The home appraisal is required to be performed on any home you are getting a mortgage on.
This article takes an in-depth look at how the home appraisal process works, the costs, and how to avoid an appraisal that is too low.
What is a Home Appraisal?
A home appraisal is the current market value of a property estimated by a certified appraiser. Mortgage lenders use home appraisals to determine the loan-to-value amount. Lenders will not issue mortgage loans higher than the appraised value.
But a home appraisal isn’t just a monetary figure on a piece of paper. It is a detailed document that describes what makes a house valuable and the house’s value relative to other properties in the neighborhood.
What do Home Appraisers Look for:
- The size of the lot and square footage of the home
- Location of the home
- Structural Construction Materials
- The age and design of the home
- Updates made after construction
- Comparable home sales in the area
Home Appraisal Cost
In general, the average cost of a home apprisal is between $320 and $450. The cost is determined by the state and the size of the home. An apprisal on larger homes can cost between $500 and $750. The buyer is required to pay the home appraisal cost prior to closing on the loan.
Factors that Affect the Home Appraisal Cost
- Square footage of the home
- Type of Property
- Property location
- Land square footage
- Extensive damage or repairs
- The company doing the home appraisal
Tips to Avoid a Home Appraisal
Inform your lender of your preference for a home appraiser who comes from the same county or a neighboring county. You are footing the bill, after all. Meet up with the home appraiser during inspection to share any knowledge you may have of recent foreclosures and short sales that may skew the comps.
Also, inform your lender of your preference for an appraiser with a residential appraiser certification and a professional designation.
This is important because many appraisers pull data off the deed at the courthouse or the MLS without checking it out. Most appraisers worth their salt will appreciate this information.
The methodology used to evaluate the property
- House features and amenities, including any improvements and materials used
- Reference to any serious structural problems
- Overview of the immediate market area, including recent market trend
- Comparative market analysis; and
- Supporting sketches, photographs, and maps
- Turnaround Time
Tips to Increase the Home Appraisal Value
- Repair and paint interior walls
- Trim bushes and mow lawn
- Touch up exterior paint
- Replace broken or outdated fixtures, lights, fans, and door handles
- Leave the blinds open to allow more natural light in
- Remove clutter
- Paint colored walls a neutral color
- Clean the home from top to bottom
- Polish floors and steam clean carpets
When the Home Appraisal is Lower Than the Purchase Price
If the appraised value is considerably less than the purchase price, this creates issues. A lender will not process a loan for an amount that exceeds the appraised value of the home. Lenders treat an appraiser report as the final word on the value of a home.
Let’s say there’s a home on the market for $275,000. You and the seller agree to a purchase price of $260,000. You move forward with the loan process, and halfway through the process, the home appraisal comes back with a value of $245,000.
If that value is less than the amount in your purchase mortgage application (called an under-or short appraisal), the lender can’t process the loan.
You would either have to cover the difference (an unforeseen glitch you may not have prepared for) or impress the seller to reduce the price. Sellers don’t have many other options because the appraisal amount will be relatively the same with an appraiser, and buyers will not obtain loans for more than the home’s appraised value.
There are only three things you can do when the appraisal is less than the purchase price
- You and the seller would have to agree to a purchase price equal to the appraised value.
- Pay an extra down payment to make up the difference.
- Cancel the contract
Importance of Home Appraisals
Lenders want to be sure that they aren’t offering mortgages solely based on a seller’s subjective opinion. An independent assessment is more objective and acceptable.
On the one hand, a home appraisal protects you and your lender from paying too much for a home. And on the other hand, it protects the bank from getting stuck with dead weight whose value doesn’t match their investment. The URAR, or Uniform Residential Appraisal Report, is the most popular type of appraisal.
Three Stages of the Home Appraisal Process
An independent professional/expert conducted the home appraisal process, which reinforces the validity of the estimate in the appraisal report.
- Inspection – Usually, walk-in (interior appraisal), although a drive-by (exterior appraisal) is an available option. Mortgage lenders require both types, especially interior appraisal. The objective of an inspection is for the licensed appraiser to get a first-hand feel of the house, noting its size, function, condition, and quality.
- Comparables – Refers to properties very similar to the appraised home that the appraiser check to come up with a fair market value of the appraised home.
- Final Appraisal Report – Compilation of relevant data and house estimate.
You Can Challenge the Appraisal
You can challenge an appraisal if any part of the appraisal report or supporting documents seems off, inaccurate, or not comprehensive enough. Most lenders have a strict system to review appraisals that compare multiple appraisals on all known sales in the immediate neighborhood.
You may even order a second appraisal, especially if the first appraiser doesn’t have rooted experience or familiarity with the market area in which the house is located.
In any case, make sure that the lender recognizes the second appraiser.
And there’s a third option. File a complaint with the appropriate state’s appraiser licensing agency if you believe the appraisal is inaccurate and the appraisal is being adamant regarding your concerns.
Home Appraisals vs. Home Inspections
The first stage of an appraisal is an inspection by the certified home appraiser. But this is a very different process from a home inspection. A property inspection is specifically for examining a home to ensure that everything is in working order. And if not, identify existing defects.
As explained above, a home appraisal is specifically for telling the fair market price of the home.
As a result, different professionals carry out home appraisals and home inspections. An appraiser carries out an appraisal, while an inspector carries out an inspection.
Both are important. You certainly don’t want a rude shock after buying your home, which is why you should have an inspector check everything, from the chimney to your plumbing and more.
The Home Appraisal Process
On a basic level, an appraiser valuates a house after two broad steps:
- After checking the house’s key characteristics and comparing with homes similar to it in the immediate market area.
- In detail, the appraiser typically starts with researching the age, type, style, and location of the house. Additionally, s/he will peruse data about the home’s neighborhood, recent sales, and several other factors.
- Then the appraiser goes for the physical inspection, where s/he notes home features such as size (square footage), condition of the home, number of bedrooms, and bathrooms. The appraiser would also note amenities like an extra-large garage, a pool, screened-in porch, et cetera.
- After this, the appraiser will then check through recently sold houses similar to those you intend to buy in the area, called comparables or comps. S/he gleans valuable information to make this comparison from different sources, including local real estate MLS (multiple listing service) and county courthouse records.
- Finally, the appraiser files the home appraisal report using all of this information and making necessary adjustments. Information in the report typically includes:
How Long is a Home Appraisal Good for?
Home appraisals are only valid for a set period, regardless of loan type. However, this set period aptly called “term of validity” differs between loan types. The term of validity varies wildly. It could be as low as 60 days or as high as 180 days. For example, while FHA appraisals are good for 120 days, VA appraisals are valid for 180 days.
These limits aren’t set in stone. When market conditions fluctuate rapidly, validity typically drops. And there are special circumstances when the FHA allows the validity of up to 240 days (8 months).
After expiry, some loan types do not require a brand new appraisal. For example, FHA guidelines stipulate that an appraisal update, called “re-certification of value” may be done if no recent renovating or remodeling work has been done.
This is important, especially if a home appraisal had been done for the home in the recent past.