Understanding Home Appraisals in the Real Estate Process

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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 considers the location, features, and size of the home, as well as recent sales data in the area
• A low appraisal might mean renegotiating your deal, paying more out of pocket, or backing out of the deal.

When you apply for a mortgage to buy a home, your mortgage lender will require the home to undergo an appraisal. This helps the lender determine how much the home is worth and how much they can potentially loan you for it.

Ultimately, appraisals protect both you and the lender's investment by ensuring that you aren't overpaying for the property.

Defining a home appraisal

A home appraisal is an objective assessment of a property's value on the local market. It is completed by a licensed appraiser.

Appraisers assess the value of a property using the size and condition of the property, various features of the home and the neighborhood it's in, and how it compares to similar homes recently sold in the area.

The importance of home appraisals can't be stressed enough. They can factor into a home's price, your out-of-pocket costs, your mortgage approval, and even whether the deal goes through altogether.

The appraisal process

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

See below to learn more about the appraisal process for assessing home value.

Steps involved in conducting a home appraisal

There are several ways to conduct a home appraisal. Some may use data only (tax records, floor plans, etc.), while others may involve a simple drive-by of the house. In many cases, though, the appraiser will:

• Physically visit the home to walk around and throughout the property. 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
• Find 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 inform their opinion of the home's value.
• Produce an appraisal report. This will give a final verdict as to how much the home is worth.

It usually takes around a week from the time the lender schedules the appraisal to the time the appraiser finishes their walk-through. Once they do the walk-through, it may take another week or so to get the full report back.

Why are appraisals necessary?

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).

Here's why you can expect to need an appraisal.

Protecting the financial interests of all parties

The biggest reason for appraisals is that it protects both you and the lender. For you, it ensures you're not overpaying for a house — or paying more than you stand to get back later on.

For lenders, it protects against default. If you fail to make your mortgage payments later, the lender would need to foreclose on and sell the home to cover its remaining expenses. Because of this, the lender wants to make sure the home would produce enough profits to cover these costs.

Ensuring fair market value is established

Lenders use appraisals to determine the fair market value of a house and, ultimately, how much they're willing to lend a borrower for it. The lender will only loan you up to that appraised value, so if you've offered more than that, you'll need to figure out a new path forward. Some buyers opt to pay the difference out of pocket, while others choose to renegotiate. Depending on your contract, you may be able to back out of the transaction as well.

Components of a home appraisal

There are three main components of a home appraisal.

Physical inspection of the property

This is when the appraiser physically walks the property. They may evaluate the exterior of the home and, sometimes, request access to the interior, too. This allows them to better assess the condition of the property and features throughout the home.

Comparative market analysis

During this step, the appraiser will use recent home sale data to gauge a home's potential market value. They'll look at similar properties — one of the same size, age, and condition — and factor in their sale price when appraising the property in question.

Evaluation of current market trends

Finally, appraisers will also take into account market conditions. If the market has recently turned into a seller's market, for example, the home may be worth slightly more than it would have been a few months ago. The opposite goes for a buyer's market — when there are more homes for sale than potential buyers.

Who requires a home appraisal?

Home appraisals have many uses, but they're typically best used by the following three parties.

Buyers obtaining a mortgage

Mortgage lenders will always require an appraisal before they'll agree to loan money for a property. They want to be sure the home is worth what you're borrowing for it and that selling the home will cover any unpaid loan balance should you default on your loan.

Sellers setting a listing price

An appraisal can also give you a good idea of what your home should fetch on the local market. This can help you set an appropriate price tag or prepare for negotiations if you're looking to sell your house.

Lenders assessing loan risk

Appraisals can also help in the risk assessment process. For example, if a home is worth $350,000, and you're asking to borrow $349,000, that's not much cushion — and makes the loan a riskier bet. If the home is worth $350,000 and you're only borrowing $250,000, though, there's much less risk in the loan. The lender may even reward you with a lower interest rate because of it. (This is why down payment size matters so much in mortgage lending!)

Impact of appraisals on real estate transactions

A home's appraisal can impact many parts of a real estate transaction. It can also play into your costs after closing, once you're in the home.

Here's how you can expect appraisals to factor into your home purchase.

Influencing loan approval and terms

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.

The appraised value can also factor into the risk you present as a borrower and, subsequently, the interest rate and mortgage terms you're offered. Both of these can play a big role in the long-term costs of your mortgage.

Negotiating purchase prices

The appraisal can also factor into negotiations. If a home's appraised value comes in lower than what you've offered, it can give you leverage to renegotiate with the seller and potentially reduce the selling price.

Keep in mind, though: Not all sellers will be amenable to this. If they think they can get the original offer price elsewhere, they may opt to relist their property and find another buyer.

Property tax assessments

Property taxes are based on the appraised value of a property. The exact amount you pay will depend on the tax rates in your area, but generally speaking, the higher the appraised value, the larger your annual tax bill will be.

Dealing with appraisal discrepancies

As noted earlier, there are times when a home's appraised value doesn't match what you've offered for it. When this happens, you have some options.

Options for buyers and sellers if an appraisal comes in low

First, you can renegotiate with the seller. Ask them to accept a lower price point and move ahead with the sale as planned.

You can also make up the difference out of pocket. So if the home appraised for $300,000, but you offered $320,000, you could pay that missing $20,000 out of savings — rather than relying on your mortgage lender for it. This would allow you to move forward with the transaction.

You can back out of the deal altogether, too. If you have an appraisal contingency in your contract, you can do this without forfeiting your earnest money. If you don't, though, the seller gets to keep that cash. They could also have grounds for legal action in some circumstances.

One other option is to challenge the appraisal and get a new one. You'll only be able to do this if you have good evidence that it wasn't completed correctly. Get a copy of the appraisal report and look for errors, such as 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 (and better comps are available), you may have a case for getting a new appraisal.

FAQs

How long does a home appraisal take?

The on-site inspection typically takes a few hours, but the entire home appraisal process, including repairing the report, can take a week or two.

Can I attend the appraisal of a home I'm buying?

Buyers are usually not present during a home appraisal, but the seller or the real estate agent might be there to provide access or answer any questions.

What factors can negatively affect a home appraisal?

Poor property conditions, outdated features, and unfavorable market trends can lower the appraised value of a home. A lack of maintenance can also reduce a home's value.

How can I prepare my home for an appraisal?

Preparing for a property appraisal is critical. Ensure the property is clean, complete minor repairs, and have a list of recent home improvements and upgrades ready for the appraiser. You should also make sure the appraiser has access to all parts of the home, including the basement, attic, and crawl spaces.

What happens if the appraisal is lower than the offer?

The impact of a low home appraisal can be big. If an appraisal comes in lower than expected, you can renegotiate the sale price, make up the difference in cash, or withdraw from the deal.

What's the difference between a home appraisal vs. inspection?

A home appraisal is used to determine the value of a home. A home inspection is an assessment of the home's structure, systems, and other features. It's designed to give buyers details about the condition of a home and what repairs it may require.