Buying a home is a challenge in today’s market. Not only is real estate inventory limited by over 5 million homes, but home prices have soared over the past year. Now, buyers are being forced to take out larger mortgages to cover their costs.
Inflated home prices aren’t just costing buyers more money. In some cases, they may be causing mortgage loans to fall through.
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Why rising home values matter with a mortgage
When you get approved for a mortgage, there are different steps your mortgage lender needs to take to finalize that loan. For one thing, your finances will be further examined through a process known as underwriting. Your lender will also need reassurance the home you’re looking to buy is worth enough to cover the amount of your mortgage. That’s where home appraisals come into play.
During an appraisal, a professional will inspect a property and determine what its value is based on its condition and local home values. A big reason home prices are so high right now is that demand is high, and buyers are frequently entering into bidding wars, which drive prices up.
To put it another way, today’s high home prices aren’t necessarily reflective of homes’ actual value. And that’s something that can come through during an appraisal.
In August, about 13% of home appraisals came in below their sale price, according to CoreLogic. In May, nearly 20% of appraisals followed a similar pattern. When homes don’t appraise for a high enough value, a mortgage can easily fall through.
Mortgages are secured loans, which means they’re backed by a specific asset — the home that’s being purchased. If a lender is giving out a $300,000 mortgage for a home but its appraisal comes back at $290,000, that mortgage could fall through because $290,000 won’t be enough to allow that lender to get repaid if the borrower stops paying their mortgage. When you have a housing market with inflated home prices, …….