battle, and a losing one at that. I had a case where the house came in 20k under the sale price, but there were buyers willing to pay more than our offer. We tried to appeal the appraisal, and the appraiser stuck with their number. In this particular case, we ended up with a combination of #1 and #2 to get the deal done.
4. We can walk away and try to get a new buyer.
5. We can try to have the buyer start over with a new mortgage company.
FHA requires certain health and safety standards to be met in a home before they will insure a mortgage on a home. These FHA appraisers may look for and note the following: missing hand rails, peeling paint (especially on the exterior), missing outlet covers, exposed wires, broken steps, non-functioning furnaces and water heaters, and more items.
If the appraiser calls an item out, this usually will end up in what’s called a work order. Work orders usually need to be done by the seller, and once it is done, have the appraiser come back out to verify that the work order was completed.
Underwriting is part of the mortgage process. The underwriter is the person that looks at the amount of risk involved in issuing the mortgage to the buyer. They take into account all the factors of the buyer as well as the various factors involved with the home itself (via the appraisal). They typically will analyze the buyers' credit report, your income statements, and the appraisal of the home. Their determination results in an approval of the loan, or the disapproval of the loan.
Underwriters can be asked to re-evaluate the file if something is amiss. This process can add a few days of delay to the closing date though.