According to NAR, 9% of contracts were terminated due to appraisal-related challenges. Home buying is a tedious process especially when calculating the right value of the house you buy.
During the appraisal process, you may come across two important terms: “appraisal amount” and “loan amount”. Understanding the difference between these two figures is crucial for home buyers.
What is the Appraisal Amount?
The appraisal amount refers to the value assigned to a property by a professional appraiser. The appraiser evaluates the property based on various factors, such as its location, size, condition, and comparable properties in the area.
However, the primary purpose of the appraisal amount is to ensure the property’s value and the loan amount requested by the buyer.
Role in the Home Buying Process
The appraisal amount plays a vital role in the home-buying process. However, lenders require an appraisal to protect their investment to ensure that property value justifies the loan amount.
It helps prevent borrowers from obtaining a loan that surpasses the property’s worth. By reducing the risk for both the buyer and the lender.
What is the Loan Amount?
The loan amount represents the total sum of money borrowed from a lender to purchase a property. This includes the purchase price of the home, without the down payment made by the buyer.
Moreover, the lenders typically determine the loan amount based on the appraised value of the property. Buyer’s financial circumstances, such as income, credit history, and debt-to-income ratio.
Factors Affecting the Loan Amount
Several factors can influence the loan amount that lenders are willing to provide. Such as:
- Borrower’s credit score
- Employment history
- Debt obligations
- Type of loan program
Finally, lenders carefully assess these factors to determine the borrower’s ability to repay the loan.
Important Rules and Considerations
Loan-to-Value Ratio
One crucial rule to understand is the loan-to-value (LTV) ratio. It is the percentage obtained by dividing the loan amount by the appraised value of the property.
Lenders often have maximum LTV ratios. If you exceed these limits it may lead to additional requirements or potential loan denial.
Borrowers need to be aware of the LTV ratio and its implications.
Appraisal Contingency
An appraisal contingency is a clause in the purchase agreement that protects the buyer. It allows the buyer to back out of the transaction or renegotiate the terms if the property’s appraisal amount is lower than the purchase price.
Include an appraisal contingency in the contract so that buyers have the opportunity to reassess the deal based on the appraised value.
Down Payment Requirements
Down payment requirements can vary depending on the type of loan and the lender.
Generally, a higher down payment reduces the loan amount, which can positively impact the borrower’s financial situation.
In conclusion, lenders often offer better interest rates and terms to borrowers with larger down payments.
Loan Limits and Programs
Different loan programs have specific loan limits that borrowers can obtain.
These limits are set by government-sponsored entities like Fannie Mae and Freddie Mac.
It is important to research and understand the loan programs available to you. This affects the loan amount and eligibility criteria.