Appraisals are a professional review that sets a market value for a property. Lenders require 3rd-party appraisals before they will lend.
Appraisals are an opaque aspect of the borrowing process. Lenders require them as part of their due diligence process. Just as they scrutinize the occupant and mechanical history of the property, they require an unbiased evaluation before they will lend money for it to be purchased.
‘Value’ in this case is not the price that the property is selling for, but an independent price set by a professional appraiser.
How appraisals work
When called on (and paid), an appraiser will visit a property, examine it from foundation to roof and declare what the property is worth. Appraisers are professionally trained and certified and lenders base their loan decisions on their report. The work is somewhat subjective and two appraisers may reach slightly different conclusions.
Who orders the appraisal and who pays for it?
The lender orders the appraisal and owns the results. The client is charged (we try and cover that cost whenever possible) and the report is sent directly to the Lender from the Appraiser. The document is the lender’s, is not public and does not get shared with the borrower.
What happens if the valuation comes in below or above expectations?
If the appraisal is too far below the selling price, the lender may not want to offer the mortgage as they don’t want to overpay. If it is too high, the borrower may ask questions about why the home sold below market value. Lenders only go to certain loan-to-value thresholds, some are more flexible than others.
Can I bring in my own appraiser?
Each Lender has their own list of Approved Appraisers. If an Appraiser, or Appraisal company, is not on that list then the Lender will not accept the report from anybody else.
What if I disagree with the appraiser’s number? What if it means I can no longer afford the home?
This can happen. Your Realtor ensures that the price you are paying for that new home has some comparable sales data to support the price you are paying. The Appraiser is looking for similar properties that have sold in the same price range in the last 30-60 days. If there is no supporting data that is when challenges occur.
Lenders will base their lending criteria on the lesser of the price or the Appraiser’s valuation. Should the valuation come in below expectations then conversations can be had about different ways to structure your mortgage. Can we adjust the loan-to-value? Can we hire another Appraiser for a second opinion? Can we access more funds for a direct to Vendor payment to offset the shortfall? We have been here before and we have had all sorts of outcomes.
Lenders and Loan to Value
A lender’s key ratio is the loan-to-value (LTV) of the mortgage. That is, the percentage they are lending against the (appraised) value of the property. Mortgage brokers and lenders watch this ratio closely and it can affect everything from rates to not having a mortgage approved. Here are some examples:
Our clients purchased a home in Hamilton for $599,000 with a down payment of $300,000. The resulting LTV was just under 50%. The Lender provided them their lowest available mortgage rate due to the low risk of the mortgage going into default. With so much equity already invested the Lender sees this as this as a safe investment.
Our clients won a hotly-contested bidding war in midtown Toronto. Their offer price of $1,700,000 won the day but was at the very top of their budget. The Closing Costs were high (we make Closing Costs of shortlisted properties visible in the Mortgage Summary of our Borrower Journey web application) and their maximum down payment was 20%. In this instance the mortgage had an 80% LTV. We moved from a 25 year to 30-year amortization to lower the monthly payment and keep the LTV within range. They are loving their new family home close to both of their offices.
A couple moved to Canada when a spouse took a job at one of Canada’s chartered banks. They purchased a condo in downtown Toronto for $600,000, with a 10% down payment. As the LTV was 90% this was an insured purchase (happens when the LTV is greater than 80%) and the clients incurred the insurance premium (which gets added to the mortgage). In this situation we were able to access a New-to-Canada lending program, the file was reviewed and approved by both the Lender and Insurer. The interest rate was excellent due to the fact that the Lender had no risk (because it was an insured mortgage. The insurance premiums were high but they allowed us to make the deal work. Everybody was, and is, very happy.