An appraisal of your property is also needed to obtain a mortgage.
In fact, an appraisal is just as important as your credit history because the value of the property you intend to purchase can be used by the bank as collateral if you are unable to make a payment. You can be refused a mortgage or granted a smaller amount if the appraisal is less than the loan amount you want to borrow. As a result, you will have to make up the difference by making a larger down payment or renegotiating the sale price with the seller.
This situation can be avoided if you consult with your Realtor for a Comparative Market Analysis (also called a CMA, or “comps”). The CMA will show you recent sales of properties within the neighborhood where you plan to purchase. This lets you know if you’re paying a reasonable and fair price for the property, and it also gives you an idea about the appraiser’s perspective of the property’s value.
The value of the property is determined by answering three questions:
1. How much would it cost to rebuild the property?
2. How does the property measure against other properties of comparable size, quality, and location that have sold recently?
3. What is a buyer willing to pay for the property at this time?
Banks and mortgage companies frequently lament over the fact that some people overestimate their properties’ worth, and are therefore disappointed when they do not receive the loan amount they think they deserve. You can avoid this frustrating scenario if you get a CMA report before approaching the lenders. And don’t forget to obtain your own copy of the appraisal—you are entitled by federal law to own one.
REMINDER: Improve your credit. But if you have a strong history of paying rent or other mortgage payments on time, you are more likely to qualify for a low interest rate. You can prepare for the mortgage loan by eliminating, reducing, consolidating, and avoiding debt. Once again, this goes back to having a plan and saving money.
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