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What’s a Home Appraisal and When Do I Need One?

Apr 8 2021

You may be most familiar with appraisals in regards to jewelry or fine art. Having those items appraised by a professional tells you how much the appraiser thinks the item will sell for, or its “market value.” 

The same process happens when you take out a mortgage to buy or refinance a home. Because you’re borrowing money from a lender, like a bank or credit union, they’ll want to know what the home is actually worth before agreeing to fund the loan. 

Just like that diamond ring, if it doesn’t appraise for what you hoped, you’ll have decisions to make … but we’ll get into that later. 

What is a home appraisal?  

A home appraisal is a necessary part of a real estate transaction when you: 

  • Sell your home to a buyer who is taking out a mortgage
  • Buy a house using a mortgage
  • Refinance your mortgage 

An appraisal is an estimate of what a home might be worth if it’s listed for sale. 

Let’s say you’re in the process of buying a home. You see one you like, your offer is accepted, and you apply for a mortgage. As part of the mortgage application process, your lender will order an appraisal (which you’ll need to pay for – they’re typically a few hundred bucks). 

The appraiser gives the lender (and you) an unbiased, professional assessment of what the home is worth. This way, your mortgage lender knows they’re not loaning you more money than what you might receive if they were to foreclose on your home and sell it to pay off your debt. 

(That only happens if you can’t pay your mortgage for an extended period of time – but there are mortgage relief options available to help you keep your home if you’re struggling financially.)

That’s not the only time you may need an appraisal, however. For example, you might want to have your own home, which you already own, appraised to refinance your mortgage, request to have your property taxes lowered, or just see how much it’s worth. 

Let’s dive a little deeper. 

What does an appraiser do? 

If you’re buying a home or refinancing, an appraiser determines for the lender what the home’s value or sales price should be based on its condition, location, and features.  

Wait a minute: What’s the difference between an appraiser and a home inspector? An appraiser gathers information about a home to estimate how much money it’s worth, while a home inspector puts together a report on a home’s condition and needed repairs for your knowledge and use as a buyer.  

Appraisers are required to collect detailed information on the property and the neighborhood including maps and photos, inside and out.  

A qualified appraiser is state-licensed or certified and is familiar with the area in which a home is located. Federal law states that an appraiser must be impartial, meaning they have nothing to gain from the transaction. 

How does an appraisal work? 

A property’s appraised value is largely influenced by the prices for similar homes that were recently sold in the area, known as comparables, or “comps.”  

Typically, an appraiser inspects the interior and exterior of a home and notes any conditions that may lower its value, such as needed repairs. During COVID-19, however, some lenders are allowing appraisers to perform their inspections without going inside (we expand on this in our post on home appraisals during COVID).

There’s no single standard appraisal report form, format, or style. However, for residential mortgage lending, many appraisers will use appraisal report forms developed by Fannie Mae and Freddie Mac. The report asks the appraiser to describe the interior and exterior of the property, the neighborhood, and nearby comparable sales. The appraiser then provides an analysis and conclusions about the property’s value based on their observations. 

An appraiser will also take notes about the home’s features, number of bedrooms/bathrooms, floor plan, and square footage. They’re required to collect detailed information on the property and the neighborhood including maps and photos, inside and out. 

In some cases, banks reject appraisals that don’t include photos of every room in the house, meaning the appraiser has to make a return trip. 

Appraisals for homebuyers 

If you’re a homebuyer, once an appraisal is ordered and paid for, you can sit back and wait for the report. 

If the home appraises at (or above) the contract price, you’re in good shape. The lender will proceed with underwriting your loan. 

However, having the appraisal come in below the price you’re buying the home for can halt your homebuying process, something neither you nor the seller want to happen. You’ll have a few options at this point: You can ask the seller to lower the price, you can ask for a second-opinion appraisal, or you can walk away from the deal. 

Struggling with what to do at this point happens more than you might think. According to the National Association of Realtors, “appraisal issues” are responsible for 18% of contract delays, the second-highest in their findings, just behind financing problems (37%).  

 So what can you do if you think an appraisal value doesn’t accurately fit the home? Contact your lender and submit your concerns in writing with a request to have the appraiser respond. Be as detailed as you can, and be sure to include any documentation you think would help the appraiser to understand your concerns. 

Appraisals for homeowners 

Homeowners should make sure their home “shows well” and provide the appraiser with a list of recent upgrades. Perhaps you’ve just added a new roof or replaced all of the windows, for example.  

As the homeowner, you don’t need to be present during the appraisal. However, you can ask your real estate agent to be there during the appraisal to answer any questions the appraiser may have about your home, such as, “Is there a permit for this addition?” 

The appraiser will take a few days to verify the information for their report, and in about 10 days will deliver the appraisal to your lender. You can request a copy from the lender, too. 

Appraisals for refinances

If you’re refinancing a conventional mortgage (meaning it wasn’t obtained through a government loan program), a low appraisal can prevent you from doing so.

To refinance your mortgage, your home needs to appraise at or above the amount you’re refinancing, divided by the lender’s maximum loan-to-value ratio (defined as the relationship between the loan amount and the value of the property).

For example, if you’re refinancing a $180,000 mortgage and your lender’s maximum loan-to-value ratio is 90%, the home must appraise for at least $200,000 ($180,000 ÷ .90).

Keep in mind that if the amount (of money left in your loan) that you’re refinancing is greater than 80% of the appraised value, you’ll likely have to pay private mortgage insurance (PMI). This is because your equity, or the amount of financial ownership you have in your home, is less than 20%, which is the standard reason why homeowners need to pay PMI.

Pro-tip: If you have a loan through the Federal Housing Administration (FHA), you can refinance without an appraisal through the FHA Streamline program.

Asking to see an appraisal 

As a buyer, if you have any questions about your appraisal, you can request a copy of the report. (You paid for it, after all!) Having a look at it will help you understand the process and make you more informed about the home.  

While an appraisal is mainly a safeguard for the lender, it will also give you peace of mind that you’re not paying more for the home than what a professional assessment of the market says the home is worth.  

In most cases, the appraisal is just a formality that is checked off on the way to owning your home! 

For more ways to prepare for the homebuying process, check out these posts:

 

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