What Is an Appraisal? Everything You Need to Know
BY: NATHAN GOLDEN | 2022
Read Time: 8 min
There are some non-negotiables when it comes to the homebuying process. If you’re taking out a mortgage, getting an appraisal is one of them.
What is an appraisal? It’s a key part of your loan application, during which a real estate appraiser will assess the condition and value of the home. Lenders require the appraisal before they will approve your loan and let you close on the home.
We’ll explain why appraisals are important – and how they benefit you.
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Appraisal definition: What, exactly, is a home appraisal?
A home appraisal is an assessment of the fair market value and condition of a property.
Appraisals are performed by professional appraisers who look at several factors to determine the property value:
- Overall condition of the home
- Square footage
- Curb appeal
- Whether there are any hazards or liabilities
- Local amenities
- Comparable properties (known as “comps”) – meaning similar homes that sold in the area within the past year
“The property itself will be evaluated by using certain appraisal requirements such as the size and functionality of the land where the house stands, the number of bedrooms and bathrooms, the overall condition of the home, and upgrades if there are any,” says Kris Lippi, a real estate broker in Hartford, Connecticut and a member of the Forbes Real Estate Council.
“Other factors will be considered as well, such as the quality of schools in the area, the public transportation available, and how close the property is to commercial and public areas,” he adds.
The appraiser will issue an appraisal report that includes details and commentary on the condition of the home, along with their estimate of the fair market value of the property.
The comparable sales are critical to determining the home’s valuation. The licensed appraiser looks at recent sales in the neighborhood to gauge how much the property should sell for.
Mortgage lenders require a home appraisal because your loan amount cannot exceed the home’s actual value. They need to ensure that they could recoup the cost of your loan if you fell behind on payments and they foreclosed and needed to resell the home.
Related reading: A Low Appraisal in a Hot Market Can Be a Deal-killer. Here’s How To Salvage Your Purchase
How long does a home appraisal take?
The on-site portion of the appraisal can typically be completed in a few hours or even less, whether the appraiser plans to physically assess the property or do a drive-by appraisal, in which they do not look inside the house.
The part that could take the longest is getting the appraiser to the property. The U.S. is experiencing an appraiser shortage.
However, purchased-focused lenders can get timely appraisals done for short closings.
Once the appraiser views the property, he or she must analyze property records and information about the surrounding areas and comparable properties.
Typically, it takes about two weeks to receive an appraisal report, again, depending on the appraiser’s schedule and workload.
How much does an appraisal cost?
Appraisal costs vary based on where you live and the size and condition of the home.
But you should expect to pay at least $500 for the appraisal. The cost could be higher if there are complex appraisal requirements or you need the report completed urgently.
Who orders the home appraisal?
After you’ve gone under contract to buy a home and have applied for a mortgage, your lender will request an appraisal for the property. You do not need to arrange the appraisal, though you will pay for it as part of your closing costs.
“Typically, a mortgage company won’t accept an appraisal that is not directly ordered by them,” says Melissa Perrille who worked as a home appraiser before founding Premier Realty Group in North Providence, R.I.
However, the appraiser works independently of the lender and issues an objective assessment of the home’s value.
Still, “homebuyers should always make sure to find out about the appraiser’s location to ensure they are from the area and will have the market knowledge needed to complete the report accurately,” Perrille says. “A homebuyer always has the right to rebut an appraisal report but that requires supporting documentation to the lender for review.”
How the home appraisal affects your home purchase
The home appraisal process can be anxiety-inducing for homebuyers, since a low appraisal can be a deal-breaker for purchasing the home.
Let’s say you put in an offer on a home with a sale price of $300,000. You plan to put down 3%, or $9,000. That means you’ll need a loan for the remaining $291,000.
But the appraiser determines that the home is only worth $285,000 based on its condition and comps. Your lender will not let you borrow more than the home’s value, so you can only get approved for 3% down based on the $285,000 value.
Now you have to decide whether to pay the difference between the appraised price and the sale price out of your own pocket (in addition to your down payment and closing costs).
In this case, you would have to come up with over $23,000 to cover the appraisal shortage and the 3% down payment instead of the original $9,000.
If you have an appraisal contingency in your sale contract, you may be able to cancel the sale without losing any earnest money. Appraisal contingencies give you the right to walk away from the sale without financial penalties if the appraisal comes in lower than the sale price.
But if you don’t have such a contingency, you may have to decide whether to move forward and pay the additional costs upfront or walk away and lose your earnest money.
Although your lender will order the appraisal, it actually benefits you as well. You want to know that you’re not paying more for your home than it’s worth, as that could hurt you financially down the road.
If you wanted to sell the home in a few years, you run the risk of not being able to sell it for enough money to pay off your loan. Or, if you buy the house for more than it’s worth plus do some renovations, you may not make back the money you put into it, let alone turn a profit.
