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What is a home appraisal? Everything you need to know

Bankrate logo Bankrate 12/11/2020 Libby Wells
a large lawn in front of a house: An exterior of a house with lawn © ucpage/Getty Images An exterior of a house with lawn

Whether you're buying or selling a home or refinancing your mortgage, having a home appraisal completed is a critical step in the process.

Problems pertaining to home appraisals are the second-biggest cause of delayed loan settlements, however, according to the National Association of Realtors. That’s why it’s important to understand what an appraisal is, why it’s necessary to the mortgage process and how it can impact your 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 is typically done in order to verify 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, an accurate appraisal is vital.

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

How do home appraisals work?

To conduct an appraisal, a licensed appraiser makes an appointment with the homeowner to visit the home once the order from the lender has been received. Prior to the pandemic, appraisers routinely went inside homes, but aren't being required to go inside every home now.

Some lenders are relying on “enhanced exterior appraisals,” explains James Crumpler, a licensed real estate appraiser based in West Palm Beach, Florida.

“Typically, with an exterior-only appraisal, you take pictures and rely solely on public records,” Crumpler says. “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.”

Crumpler notes he's still doing full interior inspections during the pandemic because some homes are too high-end or unique to appraise solely from the outside.

“Some properties are too custom and too nice to try to guess what it is from the street,” Crumpler says. “If you’re dealing with a house that’s $1 million, you don’t want someone standing outside trying to guess what the house is like inside.”

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

Once a buyer makes an offer on a house and signs a purchase agreement, the lender orders an appraisal. With a refinance, the appraisal is ordered usually after the homeowner applies for the new loan.

Once the appraiser has completed the site visit and market analysis and checked the public records on the property, the appraiser writes up a report, which is standardized as the Uniform Residential Appraisal Report. For a residential property, the appraiser may take anywhere from several hours to a week or more to complete this report. A lot depends on the size, complexity and condition of the home.

The borrower is entitled to a free copy of the appraisal before their loan closes. As the borrower, you should read the report thoroughly and notify the lender if you believe it contains 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 may 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 long does an appraisal take?

For smaller homes, the appraiser visit might be as short as 15 minutes or 30 minutes, but a larger property could take several hours to assess. The appraisal generally takes less time 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?

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. The 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,” Crumpler explains. “Whoever orders the appraisal is the client.”

How an appraisal determines a home's value

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. 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 home despite the low valuation, you'll have a choice to make:

  • You could negotiate with the seller to try to get the price closer to the appraised value; or
  • You could 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, though, as an appraiser does look at the condition of the home, but not to the extent a home inspector does. For instance, an inspector may 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 may be some exceptions for refinancing), but an inspection isn't. An inspection is often recommended, however, so that buyers can ensure the home has no major defects before the sale is finalized.

How to prepare for a home appraisal

If you're the seller of the home, there 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 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.

“Make sure there is not a lot of clutter stacked up against walls and on the floor,” Crumpler recommends. “It doesn’t necessarily change the value, but it certainly makes it easier. I’ve been in homes where an entire bedroom is used for storage and you can’t tell if there are damages to the walls or flooring. Pick things up so (the appraiser) can see.”

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, which includes all of the finalized details of your loan and the closing costs associated with it. You should 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.

All of that can't happen as quickly if the appraisal doesn't come back favorably, so its importance in the process of getting a mortgage can't be overstated.

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