If there’s financing involved in the transaction, the short answer is, “Yes, you do need an appraisal to buy new construction.” Even though it’s a newly built residence, lenders want to ensure the collateral has a solid loan-to-value ratio. Should the appraised figure come in outside the LTV parameters, the lender might order another appraisal or pull the financing. However, if the property brings a higher appraisal value than the mortgage loan amount, you’ll have the benefit of instant equity.
In the past several years, though new homes were built to code and had wonderful amenities, banks were not too eager to loan. The reason wasn’t because of the quality of the newly built homes, it was because the value of resales or existing homes, were deflated due to the national economic downturn. Since “comparable” properties were not worth as much as they should be, appraisals would come-in short of the lending amount, which caused problems with loan approval. Now, home values are on a steady rise and banks have loosened lending requirements.
Why Lenders Require a Home Appraisal to Buy New Construction
Simply put, lenders want to be certain of the home’s condition, quality, and its market value. An appraiser is an independent party that evaluates the home and assigns a market value based on several factors. Because the appraiser is a licensed professional, he or she calculates the value of a home based on local market conditions.
“When you go to buy a home, your mortgage lender will want to know whether the house you are interested in buying is worth the amount you are willing to spend. They need to check out the house for anything that can devalue or increase the property’s worth. To do this, they require home appraisals for all borrowers.” –Realtor.com
Builders of new construction must be careful in pricing their properties as the majority of buyers will not purchase homes with cash. Since most buyers need to obtain financing for new construction, either through a mortgage broker, a bank, or credit union, the lending entities will schedule an appraisal to learn if the agreed purchase price and financing amount are at or near parity. If the appraisal comes in a bit under the contract price, the buyer can rely on his or her real estate buyer’s agent to negotiate a lower price.
What Factors are Considered in a Home Appraisal
There are four main factors which go into a home appraisal. Each is very important to determining the market value of the residence, and some are all about function, while others are about safety, as well as creature comforts. Here are the four primary home appraisal factors:
- Property size. The size of the home is quite important because the more square footage it has, the more value it captures. In addition, more bedrooms and bathrooms increase value substantially because more people can live comfortably in the home.
- Exterior. Starting with the foundation, the appraiser will carefully inspect the home’s exterior. The appraiser will also take a close look at the exterior walls and the roof. Of course, in a newly built home, these should be in excellent condition.
- Interior. The interior walls, doors, windows, floors, and ceiling will also be closely evaluated during the appraisal. The quality of construction will play an integral role here, as the higher the quality, the better.
- Extra features. Amenities and safety equipment are also a key factor. If a home has a swimming pool, an outdoor kitchen, those might help to increase the appraisal. Smoke detectors and security systems are also important.