The House I’m Buying Is a Fixer Upper. Here’s How I Made Sure I Wouldn’t Have a Problem With the Appraisal

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If you’re buying a home with a mortgage loan, your lender will require an appraisal. Read on for steps to take to ensure it won’t impede your home loan. 

I’m buying a home that needs some updating. I’m getting a mortgage on the house, though, which meant that I would need an appraisal during the process.

When a home is appraised, a professional looks at the condition and details of the property to estimate its fair market value. The home must appraise for enough that it can serve as sufficient collateral for the loan. For example, let’s say you’re paying $100,000 for a home and putting a $10,000 down payment. If the mortgage lender required a 90% loan-to-value ratio, the home would actually need to appraise for at least the $100,000 you’re paying in order to move forward, because otherwise you’d be borrowing more than 90% of what the house is worth.

Since a fixer-upper is, by definition, not in great condition, there’s a greater chance it won’t appraise for enough to close the deal. Here’s what I did to make sure this wasn’t an issue with my transaction.

I made a larger down payment

Since I was afraid my appraisal would come in at a lower amount than I’m paying for the house due to the fact it needs some remodeling, I opted to make a larger down payment. Making at least a 20% down payment is recommended so you can avoid paying for private mortgage insurance (PMI), which is an extra fee tacked onto your loan that protects the lender in case you’re unable to make payments. While I have bought houses in the past and put down the recommended 20% out of my bank account, this time I made a 33% down payment.

With a larger down payment, the house could have appraised for less than I was paying and I still wouldn’t have exceeded my lender’s loan-to-value requirements so I would have been able to go ahead and close the deal.

If you’re buying a fixer-upper, you may also want to plan to put more money down just in case the appraisal doesn’t go as planned. In my case, my appraisal did come in at a little less than I’m paying for the property, so it was good I had the extra money down.

I made sure there were no health-and-safety issues

Before I made an offer on the house, I had a contractor come through and assess the condition. Specifically, I wanted to ensure there were no issues that compromised the health and safety of the home.

See, appraisers are expected to note major physical deficiencies in a house, like leaky roofs or major appliances that are not functional. If these problems exist, the appraiser typically estimates the home’s value “subject to repairs.” In other words, the appraiser specifies how much the house would be worth if the fixes were made and the issues must then be corrected prior to closing.

I knew that no problems with my house could be fixed prior to the closing date due to the circumstances of the sale. So there was no point in trying to move forward with a loan that I would have problems with.

I compared my house to similar homes

Finally, the last thing I did was look up what similar houses were selling for. I wanted to make sure that the cost of what I was paying for the house, plus repairs, wouldn’t exceed the cost of comparable properties. If it did, that would mean I was likely overpaying for the property.

If you are considering buying a home that needs some remodeling, you may also want to take these steps before you make an offer. If you don’t, be aware that you could end up with a home appraisal that derails your ability to move forward with the home purchase. This would not only be disappointing after getting your offer accepted, but it would also mean you were out the money for the appraisal with nothing to show for it. That’s just a huge waste of time and money, and you don’t need that during the home-buying process.

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