When you close on a home, part of the process includes paying closing costs. Wrapped up in those closing costs is a home appraisal fee.
We’ve created an overview to help explain everything you need to know about home appraisals, including why you need to pay for one and how you can get the most out of the appraisal process.
What Is A Home Appraisal?
An appraisal determines the fair market value for a home. In other words, it assures your lender that the price you’ve agreed to pay for a home is fair. Appraisals are also often used to estimate property taxes, which makes them a requirement in most counties.
Your mortgage lender needs to know that they aren’t giving you more than the amount necessary to buy a property. For example, let’s say the mortgage lender issues you a loan for $500,000 and the property you buy is only worth $200,000. The lender will have a very tough time recouping the money from the sale in the event that you default on the loan and the home goes into foreclosure.
An appraisal differs from a home inspection. A home inspection is a much more in-depth process. In a home inspection, an inspector specifically looks for problems in the home and determines whether certain areas need repairs. An inspector may test outlets, run the home’s furnace to see if it can hold a stable temperature and look at the roof to see if it’s been properly installed.
A home appraiser will take visible defects into account, such as a roof that’s caved in or the fact that the home doesn’t have a working plumbing system, but appraisers do not search for specific problems. Instead, the appraiser looks for an overall value to assign to the property.
What Is The Home Appraisal Process?
Appraisals are not performed by your mortgage company. Most state laws require that only an independent third party may perform an appraisal, though your mortgage lender may help schedule or arrange the appraisal.
Most home appraisals consist of three steps:
- The actual inspection: The appraiser arrives at the home and takes a look around the interior and exterior of the property to determine the basic condition of the home.
- Outside research: The appraiser finishes the home inspection and researches similar homes in the area. The appraiser looks at the final selling prices of homes near your home and compares them to the amount that you offer for the property. Like the inspection, this also plays into the appraiser’s final market value estimate.
- The final appraisal report: After the appraiser finishes their research, they make a final estimation of the value of the property in a formal report. The appraiser then delivers the report to your mortgage lender.
What Gives A House Value?
During the inspection, an appraiser looks at a number of factors in the home to determine its value. Some of the things that appraisers consider when they determine a home’s value include:
The basic condition of the home. The appraiser won’t check to see if outlets are working or consider the paint color on the walls when they assign a value to the home, but they will assess the home’s basic condition. The appraiser counts the number of bedrooms and makes sure each bedroom has a window and a closet. They also check for health and safety considerations, such as the presence of lead paint and check to see if the HVAC system and cooling system are functional. They will also make sure that someone could reasonably live in the home. If they cannot, expect the appraisal value to be significantly lower than surrounding homes that are in livable condition.
Upgrades. Your appraiser will look at any upgrades or improvements you made to the property. The upgrade needs to be a permanent fixture of the home if you want it to increase the value of the home. If you can take it with you when you move, your appraiser probably won’t consider it an upgrade. The appraiser also considers upgrades outside of the home’s living space, including upgrades to the garage, pool or basement.
Other homes in your area. Appraisers don’t just look at your property when they assign a value to your home. They also look at public records of other homes near yours. Because location is a major factor in determining the value of a property, appraisers will look at what similar homes have recently sold for and how property values trend.
What Does My Appraisal Mean?
Once you get your appraisal, what does this actually mean for you as the buyer? Before your mortgage lender gives you a loan, they look at the appraiser’s report to ensure that they have enough equity to recoup the cost of the loan if you default.
Ideally, you want your appraisal value to be close to the amount of your offer to buy the home. Lenders use something called a loan-to-value (LTV) ratio, which compares the total value of your mortgage to the assessed value of the home to determine whether the loan is too risky to carry out.
To calculate your home’s LTV ratio, simply divide your mortgage value by the assessed value of the home and multiply by 100. For example, if you take out a loan on a home for $300,000 and the appraiser determines that the home is worth $375,000, you’d have an LTV ratio of 0.8, or 80%.
