Let's see... where did we leave off? We were talking about money and how much of it you'll hand over, up front, when taking the FHA route for your home loan. So far I've explained Earnest Money, Due Diligence, and Home Inspection options and subsequent costs. Now I'll explain appraisals.

It sounds pretty self explanatory. Most people know how jewelry or auto appraisals work, and home appraisals are similar, but they can make or break your entire loan approval. Seriously, you can have all your ducks in a row in every other area, but if the appraisal doesn't line up with the rest of those ducks, it'll be time to re-group.

Let me explain.

Step Four - Is it worth it?

Appraisal ($510)
Here's the nail biter.
With conventional loans, an appraisal is not necessary (although it's strongly recommended, since it lets you know how much your house is worth). However, with an FHA Loan, an appraisal is required - no exceptions. Also, the sale price of the house cannot exceed the appraised value. If that happens, the loan will automatically be denied.

For example, if you go under contract for a $200,000 house, and an appraiser says it's only worth $180,000, the loan will be denied. The Federal Housing Administration won't back a house for more than it's worth, which makes sense. Honestly, no first-time buyer (or any buyer), wants to pay more for a house than what it's actually worth. The problem comes when sellers over-estimate the value of their home and price it too high; according to our real estate agent, this happens fairly often. Appraisers look at the condition of the house, the neighborhood, the crime rate of the area, the sale price of other newly bought homes in the subdivision, and a whole slew of other factors to determine how much a house is worth.

By the time our house was appraised, our due diligence period had ended (see previous post for more details). We were already financially and emotionally invested in this place, so the idea that we might not be able to move forward if the numbers didn't align was very stressful. Especially since we had already submitted our move-out notice to our leasing office and started putting things in boxes. I did not like the idea of being back at square one and paying out-of-lease rental rates while we looked for something else and went through the whole process again.

Refundable? Nope.
Did I mention appraisal fees cannot be refunded under any circumstance? I may be talking dollars and cents to some, but a thousand dollars here and five hundred dollars there while we were just starting to save for a down payment on our first home was a big deal for us. NOT a fun feeling waiting for your FHA appraisal to come back. If it's appraised for less than what you've already agreed to pay, you do have the option to re-negotiate with the seller(s).

While it would be smart for the seller(s) to lower the price (if it goes back on the market and gets appraised by another buyer, they'll likely just be back in the same situation), they don't have to. In that case you're forced to back out of the contract and possibly forfeit your Earnest Money as per the seller's discretion, and you're still losing another $1K or so from inspection and appraisal fees.

THIS is the kind of info I wished others had told me about when it comes to buying a house. I knew there'd be fees, and extra costs, and of course the dreaded down payment, but I had no idea so much money and so many decisions would be in limbo while you hurry up and wait to sit around for the next phase of the process.

The Outcome
Our house appraised for a bit more than the sale price, thank God. In the grand scheme of things, we're basically getting the house for exactly what it's worth, and while that was a good feeling, it was an even better feeling knowing we were almost home free. Almost.

All that was left to do was "sit" on our credit and wait for closing. No major purchases are allowed during this time; changes to your credit score, while the loan is under review, can delay your closing and possibly cause the loan to be denied. Also, change in or loss of employment could put the loan in jeopardy.

I was nearing the end of my work contract at the time, and I was unsure if it would get renewed, end, or be terminated early. Oh the joys of uncertainty. There were so many moments of uncertainty, but thankfully we closed on the house a couple weeks before I made a new career move (signed a new contract with a different company), and the timing worked out perfectly.

And that's all I've got for today! Next week I'll talk about Closing and my final thoughts. Till then!

Part one here
Part two here
Part three here