Once you are under contract, your lender will send out an appraiser to make sure the purchase price is in line with the property’s value.
The appraised value of a home is an important factor in the loan underwriting process. Although lenders may use the sale price to determine the amount of the mortgage they will offer, they generally only do so when the property is sold for less than the appraisal amount. Also, the loan-to-value ratio is based on the appraised value and helps lenders figure out how much money may be borrowed to purchase the property and under what terms. If the LTV is high, the lender is more likely to require the borrower to purchase private mortgage insurance.
Appraisals provide a professional opinion of value, but they aren’t an exact science. Appraisals may differ quite a bit depending on when they’re done and who’s doing them. Also, changes in market conditions can dramatically alter appraised value.
There are special considerations that appraised value doesn’t take into account, such as the need to sell rapidly.
Appraisals are often considered somewhat backward looking, because they use sold data from comparable properties (often nicknamed “comps”) to help come up with a reasonable price.
For buying purposes, appraisals are usually used to determine market value or factor into the pricing equation. But other appraisals are used to determine insurance value, replacement value, and assessed value for property tax purposes.