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Eager to refinance your mortgage? Chances are your lender will require an appraisal to gauge the value of your home. Don’t panic: Major home improvements aren’t required (or recommended) to prepare. Still, there are steps you can take to ensure an accurate appraisal and a successful refinance.
Why is an appraisal needed to refinance?
You probably remember the appraisal drill from your original mortgage application: Lenders want an evaluation of the property being used as collateral to assess the amount of risk involved with the loan. A refinance is essentially applying for a new mortgage, but since property values can and do fluctuate, lenders don’t want to offer you a new loan based on the home’s original appraisal: Suppose the home has dropped in value in the last few years?
So many lenders demand a current estimate of your home’s worth in order to approve a refinance. An appraisal can also help a lender determine the amount of money that’s appropriate for you to borrow, especially if you’re planning to take some of it as ready money, as in a cash-out refinance.
“While most borrowers have the best intentions to repay their loans, things sometimes happen that prevent that,” explains John Brenan, a Roseville, Calif.-based chief appraiser at Clear Capital, a real estate valuation provider. “Therefore, the lender needs to know that, in a worst-case scenario, your property is worth enough to cover the amount of money being loaned.”
While you’ll pay for the appraisal — typically a few hundred dollars — it’s primarily being performed for the lender’s benefit. However, there are some benefits to the homeowner when a refinance appraisal is conducted. It provides a contemporary take on the home’s value — a useful figure to keep in mind, should you consider selling. If the home has appreciated since you bought it, you might be in for a pleasant surprise as to the worth of your equity stake. And of course, the appraisal will help determine how big a loan you can get, and — if you’re doing a cash-out refi — how much money you can take out.
Exceptions to the appraisal rule
Although common, appraisals aren’t always required when refinancing a mortgage, says Steven Ho, a New York City-based loan officer at Interstate Home Loan Center. “On some occasions, a refinance where only the existing loan is being refinanced without taking cash out at closing, and when the owner has plenty of equity accrued, will not require an appraisal at all,” Ho says.
“Conventional loans are more likely to not require an appraisal than non-conventional, government-backed loans,” he adds. However, there are exceptions here too. Both the VA streamline refinance and the FHA streamline refinance programs, available to homeowners who already have, respectively, VA and FHA loans, don’t require appraisals.
How to prepare for a refinance appraisal
If an appraisal is required, your lender will order one when you apply to refinance. The appraiser will schedule a visit to your home, at which time they’ll briefly inspect your property.
“When the appraiser arrives, they’ll want to walk through your home to observe the quality, condition, type and number of rooms, appliances, fixtures, floor coverings, countertops and more,” Brenan says. “They’ll take note of special features, any remodeling or updating, or if any obvious repairs are needed. He or she may also take photos and measurements of your home, which will be used in their report.” This appraisal report will be delivered to you and your lender.
So what should you do to score the best-possible appraisal? “Have your home in show-ready condition before the appraiser arrives, just as you would if you were going to sell the property,” suggests Bill Samuel, owner of Blue Ladder Development, a Chicago home-buying firm.
1. Improve your curb appeal
Make sure to cut your lawn and give your porch, patio and fence(s) a good washing. Power washing your driveway will also improve your curb appeal. These small measures signal that your home is well taken care of. Given that curb appeal can increase your home value by 7 percent or more, a focus on the exterior is likely to improve your chances of a favorable appraisal.
2. Declutter and clean your home
Thoroughly clean and declutter your home’s interior. Make sure all counter tops are free of mail, shopping bags and other random clutter. Vacuum your floors and put away blankets, bags and clothes that may often pile up on living room chairs.
3. List all upgrades and improvements you have made
Present the appraiser with a list of any special features or improvements you’ve made in the past few years to your home — especially details about major remodeling projects or additions, a new roof, windows or HVAC system, updated appliances and added insulation. “Don’t try to unduly influence or pressure the appraiser,” Brenan says, “but provide copies of any documentation for work performed on the home, which the appraiser should welcome.”
4. Make minor improvements
Complete some small improvements if necessary. You don’t want to go overboard in this department, because any major spending will just cut into what you save by refinancing. However, touching up the paint where there are big chips or cracks and having your carpets cleaned could add a little bit of perceived value. Replacing broken windows and doors may also pay off.
Not sure what needs to be fixed? Conduct a quick test of all major systems to make sure everything works. Run your HVAC system, turn your security system on and off, open and close all windows, do a quick test of all faucets to make sure they don’t leak, and run that ceiling fan you haven’t used in several months.
5. Research comparables in your area
The appraisal visit generally lasts “only about 15 minutes,” according to Samuel. “After the on-site visit, the appraiser typically spends a couple more hours compiling data and comparable sales to complete their valuation report.”
So, consider providing the appraiser with fresh comps in the form of information you gather about recent sales or listings in your neighborhood. Even though they do their own research, it might well be appreciated. You could also let them know about improvements to the neighborhood or HOA initiatives — anything that impacts favorably on property values. “You may have information that’s not readily apparent or obvious to the appraiser,” Brenan says. “But don’t be pushy about offering these details and printouts, or try to steer an appraiser to a desired value.”
What to do if the appraisal comes in lower than expected
Bad news: The appraiser files the report and you learn that your home is worth less than you thought. What can you do?
“First, read their report carefully and confirm all the information about your home is accurate,” Ho recommends. Did the appraiser somehow list your fireplace as non-functioning or incorrectly document the number of closets or square footage? “Appraisers are human, and it’s possible they entered the wrong data.”
Even if there are no mistakes, you might consider contesting the report. However, “you’ll need to document some evidence why your home should be worth more,” Ho says. “Perhaps there were recent homes sold privately or other comparables not considered that a local Realtor can help you find proof of.”
It isn’t easy to successfully appeal a valuation though, warns Atlanta-based real estate attorney and Re/Max Town & Country Realtor Bruce Ailion. Rather than contesting the original report, it might be easier to simply request a second opinion — that is, paying for another appraisal by a different professional. While it will cost you another appraisal fee, your lender may allow it, and then compare the evaluations.
And if this second report isn’t substantially better? “As a last resort, you can shop for a refinance from a different lender and start the process all over again,” Ailion says.
Bottom line on mortgage refinance appraisals
Home appraisals are a common requirement when you refinance a home, so you shouldn’t be concerned if your lender asks for one. It won’t take long and doesn’t require any major renovations on your part. But you should prepare by giving your home a good solid clean, fixing any obvious eyesores and maybe adding a little curb appeal — just as if you were getting ready to show it. And if you’re prepared with a list of comparables and upgrades you’ve made, you could increase your chances of getting an appraisal — and eventually a new loan — that makes you happy.