What is the fair price for the home you’re looking at buying? Or, the home you’re wanting to sell?

That can depend on multiple factors, like current market conditions, location, prices for similar homes in the same market (comparable properties), emotional attachment by the sellers (which can sometimes lead to overestimating the home’s value), a professional appraisal, and more.

When it comes to mortgages and your mortgage lender, a home appraisal is the most important factor. A lender uses an appraisal to confirm how much money they will let you borrow.

So, exactly what is a home appraisal? And, why is it needed?

The Home Appraisal

Appraisals are done by a third-party, licensed appraiser that offers their impartial opinion of a home’s value. Lenders usually require a home appraisal when you take out a mortgage, whether it’s for a purchase or a refinance. In a purchase transaction, the lender uses the appraisal report to ensure the price being paid for a home is in line with fair market value based on its condition, location, and features. For a refinance, a lender uses the appraisal to ensure the home is worth the amount of money being loaned.

The appraisal is used to assess the property’s value, as well as to help determine the interest rate paid, required down payment, and ultimately, whether the loan will be approved. It helps ensure that you don’t pay more than the home is worth and the lender doesn’t loan more money than it’s worth. The appraisal helps protect the mortgage lender if the borrower would happen to default on the loan. The lender knows they can sell the home for a fair value to recoup the money they lent if this worst-possible outcome happens.

With a purchase, the appraisal is typically conducted after the buyer and seller sign a purchase agreement, which is a contract for the sale of the home.

How Does the Home Appraisal Process Work and What Does It Cost?

Because the lender requires an appraisal, they will typically be the ones to order the appraisal. You will be the one to pay for the appraisal as part of the closing costs in the financing process. The cost usually ranges from $300 to $500, but can be different depending on the size and condition of the home.

After the mortgage lender orders the appraisal, a state-licensed appraiser will either contact you directly to schedule an appointment to see your home in person or they will use technology to assess your home’s value remotely, without needing to be physically there. One thing to keep in mind is that the appraiser is not conducting a home inspection, which is a more thorough process where an inspector searches for problems in the home to find any areas that need repairs. 

Here are the steps of the appraisal process:

1. Request For Appraisal

The lender will order the appraisal after you’ve signed the purchase agreement or after you apply for a loan with a refinance.

2. Appraisal Inspection

With an in-person visit, the appraiser will typically review the interior and exterior to assess the general condition and the curb appeal, without looking for specific problems like a home inspector would. They will examine the size and condition of the property (structurally sound, number of bedrooms and rooms, functionality of home systems, major upgrades or renovations, square footage of the house and lot). An in-person visit should take around 30 minutes for an average size home, while a larger home might take an hour or more.

3. Comparable Sales

In addition to the physical or remote inspection, the appraiser will look at comparable sales (comps) of other similar homes in the area that recently sold. The comps will be of other homes that are similar in size, age, condition, and location. The appraiser will also account for market trends, like rising or falling home prices in the area.

4. Report and Valuation

After the inspection and research is done, the appraiser makes a final evaluation of your home in an appraisal report that is delivered to your mortgage lender within one to two weeks. The report will typically include:

• A description of the property.
• An analysis of the comps and market conditions.
• The final appraised value of the home based on the appraiser’s observations.

The lender is required to provide you with a copy of the appraisal as soon as reasonably possible, but no later than three days prior to closing. Be sure to read it carefully and contact your lender if you think it’s not accurate or contains any errors.

Determining A Home’s Value

Appraisals depend on multiple factors. The location of the property will have a lot of impact on the valuation. The value will be negatively impacted if there are distressed home sales in the neighborhood or if the home is in a less-desirable neighborhood. The home’s size, condition, and amenities, plus the comps, are the other major factors used to determine value.

When selling or refinancing your home, there are factors that are out of your control. However, there are some ways you can help make a positive impact on a home appraisal. These include:

• Have a list of home improvements and upgrades (and receipts) available for the appraiser.
• Improve the curb appeal of your home with a clean yard and landscaping.
• Clean and tidy up your home.
• Address any light repairs or cosmetic issues.

What If The Appraisal Is Low?

When buying a new home, there are instances where the appraised value will differ from the purchase price agreed to between the buyer and seller. That’s because an appraisal is based on the appraiser’s opinion of the home’s value. The appraiser is a licensed professional, but home appraisals are subjective.

If it comes in lower, the appraisal could negatively impact the sale because the mortgage lender won’t loan more money than the appraised value. You can dispute an appraisal if you don’t agree with the final value. It’s important to review the appraisal report to check that everything is accurate. You can contact your lender to start the appeal process and revisit the assessment.

Make Sure You’re Covered With An Appraisal Contingency

The other options are to try to negotiate a lower sale price or to pay cash to make up the difference between the appraised value and the loan amount. You could also decide to back out of the deal and have your earnest money deposit returned if your sale contract has an appraisal contingency.

Your real estate agent will likely recommend including an appraisal contingency in the sales contract so you don’t lose money if you do have to walk away from a home purchase. Without an appraisal contingency, you’d have to forfeit your deposit if you cancel the deal. Be sure to know what contingencies are in place before signing a contract to purchase a home.

If the appraisal is for a refinance and it comes in low, you can also dispute it if you think the appraiser missed beneficial additions or home improvements, or you see any other mistakes in the appraisal report. Your home must appraise at or above the amount being refinanced for the loan to get approval.

How Long Is An Appraisal Valid?

Most appraisals are usually good for four months (120 days), while appraisals for Federal Housing Administration (FHA) loans and most Department of Veterans Affairs (VA) loans are good for six months (180 days). With FHA or VA loans, it might be possible to refinance without an appraisal.

Appraisals don’t stay valid for very long because housing market conditions constantly change, particularly when the real estate market is volatile. If the home isn’t closed on before the expiration time is reached, another home appraisal might be needed. In rare circumstances, you might be able to receive an extension on the appraisal.

The Benefits Of An Appraisal

The home appraisal process is usually required by mortgage lenders, but it can also be beneficial to buyers and sellers. It is used to identify the estimated value of a home. That benefits buyers because they know they’re paying a fair value and it benefits sellers to know if they’ve priced their home competitively.

Contact us today to learn more about the home appraisal process and how you can get started on an application for a mortgage or to refinance your home.

The information provided here is for informational purposes. When interest rates and loan program information are included, it is for illustration purposes only and not a solicitation or quote for services. This is not an advertisement or loan estimate. Current interest rates, loan programs and qualification criteria can change at any time. If you have questions or need assistance, we can be reached using the contact information above.