Just doing a google search of the property or even driving by is not enough to tell if a house has an unintended swimming pool in the basement or if there is a functioning kitchen or bathroom. A house can look beautiful from the outside and be quite scary on the inside. As they say, ‘You should never judge a book by it’s cover.’ Normally you would not want to buy a house without seeing the interior.
So why is it that an appraisal is not always necessary. If the mortgage you are asking for is more than 80% of purchase price, then the mortgage must be insured by either CMHC, Genworth or Canada Guaranty. This insurance covers the lender in case of default on payments. Sometimes however, the insurers will request an appraisal. They will arrange the appraisal internally and cover the cost.
If the mortgage is for 80% or less of the estimated or purchase price, then the lender will most likely ask for an appraisal, about 99% of the time. Many lenders do have an internal system to estimate value based on the past sale(s) of the home, the local market and comparable houses that have sold in the area. This is often called AVM (Automated Valuation Model). It is similar to what is called a desktop appraisal, where the appraiser does not go inside the house. These are more prevalent in urban areas that are highly marketable. We don’t come across these too often and a full appraisal may still be necessary if the estimated value or purchase price is not at the bottom of the value range concluded. The rarity of this type of appraisal is probably due to the fluctuations in the market. Through all of 2016 and the early part of 2017 we saw huge bidding wars that had some buyers over paying for properties. Then in late spring of this year we saw a softening in the market which has led to a virtual end to bidding wars and properties sitting on the market much longer than the months prior. This has caused lenders and appraisers to be more conservative in estimating property values and more cautious about the properties they lend on.
So why didn’t you have to get one last time? There are many possible reasons, however the most likely answer is just the change in the market and mortgage rules. The government has really tightened the regulations over the last few years, especially in this last year. We are required to submit much more documentation now than 5-10 years ago and lenders are not able to secure default insurance on near as many mortgages.
Whenever you are looking at securing a mortgage, it is better to assume you will need to pay for an appraisal and if you don’t that’s $300-$500 extra in your pocket.
If you ever have a question about appraisals we are happy to answer them. Contact us anytime.