Most mortgage lenders will require private mortgage insurance if your LTV is greater than 80%. This is why it’s beneficial to do as much research as possible before you close on a home so there are no surprises.
How Much Does A House Appraisal Cost?
Even though most lenders require an appraisal as a condition of a loan closing, as the buyer, you pay for the appraisal unless you negotiate for the seller to pay for the appraisal. The amount that you pay for your appraisal depends on a number of factors, including the size of the home, the home’s location and the amount of property research that the appraiser ends up doing before he or she issues you a final value report. As a general rule, most single-family home appraisals cost between $300 – $400, while multi-family units typically cost upward of $600.
Keep in mind that if your property is on a very large plot of land, your appraisal will cost more because the appraiser often surveys the boundary lines of the property to make sure that the listed square acreage is correct.
You can also expect to pay more for an appraisal in a very rural area simply because there are fewer appraisers working in these areas. You might need to wait longer for an appraisal in these areas as well. If you have any questions about how much your appraisal will cost, consult with your mortgage lender.
What If The Home Appraisal Comes In Low?
If your appraised value comes back lower than expected, don’t panic. The steps you can take depend on whether you are the home’s buyer or seller.
You may choose to renegotiate the sale price with the seller if the home you want to buy comes back at a lower appraised value than your mortgage. You might be able to use a low appraisal as leverage to get a better deal. If the seller doesn’t budge and you’re in love with the home, you’ll likely have to increase the amount you bring to the closing table since the lender will not give you a loan greater than the appraised value.
A few factors may be in play if the appraisal of a home you want to sell comes back low. Your real estate agent may have listed the home at too high of a price point. If this is the case, ask your agent to lower the asking price to attract more buyers. If you believe that the appraiser is wrong, you may dispute the appraisal assessment. Request another appraisal and bring documentation that proves the home is worth more than the original assessment.
You may want to present your appraiser with public records that confirm the sale of homes in the same area at similar price points or records of any upgrades or renovations you finished that increase the home’s value.
How To Increase The Value Of Your Home Appraisal
Here are a few tips to follow that can help the appraiser see the true value of your home.
Tip #1: Spruce Up Your Exterior
Your home’s curb appeal may play into your final appraisal. Before your appraiser arrives, take steps to maximize your curb appeal. Mow your lawn, trim your hedges and touch up your home’s paint if needed.
Tip #2: Make Your Home Comfortable
Your appraiser won’t dock points if your kids leave out a few toys or if your kitchen is a bit messy. However, if you make your home as comfortable as possible for the appraiser, he or she may subconsciously assess your home at a higher value. On the day of your appraisal, do some light cleaning, put your pets out of sight and set your thermostat to a comfortable temperature.
Tip #3: Make Upgrades Easy To Spot
Upgrades increase the value of your home, but a new dishwasher can be difficult to spot. At the beginning of the appraisal, present your appraiser with a list of all permanent upgrades you’ve done to make the job easier.
An appraisal determines the fair market value for a home. A professional appraisal is done by an appraiser, who assesses the interior and exterior of the property, researches similar homes in the area and gives a final report. Be sure to spruce up your home to make it look more appealing to an appraiser.
Before your mortgage lender gives you a loan, they look at the appraiser’s report to ensure that they have enough equity to recoup the cost of the loan if you default. Most single-family home appraisals cost between $300 – $400, while multi-family units typically cost up to $600, though it could be more costly if you live in a rural area or have large acreage.
If an appraisal comes in low, buyers and sellers both have options. A buyer can renegotiate the sales price and a seller can lower the home price or request another appraisal.
Appraisals are beneficial for everyone involved in the home buying process: For buyers, a home appraisal ensures that there are no glaring, hidden issues in their dream home. For sellers, an appraisal helps them price their home competitively. For mortgage lenders, an appraisal provides the peace of mind that a loan isn’t too high of a risk.
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