Home Appraisals: What It Is, Process, And How Much It Costs

Updated: 28th Dec 2021 Written by Kim Pinnelli
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Before you can buy or refinance a house, the lender will likely ask for a home appraisal. Most people groan when they hear the word, assuming it will crash their sale or make them pay more cash for the home to make up the difference.

What if, instead, you looked at an appraisal as a tool to ensure you don’t over-invest in a home that’s not worth it? An appraisal is a tool that helps lenders and buyers ensure the transaction is smart.

What Is a Home Appraisal?

A home appraisal is a report written by a professional appraiser after they evaluate the home. It shows the home’s fair market value or how much the average buyer would pay for the home on that date.

Appraisers evaluate the subject property and the prices of recently sold homes in the area to determine the home’s fair market value.

The appraisal tells you, the sellers, and the lender how much the home is worth and is what everyone uses to handle the transaction.

>> More: See the Best Online Mortgage Lenders

How Does a Home Appraisal Work?

The home appraisal works the same no matter where you live. After you apply for a mortgage, the lender will order an appraisal on the home you’ve put under contract or the home you own and are refinancing.

The appraiser comes inside the home, takes pictures and measurements, and takes notes about its condition.

They will also take pictures of the home’s exterior and pictures of the comparable sales in the area.

Homebuyers

For homebuyers, the appraisal determines how much you can borrow. It can make or break your sale. Online mortgage lenders determine your loan amount on the appraised value, not the sales price.

If the appraised value is lower than the sales price, it could affect your financing and/or your ability to buy a house.

Lenders order the appraisal on your behalf, but you pay for it at the closing. The appraisal usually takes 7 to 10 days to get back and then another few days for lenders to review.

Home Sellers

For home sellers, the appraisal ensures you’re asking the right price for the home. Sometimes sellers get a little too emotional about selling their home and inflate the price.

If the appraised value doesn’t match the asking price, lenders won’t support the price and give buyers the necessary financing.

If there are a lot of foreclosures or abandoned homes in your area, it can bring your appraised value down, making it harder to sell your home for the amount you hoped.

What Is the Purpose of a Home Appraisal?

The home appraisal ensures you sell the home for a fair value. The lender uses the home as collateral. If they base a loan amount on the sales price and it turns out to be worth much less, the bank could be in trouble if the borrower defaults.

The bank takes possession of the home when a borrower doesn’t make payments for 90 days+. If they lent more money than the home is worth, they wouldn’t make back nearly as much as they should have, which could pose financial issues.

The appraisal ensures the lender lends only what the home is worth, and if the borrower defaults, the bank should be able to make back the money it lost.

What Do Home Appraisers Look For?

Home appraisers are licensed professionals. They are not home inspectors, but they do walk through the home and look at its condition.

Overall, they are looking for the home’s value, but to determine this, they must know:

  • The size of the home and each room
  • The number of rooms
  • The condition of the home (is it livable)
  • The condition of the home’s exterior
  • Are there any major issues with the home (holes in the wall, safety hazards, etc.)
  • Does the home have any upgrades or special features?

The appraiser then compares everything about the subject home to three comparable properties. Comparable properties are recently sold homes in the area that are a similar type of home.

They may not be the exact same model, but they’ll have the same number of floors, rooms, and similar features.

The appraiser adjusts the subject home’s fair market value up and down based on the factors that are better on the home and those that are worse.

Home Inspection vs. Home Appraisal

Many people compare the home inspection vs. home appraisal – they aren’t the same thing. The home inspection determines the home’s livability and looks at every nook and cranny throughout the home.

The home inspection doesn’t determine the home’s value but provides a 30 – 50-page report showing every feature of the home and its condition.

The home inspection isn’t required by lenders but is highly recommended. It tells you if there are major issues with the home that aren’t seen by the naked eye.

For example, is there mold and mildew in the crawl space? Does the roof need immediate replacing? Are the pipes leaking?

You may find out some of these issues during an appraisal, but not everything.

You can use the home inspection to decide if the home is still a good purchase after learning what you need to fix.

How Much Does a Home Appraisal Cost?

Appraisal costs vary by area and the size of the home, but in general, expect to pay $300 – $600. The appraisal cost is the buyer’s responsibility.

What Affects the Home Appraisal Cost?

Appraisal costs are different in each state and even each county, but these factors affect its price:

  • Size of the home
  • Condition of the home
  • Size of the lot
  • Number of units (if it’s a multi-family unit)
  • Difficulty in finding comparable sales (rural properties)

Who Pays for a Home Appraisal?

Buyers pay for the home appraisal at the closing. They wrap it into your closing costs, but you can also negotiate to cover the cost with the seller.

