The appraisal is a critical part of the home-buying or refinancing process; in fact, appraisal issues are the second-most cause of closing delays, according to the National Association of Realtors. That’s why it’s important to understand what an appraisal is, why it’s necessary in the mortgage process and how it can impact your home loan.

What is a home appraisal?

A home appraisal is an objective, professional assessment to determine how much a home or property is worth.

When buying or selling a home, an appraisal verifies that the sale price of the home is in line with fair market value. This ensures the homebuyer doesn’t pay more than what the home is worth, and the mortgage lender doesn’t lend more than what the home is worth. Since the home serves as the borrower’s collateral, the accuracy of the appraisal matters significantly.

Likewise, when refinancing a mortgage, the lender will have the home appraised to confirm its market value before extending a new loan.

How much does a home appraisal cost?

For the average single-family home, a professional home appraisal costs roughly between $300 and $450. Although the lender orders the appraisal, the fee is usually paid by the borrower, unless other arrangements are negotiated. This fee is typically part of the loan’s closing costs.

The cost can increase if the home is very large or has unusual characteristics. For a large property or multi-family home, for example, the fee could be $600 or more.

“The lender typically pays the appraiser, but the homeowner or whoever the borrower is pays the lender,” explains James Crumpler, a licensed real estate appraiser based in West Palm Beach, Florida. “Whoever orders the appraisal is the client.”

How do home appraisals work?

Once an order from a lender has been received. a licensed appraiser will either make an appointment with the homeowner to visit the home or perform the appraisal remotely. Appraisers took the virtual approach at the beginning of the pandemic — even conducting exterior-only appraisals — and are poised to continue to do so.

“Typically, with an exterior-only appraisal, you take pictures and rely solely on public records,” Crumpler explains. “You take photos all the way around the house and ask the owner/occupant to send you interior photographs of each room, so you’re relying on a third party for interior viewing.”

Besides the physical assessment of the property, the appraiser also analyzes recent sales of comparable properties in the area, or “comps.” This information can be gathered from a variety of sources, such as the local multiple listing service (MLS), tax records, local real estate agents and county court records.

The appraiser also considers the neighborhood surrounding the property. A newer home in a growing subdivision might appraise higher than an old home in a community in decline, for instance.

Home appraisal process

Here’s an overview of what you can expect when obtaining an appraisal:

  1. Your lender orders the appraisal. If you’re buying a home, your lender will order an appraisal after your offer on the home has been accepted and you’ve signed the purchase agreement. When refinancing, the lender typically orders the appraisal after you apply for the new loan.
  2. The appraiser assesses the home. The appraiser will conduct either a site visit or a remote evaluation to determine the value of the home. If doing an in-person visit, the appraisal itself could take just 15 to 30 minutes. A larger home can take a few hours.
  3. The appraiser reviews comps. Along with appraising the property, the appraiser will conduct a market analysis and review public records to determine what similar properties are worth, and how those relate to the home’s value.
  4. The appraiser delivers a report and valuation. Once the information has been gathered, the appraiser will put together a report, typically the Uniform Residential Appraisal Report, for the lender. As the borrower, you are entitled to a free copy of the report before the loan closes. Read this report thoroughly and notify the lender if you believe it is inaccurate or contains any errors.

What do home appraisers look for?

Home appraisers look at many factors to determine a home’s fair market value.

Home appraisal checklist

  • Sales trends and price ranges for comparable homes in the neighborhood
  • Location of the home
  • Neighborhood (Is it urban, suburban, rural? Is it old or is it newer and growing?)
  • Square footage of the house and the lot
  • Layout of the house
  • Hazards such as flood hazards or other adverse conditions
  • Age and condition of the foundation, roof, walls and overall structure
  • Amenities, such as a fireplace, deck or swimming pool
  • Condition of appliances

The appraiser might also take into consideration whether there is any rental income or fees associated with the property, such as homeowners association fees, as well as the cost to build a similar home from the ground up.

How an appraisal determines a home’s value

As the above list shows, appraisals are based on a lot of factors, some of which are out of anyone’s control. For example, if a neighborhood has a lot of distressed home sales, that tends to lower the value of other nearby homes. Generally, the location, age, size and condition of a home, the amenities, any improvements and comps are key factors the appraiser uses to determine fair market value.

Online home appraisal: Accuracy vs. convenience

Online home appraisals, which use statistically-based automated valuation models (AVMs) to determine a home’s market value, are sometimes ordered by lenders who don’t want to pay for a full appraisal, but “they’re not very accurate,” Crumpler notes.

“They’re looking at sales prices in the area and square footage, but there is no personalized tweaking of it,” Crumpler says. “In other words, if the home next door sold and it wasn’t updated and yours was updated, it’s not going to reflect a comparable value.”

An online home appraisal might be suitable for a low-risk loan, Crumpler says, but most lenders and borrowers are better served with a full professional home appraisal.

“You get better information if you are viewing a property,” Crumpler says. “Would you buy a home without seeing it or going inside of it? All the appraiser is doing is trying to reflect the market and what a typical buyer and seller would do.”

What happens if the appraisal comes in too high or too low?

When the appraised value of a home is higher than expected, that’s a benefit to the buyer 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.

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

Alternatively, you might decide to negotiate with the seller for a price closer to the appraised value. If you still want the house and the seller is unwilling to negotiate, a lower appraised value could force you to put more money toward the down payment to make up the difference.

Home appraisal vs. inspection

In simplest terms, a home appraisal determines the value of a home, while a home inspection determines the condition of a home.

There is some overlap between a home appraisal and a home inspection. Like a home inspector, an appraiser does look at the condition of the home, but not to the extent an inspector does. For instance, an inspector might use special equipment to test things that are behind the walls, such as pipes and electrical wiring, whereas a home appraiser is looking for visible hazards and defects, such as rotted wood, exposed wires or cracks in the ceiling. In addition, since the lender orders the appraisal, the appraiser will look at whatever is on the lender’s checklist.

Another key difference: An appraisal for a home sale or mortgage refinance is usually mandatory (there might be some exceptions for refinancing), but an inspection isn’t. It’s still smart to get an inspection, however, so that you can ensure the home has no major defects before the sale is finalized.

How to prepare for a home appraisal

For homebuyers

  • Know the contingencies. Most home purchase agreements include an appraisal contingency that allows you to walk away from the deal if the appraisal turns out lower than expected. Before you make an offer on a home, be sure you understand the terms of this and any other contingencies, and your options.
  • Don’t feel pressured to make a higher offer. A competitive market can make it tempting to offer more than a house is worth, but don’t go overboard if you don’t have the extra cash to cover the difference between a higher offer and the actual appraised value.
  • Accept that the outcome is out of your control. As the buyer, you don’t have much, or any, influence over the results of the appraisal. If the valuation isn’t in line with your expectations and you have a contingency in place, you can always back out or try to negotiate.

For refinancers

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

Next steps

If a home appraisal goes well, you’re one big step closer to closing. Once the appraisal report is in, your lender will consider all of the information submitted in your application and the appraisal report to determine your approval for a loan, and for how much.

If you’re approved, you’ll receive a document, the closing disclosure, with the finalized details of your loan and the closing costs associated with it. Scrutinize this document carefully for any errors or information that seems significantly off from what you were originally quoted. If anything looks different, ask your lender to explain. The closing disclosure will be delivered to you at least three business days before your closing date, so you’ll have time to review.

If everything is in order, your next step is closing day, when you’ll bring identification and the funds to cover closing costs to the closing table. Then, you’ll be asked to sign documents to complete the transaction, and if you’re buying a home, you’ll be given the keys to the property.

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