While many industries are struggling due to the coronavirus pandemic, the housing market is setting records with historically low interest rates. Averaging just around 3% as of May 2020 for a 30-year fixed-rate mortgage, low interest rates are likely one of the leading reasons mortgages are up 28% from 2019. 

Even though more people are shopping for homes, a lack of inventory continues to create challenges for buyers: 42% reported being caught in a bidding war, and as a result, home prices are up 7.6% from November 2019. One of the biggest risks bidding wars pose is driving up sale prices beyond  appraisal values .

What to know about appraisal values 

Your mortgage lender relies on a home appraisal to make sure they aren’t lending you more than the market value of the house. Appraisals cost between $300 and $400 and are part of the homebuying process for every buyer who requires a mortgage. An appraisal value that comes in lower than your purchase price may cost you your dream home. 

Whether you are buying a home or you’ve just started house hunting, here are five secrets about home appraisals you should prepare for now. 

Appraisals can make or break deals. 

With bidding wars driving up prices, buyers may find themselves on the road to owning a home only to have the journey cut short by a low appraisal. If an appraisal is lower than the purchase price, banks can decide not to loan the original amount and only approve the appraisal value. 

Appraisals can be overturned. 

The good news is that your real estate agent can challenge an appraisal. Sometimes appraisers don’t have all of the necessary information about home improvements and updates. Your real estate agent should take the time to review the appraisal, ask questions and contribute additional information. In some (but not all) cases, lenders will approve the new appraisal.

An appraisal contingency can give you security. 

To avoid finding yourself locked into a home that you can’t afford, it is a good idea to include an appraisal contingency in your original offer to the seller. An appraisal contingency gives buyers the option to back out of the purchase without losing their initial deposit or experiencing other penalties.

Big home improvement projects don’t guarantee a better appraisal. 

According to the National Association of Realtors, homeowners spend more than $400 billion annually on home improvements, but renovations won’t necessarily get you a return on your investment when it comes time to sell. 

Whether the home you want to buy has a brand new $20,000 sunroom or $10,000 in new solar panels on the roof, there is no guarantee that these investments will result in a higher appraisal. 

Zillow estimates are not guarantees. 

Be careful using Zillow and other online companies that offer home values when deciding what to offer a seller. Typically, these online values vary from one website to the next, so make sure to check multiple sites to gain a better understanding of how these estimates may not be accurate. 

Zillow states that most estimates are within 10% of the selling price, which means if the website estimates home values to be $250,000, the actual selling price could be as low as $225,000 or as high as $275,00.  

Bottom Line

If you are struggling to find an affordable house, it may be time to expand your search area, especially if your heart is set on a small town. A recent report shows the average median home price in 50 small towns is noticeably higher compared to 50 of the largest cities. 

While there are plenty of mortgage programs available for buyers, each of them requires an appraisal to approve the loan. Do your research on home values and brace yourself for unexpected bidding wars and appraisal times, and you’ll be prepared to navigate the journey to homeownership.