If you’re buying, selling, or refinancing a home, you probably already know that there are more than a few steps involved in the whole process. One thing that you can always count on taking place before anyone can get financing is a home appraisal.
But what, exactly, happens during an appraisal may be a little unclear. If you’re in this boat, keep reading. We’re here to break down the process and tell you everything you know about home appraisals.
What is an appraisal?
When you get an appraisal on a house, an unbiased professional appraiser does research and conducts a visual inspection of the property in order to determine the home’s fair market value.
Appraisals are usually required by lenders before they will approve financing on a house.”
Appraisals are usually required by lenders before they will approve financing on a house. This is one way that lenders assess their risk of lending money and protect their interest in the house. They want to be certain that the home is actually worth the amount that they are lending a homebuyer or refinancer.
If the borrower were to default on the loan, the bank would foreclose and sell the house to recoup their losses. But if they tried to sell it and discovered that the house was worth only a fraction of what they’d initially given the borrower, they might not be able to make up the difference and would take a significant loss.
What’s the difference between an inspection and an appraisal?
Though both may involve someone coming to take a look at your house, the purpose and methodology of an inspection and appraisal are very different.
With an appraisal, the main focus is the value of the home. Though the appraiser will perform a visual inspection, it’s mostly to assess the general condition of the property, what features and finishes are included, and location.
In a home inspection, however, an inspector will perform a much more thorough examination of the property. They’ll be looking for structural issues, foundation problems, water damage, mold, electrical malfunctions, and more. They aren’t concerned with the aesthetics of the home, but instead, want to ensure that it is safe and operational for occupants.
What is considered in a home appraisal?
A licensed appraiser will consider several things in their appraisal report:
During an appraiser’s visual inspection, they’ll be looking at the overall condition of the house. Does it look well-kept or has it been neglected for several years? Is the home up-to-date or does it feel like a blast from the past? Things that they typically look for include:
- Water damage
- Noticeable structural damage
- Signs of pests
- Safety features such as smoke detectors
While they will be checking for things that impact a person’s ability to live there, they’ll also look at design and features like:
- Whether or not the home is severely outdated and in need of massive upgrades
- Outdoor curb appeal
- Age of appliances
- Home improvements
- Property additions
- Amenities (such as a pool, outdoor patio, etc.)
Aspects of the Property
Aside from the condition of the property, the following factors also play a role in the appraisal of a property:
- Number of bedrooms and bathrooms
- Total square footage
- Floor plan
- Lot size
- Home age
- Types of systems the home has, like central air and heat vs. window units
- Eco-friendly or energy-saving features
Where, exactly, the home is located will also affect your appraisal. If the home is located in a highly desirable location with great schools and bountiful community amenities, it would have a higher market value than an identical property that didn’t offer those things.
Recent Sale of Comparable Properties
After the visual inspection, the appraiser will take some time to do research on the recent sale of similar properties. They’ll look at houses comparable to yours in the same area and see how they compare and how much they sold for.
Current Market Trends
Current market trends also play a big role in the appraised value of the home. If it’s a hot seller’s market and homes are in high demand, you can expect there to be a higher appraised value on the home. On the flip side, a slow market with little demand can negatively affect the home’s appraised value.
Getting the Report
Once the appraiser conducts his inspection and research, they will compile it into one report to send to the lender and borrower.
If the appraisal is higher than the already agreed-upon sales price or refinancing amount of the home— great! You should have no issues obtaining financing due to the appraisal.
However, getting an appraisal that is less than the sales price can, unfortunately, cause headaches. This is grounds for a lender to deny a loan. If you’re buying a house, there are a few things you can try before going back to square one in your real estate search.
First, you can try and contest the appraisal. Though laws since the 2008 housing market crash have made this a little harder, you can contact your lender and let them know that there may be an error in the report.
Secondly, you could decrease the amount of money that you’d need to borrow by either putting more down yourself or asking the seller to reduce the price of the house.
Who pays the appraisal fee?
Though the lender orders the appraisal, the person borrowing the money will have to cover the expense, which is often included in the final mortgage closing cost.
Unfortunately, in most cases, appraisals are a service that borrowers cannot shop for. This means that you will be required to use the appraiser that the lender works with. While you can certainly hire one for your own personal purposes, the lender will likely not accept the appraisal, meaning you’d have to pay for theirs anyways.
Understanding the Home Appraisal Process
An appraisal is an unavoidable part of home buying or refinancing. Knowing what to expect from the appraisal process and the appraisal report can help sellers and refinancers better prepare their home and help buyers understand potential red flags that can decrease a property’s value. Even though an appraisal is designed to protect the lender, an appraisal can also benefit a borrower by ensuring you don’t pay more than a property is actually worth.