What is a home appraisal?

A home appraisal provides a comprehensive look at what a piece of property is worth, and in turn, how much a lender is willing to loan you to buy that house. Home values in a specific geographical area are determined in part by the expert opinion of a professional appraiser, who visits and examines the size, condition, quality and purpose of a home.

Mortgage lenders require an appraisal on a house before they’ll provide a loan. A home appraisal will determine if a home’s value is overpriced, protecting a potential buyer from paying too much for a house. It also protects the bank from getting stuck with a property that’s worth less than they amount they’ve invested.

While home appraisal regulations can vary state-to-state, essentially there are three aspects to the process:

1. Inspection: A certified, state-licensed home appraiser will visit the property to determine the home’s value.

2. Comparison to similar properties: The appraiser will research other homes that are in the same area and similar in makeup. He or she will compare recent home sales in the area to help determine a fair market value. If it’s new construction, the appraiser estimates the cost to replace the structure on the property if it were destroyed, and also takes into consideration land value and depreciation to determine the home’s value.

3. Final appraisal report: Using the data from the inspection and comparables (comps), the appraiser will issue a final appraisal report.

It’s important to remember that a home appraisal is not the same thing as a home inspection. If you’re buying a home, you’ll want to hire a licensed home inspector to highlight any potential problems with the house. Home appraisers will likely make note of any obvious issues, but they won’t test your HVAC system, inspect your chimney or determine if your electric is up to code. That’s the job of the home inspector.

Keep the property tidy as to not impede the home appraiser's evaluation. (Photo by Jessica Anderson)

What happens during a home appraisal?

Properties that are just a couple of streets from one another can differ greatly in price. Accessibility to public transportation, the local schools, on what floor a condo is located, and what borders the property line are all factors that can make a big difference in the price of two seemingly similar homes.

A common misunderstanding is that the appraisal amount is only for the house itself. In fact, the figure appraises the total value of the home and any other permanent structures, along with the land.

Home appraisers look at a few key features when evaluating a property:

Property size: An appraiser will consider the overall size of the plot of land, as well as the house, including number of bedrooms and bathrooms. The more bedrooms and bathrooms, the more valued the house.

The exterior: The appraiser will determine what materials comprise the exterior of the house (roof, siding, foundation) and evaluate their condition.

The interior: Similar to the exterior, the appraiser will consider what interior materials were used and what condition they’re in. Damage or defects to the walls, windows, flooring and doors will be noted.

Home improvements: Any improvements that were made under the current ownership can influence the appraised value of the home, such as a finished basement, a new patio or an upgraded master bathroom.

Extra features: Items such as a swimming pool, fireplace or garage can increase the home’s value.

While general tidiness of the home won’t help bring a higher appraisal amount, it's important the appraiser has a clear path to the property. Make certain the hedges are trimmed; gutters cleaned and remove any clutter that might impede an appraiser’s evaluation.

How much does a home appraisal cost?

Even though a lender requires the home appraisal, it’s the borrower’s responsibility to pay the fee (unless otherwise negotiated), which is typically included in the closing costs of a sale.

The mortgage lender will order the appraisal either directly from an appraiser, most of whom are independent contractors, or through appraisal management companies, which act as a sort of outsourced appraisal department for the lender.

On average, the cost of a home appraisal on a single-family home ranges between $300 and $400. The price for an appraisal on a multi-family building starts around $600, but can increase depending on the size of the property.

If you have your heart set on a home, and the appraisal comes back with a lower value than the asking price of a house, you can use cash to cover the difference. (Photo by Jessica Anderson)

How to handle the results of a home appraisal

Federal regulations require a mortgage lender to provide you with a copy of the appraisal report as soon as they receive it, or at the very least, three days before closing on a property.

Take the time to review the report and understand the information your lender is using to determine the amount of money to loan you. Consult with your real estate agent to make sure the appraisal includes accurate information and takes into consideration details, such as being in a favorable school district or proximity to a transportation hub.

If the appraisal comes in higher than the price you’re paying for the home, then you benefit immediately from the additional home equity. For instance, if you’re paying $250,000 for a house and the appraiser says it’s worth $300,000, you’ve gained $50,000 in equity instantaneously.

However, if the appraisal comes in lower than the sale price, you will need to abide by what you’ve negotiated in the contract. If your contract is contingent on an appraisal, one option you have is to withdraw the offer and have your earnest money deposit returned. The appraisal has saved you from paying too much for the home.

But if you really want the house, you’ll have to come up with the cash to cover the difference because the mortgage lender will only give you what the appraiser says the home’s value is worth. Or, the seller will have to lower the asking price to meet the appraised value. Both buyer and seller can offer compromises to satisfy the needs of the lender.

You also have the option to pay for another appraisal by a different home appraiser — just be sure to hire one from a list that’s recognized by the lender. But remember, the cost of a home appraisal is money out of your pocket whether you end up buying the house or not. Be sure to review all your options with your real estate agent before signing a contract and hiring a home appraiser.

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