What is a home appraisal? Everything you need to know

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A home appraisal is a crucial step in the process of buying a home and getting a mortgage. The appraisal establishes a property’s value, which helps the lender determine the funding for the mortgage. Appraisals are often required to refinance a mortgage as well.

What is a home appraisal?

A home appraisal is a professional opinion on how much a home is worth. Your bank or mortgage lender will order an appraisal to check whether the sale price of the home reflects fair market value. This ensures the homebuyer doesn’t overpay and that the mortgage has adequate collateral to protect the lender in case of default.

When the appraisal is ordered, an appraiser examines the overall condition of the house — the foundation, roof, plumbing and all essential systems — and provides a final report.

If you’re refinancing your mortgage, your lender may also require an appraisal to confirm the market value of the home before extending a new loan.

How do home appraisals work?

Home appraisals are typically regulated at the state level, and usually start with a certified appraiser visiting and examining the property. The appraiser then analyzes comparable properties in the area, based on recent home sales, to gauge fair market value. Data can be gathered from a variety of sources, such as the local multiple listing service (MLS), tax records, local real estate agents and county courthouse records.

Once the appraiser completes the evaluation, he or she will produce an appraisal report, which typically follows the standard Uniform Residential Appraisal Report.

What do appraisers look for?

Appraisers consider many factors that can help determine a home’s value, including:

  • Neighborhood – Home price ranges and trends in the area
  • Site – Size of the property, zoning and access to utilities
  • Hazards – Any flood hazards or adverse conditions
  • Condition – Age and state of the foundation, roof, walls and overall structure
  • Home improvements – Features like fireplaces, a porch or swimming pool
  • Comparable homes – Similar properties sold recently

The appraiser may also consider any rental income or fees associated with the property, such as HOA fees, as well as the cost to build a similar home from scratch.

How long does an appraisal take?

For a typical home, the appraiser visit might be as short as 15 to 30 minutes, but a larger property could take several hours to assess. The appraiser visit is generally shorter than a home inspection, which is a more in-depth look at the property.

After visiting the home, the appraiser may take a few days to a week to complete the formal written report. Complex cases may require several weeks.

How much does a home appraisal cost?

A professional home appraisal for a single-family house usually costs $300 to $450. Although the lender orders the appraisal, the amount is paid by the buyer, unless other arrangements are negotiated. (The fee can sometimes be rolled into the closing costs.) The cost increases if the home is very large or has unusual characteristics. For a large property or multi-family home, the fee could be $600 or more.

What happens if the appraisal comes in higher or lower?

When the appraised value of a home is higher than expected, that’s a benefit to the buyer. That’s because the difference between a high appraised value and the contract price implies additional home equity.

However, a home appraisal that comes in lower than expected could spell trouble for the sale. If this happens, look over the appraisal report closely to check for errors that could account for the unexpected valuation. Your real estate agent may want to suggest different or overlooked comps, too.

If your sales contract has an appraisal contingency, and the appraised value is lower than the amount you’ve agreed to pay, you may decide to back out of the deal and get your earnest money deposit refunded.

If you still want to buy the house despite the low valuation, you will have a choice to make.

“There are a number of options, and it will really come down to how much you want the house,” says Kim Bragman, chairman of the San Antonio Board of Realtors. “You could try to negotiate with the seller to get the price closer to the appraisal, or you may also consider putting more money toward the down payment to make up the difference. And of course, you could also choose to walk away.”

Do I need an appraisal to refinance?

Most lenders require an appraisal for a refinance, but homeowners with a FHA loan or VA loan may be eligible to refinance without getting a home appraisal. Both of these government-backed mortgage programs have refinance options that don’t require appraisals:

How to prepare for a home appraisal

If you’re the seller of the home, here are some steps you can take to avoid a low home appraisal:

  • Prepare your own comps. Give the appraiser a list of properties in the area that you believe are similar to yours. Your real estate agent may be able to help, or you can research online listings.
  • Make a list of improvements. Get maximum credit for renovations or repairs that you’ve done by providing details about work you’ve completed on the property. Providing supporting photos and receipts could be helpful.
  • Clean and declutter. Spend time to make the home look its best by mowing the lawn, raking leaves and cleaning up flower beds. Make sure the house is clean and excessive clutter is put away out of sight.

Featured image by ucpage of Getty Images.

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