What to do when your appraisal comes in low
If your appraisal comes in low, you have a few options:
- Ask the seller to reduce the sale price
- Pay the difference from your own savings
- Negotiate repairs that might improve the appraisal
- Cancel the sale
You could also request a second appraisal to see if another appraiser values the home at a higher amount. However, the lender will still use the lower appraised value so it wouldn’t help unless you change lenders, too.
The right option in this scenario depends on your finances and how much you want the house. You’ll want to work closely with your real estate agent to understand the local market and the aspects of the home that caused the appraisal to come in low.
If the appraisal is in the ballpark of the sale price, and you know that a few key improvements would raise the home’s value, you might decide to purchase it anyway.
But it’s important to consider how much more money you’re really willing to put into the home. You might prefer to walk away and find another house that passes the appraisal easily and is move-in ready right away.
Do I need a home appraisal and a home inspection?
Most home loans do not require a home inspection, but you should get one anyway. A good home inspector will dig deep into all of the home’s systems, from the roof to the basement and everywhere in between.
The purpose of an inspection is to find defects that jeopardize the home’s structure and safety. If, for example, the inspector found the HVAC system had been improperly installed, you’d know before buying the home instead of learning afterward.
You can make your offer to buy the home contingent upon the home inspection which gives you a way out if the inspector discovers something troubling.
Or, as with a low appraisal, you can negotiate with the seller to reduce the sale price or make repairs prior to closing. But in today’s market, when there are more buyers than there are available homes, sellers can be more selective. They may be unwilling to negotiate if they are confident they’ll get another offer for the home.
Appraisals vs assessments and other valuations
Only a home appraisal can set the value of a home for the purpose of getting a new mortgage or a refinance. But other forms of home valuations can be useful in other ways.
A home assessment, for example, sets the value of real estate for tax purposes. Homeowners in most areas pay property taxes each year. Local governments levy this tax based on the value of your home, a value that comes from a tax assessment.
Assessments aren’t usually as precise as appraisals. After all, the local tax assessor doesn’t come out and walk through your house.
Even if the tax assessor requests a site visit, “it is typically done by a data collector and not an appraiser,” Perrille says. “The data collector will take note of condition and room counts and will typically take one exterior photo of the subject property.”
Then there are the valuations you’ll see on websites such as Zillow and Redfin. These values come from a computer algorithm that analyzes public records and overall housing trends. They’re OK to use as a starting point, but they’re not tailored to your home like an appraisal, and they may not accurately reflect the home’s value.
Some loans require special home appraisals
If you’re getting a government-backed loan like a VA or FHA mortgage, your lender will order a loan-specific appraisal.
These programs have strict guidelines that must be met before the loan can close. VA loans must meet the VA’s Minimum Property Requirements, which are in place to ensure that veterans are buying houses that are safe and hazard-free and that the VA is not backing loans for more than the homes are worth.
FHA loans have their own set of appraisal requirements, too.
What is a home appraisal? FAQs
An appraisal defines the value of a home. After you apply for a mortgage, your lender will order an appraisal to determine whether the property’s fair market value is equal to or greater than the sale price. Most refinance loans also require an appraisal.
A licensed or certified home appraiser conducts home appraisals. The appraiser assesses the property itself, including sheds, pools, and other outbuildings. The appraiser also analyzes the local real estate market, which influences the subject home’s value.
Expect to wait at least a week or two between the appraisal order and the arrival of the appraisal report. If you’re buying a multi-unit property or an unusually large home, the appraisal may take longer. Also, properties that include several buildings can take longer to appraise. Wait times for appraisals tend to be longer in hot housing markets.
Expect to pay at least $500 for a home appraisal, though the cost may be more or less depending where you are buying a home. Appraisal fees can reach $1,000 or higher for complicated cases. Home buyers typically pay for the appraisal as part of the loan’s closing costs.
The bottom line
The home appraisal is important to both your lender and to you. As a borrower, you don’t want to take out a loan for more than your home is worth because that will put you in a difficult position if you want to sell the property in the future.
Besides, you want to build up home equity in a home that’s gaining value, rather than playing catch-up from the start.
- The home appraisal determines the fair market value of the property you want to buy
- Lenders order the appraisal, but the homebuyer pays the appraisal fee as part of their closing costs
- Appraisals and home inspections are different, but both provide important information to the lender and the homebuyer
*Pre-approval is based on a preliminary review of credit information provided to Fairway Independent Mortgage Corporation, which has not been reviewed by underwriting. If you have submitted verifying documentation, you have done so voluntarily. Final loan approval is subject to a full underwriting review of support documentation including, but not limited to, applicants’ creditworthiness, assets, income information, and a satisfactory appraisal.