How Home Appraisals Work

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• A home appraisal is a report that states how much a home is worth according to a licensed professional.
• The appraiser looks for any safety issues, as well as at the location and size of the home.
• An appraisal typically costs $313 to $422, according to HomeAdvisor.

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When you apply for a mortgage to buy a home, your mortgage lender will require the home to undergo an appraisal. This process protects the lender's investment in the home by ensuring that both you and the lender aren't overpaying for the property. 

What is a home appraisal?

A home appraisal is a report completed by a licensed appraiser that states the appraiser's opinion of what the property's market value is. In simple terms, it's what a professional says the home is worth.

Appraisal reports are completed using facts that relate to the value of the home, including features of the property and the neighborhood it's in. It also compares the home being appraised to nearby similar home sales.

When is an appraisal not required?

Appraisals are almost always required if you're using a mortgage to purchase a home. They're typically required for refinancing as well, though there are a few situations where you might not need one (such as if you're doing a streamline refinance on a government-backed mortgage).

A lender wants the home to have an appraisal so the company can decide whether to officially approve you for a mortgage, and for how much. If you default on your mortgage payments later, the lender would sell the home to cover remaining expenses — so it needs to make sure that the home is worth what you're paying for it.

The appraisal may also protect you if you have an appraisal contingency in your contract with the seller. The contingency may state that you can back out of the deal with your deposit or ask the seller to lower the price if the appraisal comes back saying that the home is worth less than a certain amount.

Home appraisal vs. home inspection

As a homebuyer, a home appraisal benefits both you and your mortgage lender, while a home inspection is solely for your benefit.

Home appraisers assess the value of a home. An inspector won't make notes about the value, but they'll tell you about the condition of the home so you know about any major or minor flaws.

An appraisal takes place when you apply for a mortgage, and if it shows the home is worth significantly less than the listing price, then the lender may decide not to give you a loan. 

An inspection takes place shortly after the seller has accepted your offer, typically before the appraisal happens.

How does a home appraisal work?

Your lender does not perform the appraisal — a licensed professional independent of the lender does. The lender will usually schedule the appraisal, though.

In many cases, the appraiser goes to the home to walk around the property and throughout the house. Sometimes, depending on the circumstances, a lender may allow a desktop appraisal that an appraiser can do from a computer by looking at tax records and floor plans. Or you could have an appraiser only look at the exterior of the home, and they will probably use additional data to finish their assessment. But most appraisals are done in person and include both the interior and exterior of the home.

Once the appraiser has evaluated the home, they'll work on finding other recent home sales that are similar to the property they're appraising. They'll use these similar sales, known as "comps" or comparable sales, to come up with their opinion of the home's value. 

It takes around a week from the time the lender schedules the appraisal to the time the appraiser finishes their walk-through. An appraiser may spend up to a few hours in the home if they visit in person, and the larger the property, the longer an appraisal takes. Once they do the walk-through, it may take another week or so to get the full report back.

What does an appraiser look for?

When the appraiser visits the home, they will look at the following aspects to determine the value:

• Interior: The appraiser will note the materials that make up the interior of the home and the condition they're in. They'll also note any appliances in the home, including dishwashers, refrigerators, and washer/dryer combos.
• Exterior: They will look at the roof, chimney, exterior walls, gutters, windows, and any additional features, such as decks, porches, pools, or fences.
• Home systems: Appraisers will make note of the systems that keep the home humming, such as the type of heating and cooling, and where the utilities come from (such as if the water comes from the municipality or if it's connected to a well). 
• Neighborhood: The appraiser will look at certain neighborhood characteristics, such as whether it's in an urban, suburban, or rural area, and whether property values are increasing. 
• Size: How many square feet is the home (including the garage, attic, or basement), and how many rooms are there?
• Home improvements: If the seller made any upgrades to the home in the past few years — especially energy-efficient improvements to the roof, windows, insulation, or other features — the home could be worth more.
• Problems: Though they won't look for issues as thoroughly as a home inspector, the appraiser will be on the lookout for signs of water damage, safety issues, or other problems that could hurt the property value. 

If you are getting an FHA, VA, or USDA mortgage, the appraiser will make sure the property meets the specific standards required for that type of home loan.

How much does a home appraisal cost?

According to data from HomeAdvisor, a typical home appraisal costs $313 to $422. The larger a home or property is, the more the appraisal will cost.

The appraisal may be more expensive for an FHA, VA, or USDA mortgage than it is for a conventional mortgage. Your property needs to meet certain standards for you to qualify for one of these mortgages, so the appraiser has to look for specific things.

As the buyer, you usually pay for the appraisal. It's possible to negotiate with the seller so that they cover the cost, though.

What's included in an appraisal report

Most appraisals utilize the Uniform Residential Appraisal Report, or a Form 1004. You can see what this form looks like here.

The appraisal report will include information from both the appraiser's physical visit to the property as well as the research they do to come up with the comps for the valuation.

If you look at the Form 1004, you'll see that there are boxes for the appraiser to mark whether or not the property has certain features, as well as space for them to make additional notes. Then, there's space for them to include information about three comparable sales, which will be used to determine if the subject property is priced fairly.

For buyers, the most important part of the appraisal report is the opinion of value, located near the end of the form in the "reconciliation" section. If the appraisal matches the contract price or is above the contract price, you'll be able to move forward in the mortgage underwriting process. But if the appraised value is lower, you'll need to renegotiate or back out of the deal.

How sellers can prepare for the appraisal

The best way you can prepare for your appraisal as a seller is by making sure your home is in just as good shape as it was when you were showing your home to potential buyers.

While appraisers are trained to look beyond surface-level improvements and window dressing, making sure your home looks its best can indicate that the home has been cared for, and ensures the appraiser is able to accurately evaluate its condition.

Challenging the appraisal

Low appraisals are uncommon, but they do happen. This results in an appraisal gap, meaning the determined home value is less than what you offered.

If the buyer or seller believes an appraisal was unfairly low, they can challenge it and ask for a new appraisal. But before challenging an appraisal, you should know that homebuyers and sellers are usually unsuccessful in getting their appraisals changed. 

You'll only be able to challenge the appraisal if you have good evidence that it wasn't completed correctly. Get a copy of the appraisal report and look for errors, such as an incorrect square footage. Be sure to check the comps as well. If the appraiser didn't use comps that have similar features and are geographically close to the subject property when better comps are available, you may have a case for getting a new appraisal.

Home appraisal frequently asked questions

If the appraisal comes in lower than what you offered, you'll need to renegotiate or back out of the deal. Renegotiating may mean offering to bring more money to the table out of your own pocket or asking the seller to lower the price.

If the appraisal is higher than what you offered, you're in a great spot, because it means you're buying the house at a discount of what it's actually worth. 

Things like damage, old systems or appliances, and safety hazards can negatively affect a home appraisal and lead to a lower-than-expected market value.

The vast majority of the time, houses appraise at or above value. This means that the appraiser believes that the fair market value of the home is equal to or higher than the contract price, allowing the sale to move forward. According to Fannie Mae, only around 8% of appraisals come in below the contract price.

Personal Finance Reviews Editor

Mortgage Reporter

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