Home appraisals are a vital component of mortgage lending. See how the appraisal process works and learn how it protects you as a homebuyer.
Financing your new home is a process with numerous steps. The home appraisal is a step that can be particularly confusing to many buyers. Is the value of your home what you and the seller just agreed on? Is it the tax assessment value or what the house last sold for? How is the appraisal different from the inspection I just completed? Here are the answers that you need to get you through one of the final—and most important—steps of the home buying process.
What Is a Home Appraisal?
A home appraisal is an unbiased report on the worth of a house in the fair market, performed by a trained and licensed individual. Appraisals are needed to ensure the homebuyer, the home seller and the mortgage lender receive the accurate and true value of the real estate in question.
In most residential property transactions you are able to choose your real estate agent and your lender, but you cannot choose your appraiser. Instead the appraiser must be chosen by your lender to provide a level of independence from the buyer and seller.
In order to ensure that appraisals are impartial the Appraisal Independence Requirements, or AIR, prohibits a lender’s loan production staff from having direct contact with—or influence upon—any appraisers.
To reduce the risk of violating AIR many lenders now hire appraisers via appraisal management companies. These companies work with many residential appraisers in order to cover a more diverse housing market and to reduce the risk of improper influence.
How Does a Qualified Appraisal Help Me?
An accurate appraisal has the power to protect home sellers, homebuyers and mortgage lenders. Therefore, it is important to make sure that a qualified, independent appraiser evaluates your potential home.
Appraisers and appraisal management companies are licensed by individual states and they are regulated at both the state and federal level. For example, the Dodd-Frank Wall Street Reform and Consumer Protection Act ensures that real estate appraisers make their decisions based on their own knowledge and judgement, without pressure from lenders or other individuals.
Home Appraisal vs Home Inspection: What’s the Difference?
Although the home appraisal may seem similar to the home inspection, the goals of these two processes are very different.
- The appraiser determines the value of the house.
- The inspector determines any repairs needed, and their potential cost.
| Typical Duties | Home Inspector | Appraiser |
|---|---|---|
| Checks the condition of all major systems and structures in and around the home, such as HVAC and roofing. | ||
| May provide repair cost estimates for any damage or latent issues that may influence the home purchase price negotiations. | ||
| Checks the prices of recent comparable home sales in the area. | ||
| Gives the buyer and lender a report detailing their findings and the repair recommendations. | ||
| Gives the buyer, seller, and lender a report detailing how they calculated the value of the home. |
What Does a Home Appraisal Cost? Who Pays for It?
While your lender will typically arrange for an appraisal, the buyer is ultimately responsible for the cost. Generally appraisal fees range between $450 and $750, depending on the size and location of your property.
Don’t let this cost stop you from making offers: The home appraisal will only occur after your offer has been accepted by the seller and you have begun to work with a lender to finance your new home. You do not need to complete appraisals on every house you choose to bid on.
What Factors Determine a Home’s Value?
There are several steps taken by an appraiser to determine a property’s value, which include visiting the property in-person and reviewing recently-completed sales of comparable homes. The data gathered by the appraiser during this process is combined and presented to you in a final report of value.
Viewing the Property
The in-person part of an appraisal often takes over an hour, depending on your home size. The appraiser will measure the property's square footage, check the number of bedrooms and bathrooms in your home and compare the findings with housing data provided by local county records to ensure accuracy.
The appraiser also will check the status of the major systems and structure of the house. During a viewing, appraisals usually answer questions such as,
- Is there water, termite or mold damage?
- Is the furnace in good shape?
- Does the plumbing leak?
- Will any major systems or structures need replacement, such as the roof?
Appraisers will account for many home improvements and upgrades as well. This is perhaps the most confusing area for new buyers and sellers, due to the fact that remodeling and other home upgrades may not have universal value.
For example, a new roof will be desirable to nearly any buyer, but the costs and upkeep of a swimming pool may not be. It’s advisable to put in some research before you begin a home remodeling project to ensure your investment is worthwhile.
Comparables: Evaluation of Similar Home Sales
The next step is for the appraiser to look at comparables, also often referred to as "comps." Comparables are similar homes that have recently sold in the general area or even that specific neighborhood or subdivision. Appraisers look for houses that share similar characteristics with the subject property, such as size, age and architectural style. Comps typically only include homes listed and sold within the past three to six months.
The Final Report of Value
The last step in the home appraisal process is preparing a final report of value. This report will provide you and your lender with a complete property analysis. It will also outline how the appraiser calculated your home's worth. Typically, the final report of value will cover the following items:
- Size and condition of the house
- Comments about serious structural problems, like cracked foundations, wet basem*nts, windows that need replacement and roofing that needs repair
- Permanent fixtures, such as lights, ceiling fans and plumbing, including faucets
- Details about any home renovations such as updated kitchens, bathrooms or new flooring
- Comments about the surrounding area, including positive and negative local features
- Maps, photographs and sketches of the property, both inside and out
- A detailed current market analysis, including recent sales of comparable homes
How Can You Improve Your Home Appraisal Process?
As a buyer, you can make sure that the home appraisal process protects you by taking a careful look at the Final Report of Value.
If there is a significant difference between the agreed selling price and the appraised value of the home, your bank may choose not to fund the mortgage and the deal could fall through. Buyers can typically solve this problem by bringing additional “cash to close,” which is essentially increasing your down payment by the difference between the sales price and the appraisal value, or negotiating the sales price.
As a home seller, you will also want to be ready for the appraisal process. Itemize any recent improvements that you have made to the home and complete any planned DIY projects before the appraisal. Don’t be afraid to highlight the upgrades and positive features of your home to the appraiser.
Protect Your Investment with an Appraisal
When you are working your way through the complex process of buying a new home, an appraisal can seem like just one more unnecessary hoop for you and the sellers to jump through. However, an accurate appraisal offers information that can help guide you safely through one of the biggest financial decisions in your life.
