What Is a Home Appraisal and How Does It Work?


There are tons of different tasks you have to complete during the home buying process, but not all of them are as important as the home appraisal. This requirement is crucial for your loan processing and your wallet — and the outcome can either positively or negatively affect your home purchase.

A home appraisal impacts both the buyer and the seller during the path to closing. It’s particularly important if the buyer is getting a mortgage to pay for the home, but even a cash buyer should pay close attention to the home value that comes from the appraisal. Not only does the home need to appraise well in order for the loan to be approved, but it also ensures the buyer isn’t overpaying for the home.

Homeowners looking to refinance for any number of reasons can also benefit from an appraisal. Understanding how an appraisal works can help homeowners at every stage, including buying, maintaining and selling the property.

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What is a home appraisal? 

A home appraisal is a professional inspection of the home that is meant to determine the current home value. It is required by lenders to make sure the loan amount does not exceed the value of the home being purchased. For example, a seller under contract with a buyer who is taking out a mortgage would need to order an appraisal. Alternatively, a homeowner wishing to refinance or remove private mortgage insurance (PMI) would also likely need to get an appraisal before moving forward with either process.

An appraiser looks at a range of factors to determine the value, including recently sold comps in the area. They’ll also look at the size of the home and lot, as well as the location, condition and any upgrades that have been made to the property. This process is less detailed than a home inspection and is paid for by the seller rather than the buyer.

[Read: Nine Secrets of Successful Homebuyers]

How do I get my home appraised? 

No matter what your scenario may be, the home appraisal nearly always follows similar steps. Here’s what to expect.

Get the lender to order an appraisal.

While the seller is financially responsible for the appraisal, the buyer’s lender actually orders it and chooses an independent appraiser to do the job. It doesn’t matter if the loan is for a buyer or homeowner who is refinancing.

Appraisers undergo a rigorous certification process that includes coursework, training and an exam. They must be licensed by the state so that the results of the appraisal are considered honest and accurate.

Understand how the process works.

In order to determine a home’s appraisal value, the appraiser looks at factors both in the home and in the surrounding area. They will look at neighborhood comps to see what types of homes have sold in the last 12 months and what the sales prices were. The appraiser then compares the price, condition and size of those homes to yours.

They’ll also look at your home’s current condition and age, as well as how well maintained it is. Any special amenities may count in your favor, as do recent renovations that add value to the property. Any old systems or appliances will negatively impact the home value.

Know the payment process for the appraisal.

The appraisal is one of the few costs that must be paid before closing, so if you’re the seller, you can’t rely on the proceeds from the sale to cover this cost. The average appraisal cost is generally between $300 and $400. That number will vary, of course, based on the price the appraiser charges as well as the size and location of the home.

[Read: How Much Does It Cost to Sell a House?]

Check the appraisal report for inaccuracies.

The appraisal report gives a market value for the home, while also providing details on things like the condition and age of certain features of the property. While the seller paid for the appraisal, the buyer is the one who actually receives the report. Homeowners who are refinancing will receive their appraisal report as well.

It’s important to check the accuracy of the report, especially if the value comes in lower than expected. It is possible to order a second appraisal and try again if you find something inaccurate or faulty with the original appraisal, or if there’s more information that should be taken into consideration.

Appraisals for buyers and sellers 

Buyers and sellers both rely on the appraisal value in order for the loan to be approved and the sale finalized. In a best case scenario, the value from the appraisal will be equal to or greater than the purchase price. But if it’s lower than that amount, there are a few different things that could happen.

First, the buyer could simply walk away from the deal. Another option is for the buyer and seller to renegotiate the price so that it matches the appraisal. The seller may not love this idea, but the home will likely get the same appraisal price with another buyer, so it often makes sense to do this.

Or, the buyer may wish to pay the difference in cash. This assumes the buyer has the cash on hand to make a larger down payment and lower the overall loan amount. However, it’s not necessarily in the buyer’s best interest to pay more for the home than it’s worth. It will depend on their personal situation and the real estate market’s available inventory.

[Read: Best Investment Property Rates of 2021]

Refinancing appraisals for homeowners 

Homeowners can refinance their homes for a number of reasons. They may do this to get a lower rate, extend the term length in order to lower their monthly payments or to tap into their home equity with a cash-out refinance. An appraisal is generally needed to confirm the value of the home before being approved for a refinance.

An appraisal may also be required if you’re trying to drop your private mortgage insurance early. You typically need about 20% home equity in order to avoid this ongoing fee to the lender. If home values have increased in your area, you may be able to prove you have that amount of equity in your home, even if your payments haven’t covered 20% of your loan amount yet.

The appraisal process is sometimes easier for a refinance than a home purchase. Many lenders only require a drive by appraisal since the onset of the COVID-19 pandemic, which can help expedite the process and offer more leeway in the way the appraisal is conducted.

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We welcome your feedback on this article. Contact us at inquiries@thesimpledollar.com with comments or questions.



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