Buying a home is a challenge in today’s market. Not only is real estate inventory capped at over 5 million homes, house prices have skyrocketed over the past year. Now buyers are forced to take out larger mortgages to cover their costs.
Inflated house prices don’t just cost buyers more money. In some cases, they can cause mortgage loans to fail.
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Why increasing home values matter with a mortgage
When you get approval for a mortgage loan, your mortgage lender must go through different steps to finalize that loan. On the one hand, your finances will be examined further through a process known as underwriting. Your lender will also need to be reassured about the value of the home you are looking to buy to cover your mortgage amount. This is where home assessments come in.
During an appraisal, a professional will inspect a property and determine its value based on its condition and the home’s local values. One of the main reasons home prices are so high right now is because demand is high and buyers frequently engage in bidding wars, which drives prices up.
In other words, today’s high home prices don’t necessarily reflect the real value of the homes. And this is something that can appear during an assessment.
In August, about 13% of home evaluations were below their selling price, according to CoreLogic. In May, nearly 20% of reviews followed a similar trend. When homes are not valued high enough, a mortgage can easily fail.
Mortgages are secured loans, which means that they are backed by a specific asset: the house that is purchased. If a lender grants a mortgage of $ 300,000 on a house but its appraisal comes down to $ 290,000, that mortgage could fail because $ 290,000 will not be enough to allow that lender to be repaid if the borrower stops paying. his mortgage. When you have a housing market with inflated house prices, low valuations are likely to be more common.
What to do if your home’s valuation is too low
If you buy a home and it isn’t valued high enough to cover your mortgage, you have several options. First, you can invest more and borrow less, if you have the cash to do so. Second, you can go back to your seller and try to negotiate the price of the house down. This is something your seller may or may not agree to, however. If neither of the two options works, you may have to go.
Home appraisals are designed to protect mortgage lenders. But they can also protect homebuyers, as buying a home for much more than its actual value could hurt you financially.
Suppose you pay $ 350,000 for a house that is really only worth $ 310,000, and you unexpectedly have to sell it two years after buying it. At this point, the home’s value could drop significantly below your purchase price, which means you could lose money on a sale.
It is important to pay attention to what an appraiser says about the home you are looking to buy. If a home isn’t appraised for enough money to cover your mortgage, it’s a sign that you might be better off getting out of the deal.