- A home appraisal is a professional assessment of a home’s fair market value.
- A home's appraised value is generally based on sales prices of recently sold properties that are similar to the subject property in terms of location, size, age, and condition. The sales prices are adjusted to account for material differences between the subject and the comparable property.
- Appraisals are often used by homebuyers to confirm that a property is worth the amount they’re paying as well as homeowners to confirm the value of the home for refinancing or home equity borrowing. They are also used by lenders to determine how much they can loan against a property.
Whether you’re buying a home, refinancing an existing mortgage, or applying for a second mortgage, a home appraisal can help you and your lender make sound decisions about how much to finance.
What Is a Home Appraisal?
A home appraisal is an unbiased professional assessment of a home's fair market value, typically conducted by a licensed real estate appraiser.
When Are Home Appraisals Needed?
Appraisals are often used in real estate transactions to confirm the current value of the property being purchased. This can help the homebuyer be sure that the property is worth the amount they are paying.
If the purchase is being financed with a home loan, mortgage lenders may require an appraisal.[1] This is because mortgage loans are typically secured by the property, meaning that the property serves as collateral for the loan. Therefore, the lender needs to know that the property is worth enough to qualify for the loan amount.
Appraisals are also commonly used when a homeowner is applying for a second mortgage, such as a home equity loan or home equity line of credit (HELOC). Lenders require that homeowners maintain a certain amount of equity in their homes (often around 20% according to the FTC),[2] so they need to know the current value to determine how much they can lend to the homeowner.
The Home Appraisal Process
Here is more detailed information about how the home appraisal process works.
Steps Involved in a Home Appraisal
There are three steps involved in getting a home appraisal.
Step 1: Ordering the Appraisal
The appraisal is often ordered by the lender but may be ordered by the homebuyer or homeowner.
Step 2: Conducting the Appraisal
The appraiser assesses the property and compares it to similar properties (called comparables or simply comps) recently sold on the open market. The idea is that open-market sales have a willing buyer and a willing seller, so the price those parties agreed on is likely a strong indicator of the fair market value of that property.
Because no two properties are exactly the same, the appraiser adjusts the sales prices of recent comps to account for differences between the comp and the subject property. For example, if a comp had three bathrooms, but the subject property has only two bathrooms, the appraiser would adjust the sales price of the comp down to what it would have been if that comp had only two bathrooms.
The appraiser adjusts for various factors, including the home's size, condition, location, and features, and then compiles a report showing their professional opinion of value and supporting data.
Step 3: Reviewing the Appraisal
The lender reviews the appraisal to determine if they can approve a loan for the applicant and, if so, how much money they can lend.
The applicant is entitled to a copy of the appraisal promptly after completion or at least three days before closing on the loan, whichever is earlier.[3]
How Long Does a Home Appraisal Take?
The time it takes to get a home appraisal depends on factors like the appraiser’s workload and the complexity of the property being assessed.
On average, a home appraisal takes around 14 days to complete.[4]
How Much Does a Home Appraisal Cost?
The cost of a home appraisal depends on the size and location of the property, as well as the complexity of the subject property and its comps. For example, a small condo may cost less to appraise than a large single-family home.
The average appraisal costs around $500.[4]
Who Pays for the Appraisal?
While the lender typically orders the appraisal, the homebuyer or homeowner usually pays for the appraisal as part of the financing process. In some cases, the buyer can negotiate with the seller to have the seller cover the expense. The appraisal may be listed as a closing cost.[5]
What Do Home Appraisers Look For?
When conducting an appraisal, appraisers look for anything that could affect the property’s value, including:
- Location
- Size and layout of the structure, including the number of bedrooms and bathrooms
- Lot size and grading
- Age and condition of the home
- Upgrades and renovations
- Appliances
- Landscaping
- Special features (such as fireplaces, pools, and views)
- Any hazards on the property
- General housing market conditions
What Happens if the Appraisal Is Lower than the Offer Price in a Purchase?
An appraisal that comes in lower than the agreed-upon offer price can create complications in real estate transactions because the buyer may not wish to pay more than the appraised value, and the lender might not be willing to finance more than their share of the appraised value.
If an appraisal comes in low, the homebuyer and seller have a few options.
Option 1: Renegotiate the Price
The buyer can ask the seller to lower the purchase price to match the appraised value. If the seller is motivated to close the deal, they may be willing to accept this simple solution.
Option 2: The Buyer Can Increase the Down Payment
If the buyer is comfortable purchasing the property at the offer price, despite the lower appraisal, they can increase their down payment to make up the difference. This may satisfy the lender because the lender will not need to accept additional financial risk.
Option 3: The Seller Can Offer a Concession
The seller can offer financial concessions, such as covering part of the closing costs or paying for repairs, to make up for the lower appraisal. This concession may give the buyer enough cash to increase their down payment to cover the appraisal gap.
Option 4: The Buyer Can Walk Away
Purchase offers usually contain contingencies to give the buyer a way to cancel the deal without losing their earnest money deposit. Appraisal contingencies, for example, allow the buyer to terminate the offer if the appraiser finds that the property is worth less than the agreed-upon purchase price. Similarly, financing contingencies allow the buyer to cancel the offer if they cannot secure financing. So, if the lender refuses to fund the purchase due to a low appraised value, the buyer may be able to walk away from the deal without forfeiting their deposit.
Option 5: The Buyer Can Request a Reconsideration of the Value
If the buyer believes the appraisal is inaccurate, they can ask their lender to reconsider the value.[5] There may be factual errors in the report that skew the value low, for example. Or the appraiser may have overlooked a comp that would have brought the appraised value up. If a revised appraisal confirms that the property is worth the purchase price, the deal can proceed as planned.
The Bottom Line
Appraisals are a valuable tool in determining how much a home is worth.
If you are buying a home, looking to refinance, or hoping to convert some of your home equity into cash, an appraisal can help your lender determine how much you can borrow and under what terms.