You must do this before you sign the contract, and it must approve it since each loan program only allows sellers to pay a certain amount of closing costs.

Home Appraisals for Refinancing a Mortgage

If you’re refinancing your mortgage, you’ll likely need an appraisal just like you did when you bought the home.

Mortgage Lenders must know how much the home is worth, especially if you’re trying to take cash out of your home’s equity.

There are a few exceptions to the rule, though. If you have an FHA loan or VA loan and use the streamline refinance process, you won’t need to pay for another appraisal since you’re only refinancing the amount you owe, and you’re not taking cash out of the equity.

How to Prepare for a Home Appraisal

Because the appraiser will walk around your home and look for anything that isn’t in great condition, it’s important to walk around your house and determine what needs repairs.

Look for obvious issues that would catch the appraiser’s eye, but also pay attention to small details since most buyers will order an inspection too.

Look for obvious issues such as:

  • Holes in the wall
  • Leaking pipes
  • Safety issues
  • Utilities not working
  • Lights not working
  • Pooling water
  • Mold or mildew growth

Make sure your home is in the condition you would want it if you were buying it. Any major issues could bring the home’s value down and cause you to lose the sale.

>> More: How to Choose the Best Mortgage

Home Appraisal Tips for Home Sellers

You can’t influence a home appraiser much, but there are some ways to make the process easier and for it to go in your favor.

  • Make sure the home is free of clutter so the appraiser can get around it easily
  • Provide a list of upgrades or special features the home has
  • Provide a list of offers you received so the appraiser knows where you need to be and can determine if it’s close
  • Communicate with the appraiser during the appraisal
  • Provide a list of recently sold homes in the area if the appraiser isn’t familiar with the area

Home Appraisal Tips for Refinancers

If you’re refinancing your home, the process works the same. You want an appraised value that’s high enough for you to get the loan amount you need. To ensure you get the highest value possible, do the following.

  • Keep the home free of clutter
  • Give the appraiser a list of upgrades or special features your home has
  • Communicate with the appraiser throughout the process, especially if they overlook an important part of the home
  • Provide a list of recently sold homes in the area

Home Appraisal Tips for Home Buyers

The appraisal may feel like a threat to your purchase, but it prevents you from paying too much for a home. Be realistic when you receive the appraised value.

If it’s much lower than what you offered, talk to your real estate agent and look up comparable sales in the area. Determine if the appraiser was way off or if you assumed the home was worth more.

It’s easy to believe the asking price the seller set, but sellers can get emotional about selling their home too.

An appraisal is an independent evaluation of the home’s value and is usually close to its worth. If you feel it’s not, you can file an appeal and/or ask for a second option to be sure.

Other Types of Home Appraisals

  • Hybrid Appraisals: Appraisers don’t visit the property but instead use information from third parties, including public records, inspection reports, and information published about recently sold homes.
  • Drive-by Appraisal: A drive-by appraisal is an exterior-only appraisal. The appraiser relies on the home’s interior information and takes measurements and pictures only of the exterior. Lenders often use this option for refinances but no purchases.
  • Desktop Appraisal: A desktop appraisal is similar to a hybrid appraisal, except the appraiser relies on online information to determine the home’s value.
  • FHA Appraisal: The FHA appraisal is just like any other appraisal, except the appraiser must be FHA-approved and be familiar with the FHA’s minimum property requirements. They aren’t much different than a standard appraisal requires, but there is a checklist appraisers must use.
  • VA Appraisal: Like FHA appraisals, VA appraisals have a checklist of property requirements the home must meet, and the appraiser must be VA-approved. Before the lender can use the VA appraisal, the VA must sign off on it.

Are Home Appraisals Required?

Home appraisals are necessary for all purchases. It’s how the lender determines if you’re paying a fair amount for the home.

Some refinance programs don’t require an appraisal, especially if you’re doing FHA streamline refinance or the VA streamline refinance program or using the same lender.

Bottom Line: What Is a Home Appraisal?

The home appraisal ensures you’re paying what the home is worth. For example, would you want to pay $300,000 for a home that’s only worth $250,000? It would take a long time to make that money back and then start earning equity.

Don’t take a chance on losing money on a home you just bought. Listen to the appraiser, determine if his opinion is valid and decide if the home is still a good purchase.

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Kim Pinnelli
Kim Pinnelli

Kim Pinnelli is a Senior Writer , Editor, & Product Analyst with a Bachelor’s degree in Finance from the University of Illinois at Chicago. She has been a professional writer for over 15 years, and has appeared in a myriad of industry leading financial media outlets. Kim is committed to helping people take charge of their personal finance. Her areas of expertise spans mortgages, credit cards, credit, and loans.