Editor’s note: All of HomeLight’s coronavirus information for buyers, sellers, and agents is available on our COVID-19 hub.
When you put an offer on a house, it’s hard not to wonder: Is this place really worth what I’m going to pay? An appraisal is one way to answer that question, but like anything price-related, that appraisal isn’t going to be good forever. How long are appraisals good for, anyway? And does that change when there’s a pandemic and your sale could be delayed?
If the seller ordered their own appraisal to price the house you want to buy, this can provide another point of confusion — why would you need a new appraisal, when one was just conducted? And how long is that appraisal good for?
Clearly, appraisals can be tricky, so we’ve turned to the experts to answer your most pressing appraisal questions.
Why do you need an appraisal?
First thing’s first: You may be wondering why you need an appraisal in the first place. If a home is listed at a certain price, and you agreed to pay that price, then that’s what the house is worth, right? Well, yes and no.
If you’re paying cash for a house, you don’t need an appraisal. In this case, the house is worth what you’re willing to pay — you don’t need a third party to back it up. That said, it might be a good idea to order an appraisal anyway, just to make sure the value of the home is on par with what you’ve agreed to pay for it.
If you’re financing your new home, different rules apply.
“An appraisal is required when someone is getting a mortgage or a loan,” says Beth Nordaune, a top agent in Rochester, Minnesota. “The bank wants to make sure that the home is worth the money they are lending you.” In other words, an appraisal is required to protect the bank. If you default on your loan, an appraisal assures the bank that they’ll recoup their money when they sell your home.
How long are appraisals good for?
“It depends,” says Daniel Fries, President and Chief Appraiser of Daniel Fries & Associates, Inc. in Cumming, Georgia. “Appraisals can be ordered for many different reasons.”
Those reasons include mortgage loans, home equity loans, employee relocation, pre-listings, estate evaluation by the IRS, litigation for a divorce, or any other reason, such as diminished value from an external influence. Any one of these reasons may impact the lifetime of the appraisal.
“As an appraiser, when I do ‘private appraisals’ for an individual, I always explain my appraised value is good as of the date I view the home,” says Alvin “Chip” Wagner III, of A.L. Wagner Appraisal Group, Inc. in Naperville, Illinois.
That’s because there’s no telling what may happen to a home or the market overall to change the appraised value of a home. Never has that been more evident than in early 2020, when the coronavirus pandemic swept across the nation.
“I don’t have a crystal ball to tell what will happen tomorrow,” says Wagner. “The value I appraised a home for in early March when the spring market was quickly building momentum, will be drastically different today in light of the market conditions after COVID-19 changed our lives.”
In general, though, Wagner says that most lenders have established policies on how long an appraisal is good for. “Four months is generally what the Federal National Mortgage Association says.”
Why aren’t appraisals good forever?
There are a few ways that an appraiser can calculate the value of a home.
The first is by comparing similar homes that have sold in the area in the last six months — called “comps.” “The value of a home is an opinion based on what other homes are being listed for and selling for,” says Wagner. Comps are going to change depending on the real estate market, which is why an appraisal based on comps can change as well.
Appraisers can also use a cost approach, determining the value of a home based on how much it would cost to reproduce or replace it. This value, too, will fluctuate because the cost of labor and materials changes over time.
The last option is an income approach, which means the value is set based on how much rent or other income the home could generate. “That’s primarily used in commercial properties and apartment properties,” says Wagner. This type of appraisal isn’t good forever because the value changes based on the strength or weakness of the rental market.
“Anything can shift,” explains Nordaune.
“It can be the stock market, a major company in town shuts down, or interest rates change. There are so many things that can affect the market.”
When would an appraisal become invalid?
Appraisals can become invalid, even within their window of viability, for a few reasons.
If there is swift and sudden market activity for any reason, the comps that the appraisal was based on are most likely not relevant anymore, making the appraisal itself invalid.
An appraisal can also become invalid if the condition of the house changes suddenly due to acts of nature or other damages, such as flooding or fire.
Another reason an appraisal might become invalid is if the appraisal itself swings wildly one way or the other in terms of value. “An appraisal is often reviewed by a third-party underwriter and sometimes lenders order two,” explains Fries. Lenders will value the house at the average of the two appraisals. However, if the spread between the two appraisals is more than 5% they’ll order a third appraisal and disregard the original low or high valuation. “If one has significant issues or ignored valid comps, it can get kicked out,” Fries says.
Can you update an appraisal?
Yes, you can have an appraiser complete an appraisal update. When you request an update, the appraiser will review the appraisal and decide if the information in the original appraisal is still relevant — and give you a new value for the home.
“I completed an appraisal for a retired couple looking to downsize in December so they could make some decisions, and then in March they were looking to list the home and asked me to update my appraisal,” says Wagner.
Market trends can include: Upward or downward market prices, rising or falling market times (aka days on market), and increasing or declining supply and demand.
While updating an appraisal is possible, the more common scenario is that a lender will ask for a recertification of value. In this case, the appraiser confirms that the house is worth what it was originally appraised at, without assigning the house a new value.
“The recertification of value addendum must be attached to the original appraisal,” explains Fries. “It’s only used to extend a couple of months. When certain economic changes occur, lenders tend to request a new appraisal.”
So, how long will my appraisal be good for?
The answer depends on the kind of loan you have.
Federal Housing Administration (FHA) loans
FHA loans are loans that are backed by the Federal Housing Administration. In general, these loans are for low-to-moderate-income borrowers. If you have an FHA loan, your appraisal should be good for up to four months. After that, “FHA allows a recertification for another 120 days if applied prior to the expiration date.”
“FHA is very strict on the property inspection,” says Fries. “In order to qualify for the loan, they require access to the attic, and they verify certain safety features.” If something comes up during the inspection, they “may require a repair as opposed to making an adjustment in value.”
Veterans Affairs (VA) loans
VA loans are loans for veterans and active duty service members and are backed by the Department of Veterans Affairs. These loans are most well known for having a no-money-down option.
If you have a VA loan, the appraisal can be good for up to six months, but it automatically expires once the loan closes.
Conventional loans are loans that are not backed by a government agency. They’re also known as Federal National Mortgage Association (FNMA, or “Fannie Mae,” familiarly) loans. This nongovernmental agency sets the standards for loans in the U.S.
“Conventional lenders tend to vary on how long they deem an appraisal good for,” says Fries. “They may order a computer comp as a quick check and then decide how to proceed.”
In general, though, the appraisal for a conventional loan on a new home is good for 12 months, and the appraisal for an existing home is valid for 120 days.
Because the life of the appraisal depends on the type of loan you have, it’s important to note that if you switch loan programs, it can create additional work on the appraisal end.
No matter the standard protocol, “If a lender feels the market has changed, they will often get a new appraisal,” says Fries.
Header Image Source: (Vecislavas Popa / Pexels)