You won't get a mortgage without a home appraisal. If you are buying a home, you probably already know that it isn't a point-and-click purchase. It's a long and winding road from the decision to purchase a home to your first night in the new digs, so prepare yourself for the challenges and costs, like getting a home appraisal.
A home appraisal is an integral part of buying a home for most of us, but unlike the home inspection, you are not the primary beneficiary. The buyer is expected to pay the appraisal cost, but the client is the lender. It's best to get an overview of the procedure before you even begin shopping so that you know the purpose and cost of an appraisal.
Video of the Day
Home Appraisal Timing
When you first hear the term "home appraisal," you might think that this is something that happens early in the home purchase process to give you an expert's assessment of the condition of the house — but that's an inspection, not an appraisal.
A home appraisal is one of the very last official steps in buying a home. It happens after the buyer has obtained the mortgage preapproval, viewed the home, made an offer, had the offer accepted and completed the property inspection. All contingencies have been removed, the parties are in contract and the entire purchase hangs in the balance. Both buyer and seller are nervous, waiting for the real estate appraiser's report.
Why Get a Home Appraisal?
In our free-market society, the value of anything, including a piece of real estate, depends entirely on how much a buyer is willing to pay for it, right? Yes and no. If you own a small cottage that happens to be in the way of a major development, the cottage is worth the developer's offer of a million bucks cash. When any all-cash buyer makes an offer to which the seller agrees, the parties have established the property value, at least for them. However, it's different when there is a mortgage involved since there is a third party to the transaction.
Why does the lender care about the price paid? It's because it is lending money on the purchase — a loan secured by the property itself. The house and land it is built on is the lender's security. If the buyer stops making payments, the lender can take over the property and sell it to recoup the loan.
That's why the value of the property is of ultimate importance to the lender. It must be worth enough to cover off the outstanding loan if necessary. If the bank loans $550,000 on a property with a market value of $375,000, it is not going to be able to sell if for more than $375,000 since nobody will buy above market value. That means that the sale of the real property will not make enough money to pay off the $550,000 loan.
What Is a Home Appraisal?
An appraisal is an independent and impartial analysis of the value of the real property, and it is performed by a professional appraiser. The appraiser is charged with coming up with an accurate, current valuation for the lender. This is termed "the appraised value." To determine valuation, a licensed appraiser visits and inspects the property. The appraiser considers many factors when determining the value of a property. These can include:
- The property's condition
- The property's square footage
- The number and layout of rooms
- Features like fireplaces or backyard pools
- The property lot size
- How much natural light the home gets
- The landscaping around the property
- Whether the house has views
- Whether there is a basement or attic and whether it is finished or unfinished
- The quality of the house as determined by its detailing
In addition, a home appraiser does a deep dive into research of comparable sales of houses that have sold recently. Homes are considered comparable properties if they have the same characteristics as the house in question and are located in the same area or a similar, nearby neighborhood. To get this information, appraisers often look at official records and sales information provided on the multiple listing service, a real estate database where real estate professionals provide home listings and sales information.
Home Appraisal vs. Home Inspection
It's easy to confuse home appraisals and home inspections since both involve professionals looking over the home you are considering buying, but these are very different procedures and are conducted for very different reasons.
A home appraisal determines the value of the home to protect the lender's security interest. Home inspections are conducted for the buyer in order to identify issues with the home, including repairs that should be addressed before finalizing the sale. The buyer gets to select a home inspector to carefully review the entire home as the deal moves through closing.
The home inspector writes up a report detailing both the interior and the exterior of the house, making recommendations for required repairs or updates. The buyer or the buyer's real estate agent works with the seller to determine who should undertake the repairs or who should pay for them. Once all these details have been ironed out, it is time for the home appraisal.
Selecting the Appraiser
All states require that real estate appraisers be licensed or certified, but beyond that, it's a matter of choice. Like a home inspector, a home appraiser is selected by the client. The client is neither the buyer nor the seller, although the entire sale may fall out of bed if the appraisal comes in low. The client is the lender — the financial institution funding the mortgage. The lender's priority is to make sure that it has a proper amount of security to guarantee the loan in case the buyer stops paying.
However, it is the buyer who pays the appraisal cost. It may feel unfair that you have to pay the appraisal cost to protect the lender, but it's not as one-sided as it looks. The fact is that the buyer also has an interest in paying a fair price for the home and in most cases should do so, even for a dream home. If you pay more for a property than the house is actually worth, it can lead to financial issues in the future. For example, if you suddenly lose your job and have to sell the house, you may not even get enough to pay off the loan.
An appraisal that comes in lower than the contract price can also give the buyer more leverage when negotiating with the seller. A low appraisal slows down the deal since both parties digest the fact that the property is not worth what the buyer agreed to pay for it, giving the buyer a chance to renegotiate the deal for a lower price. If you are really in love with the place, you are not necessarily locked out. A willing buyer can come up with cash to cover the difference between the sale price and the appraisal value.
Home Appraisal Report
Once the real estate appraisal is completed, the licensed appraiser writes up the findings in a report. This report is forwarded to both the lender and the buyer, usually a few days before the closing date.
The report is more than just a single number representing the fair market value of the home. It runs more than a few pages and will include the valuation and the effective date since appraisals are usually only valid for four months. It will also list the features and condition of the house as well as an overview of the market, including comparable properties that form the basis for the appraiser's valuation.
Home Appraisal Cost
When you are looking at buying a new home, you can expect to pay a significant amount in closing costs, and the home appraisal cost will generally be included in that sum. (The only exception is when the seller agrees to pay for this as part of the sales negotiations.) It makes sense to know in advance how much money to set aside for the home appraisal so that you are prepared with the cash.
Most experts say that you can expect an average home appraisal to cost between $300 and $400, but a few nudge the cost of an appraisal to between $450 and $550. Remember that the parties to the deal don't get to shop around for a cheap appraisal. The lender selects the professional. A lender is likely to go though a third-party appraisal management company in order to be certain of an accurate assessment, and the cost can be higher.
Factors Increasing Appraisal Costs
Some factors can result in higher appraisal prices. These can include:
- The size of the house, with a larger than average home requiring more time and effort to evaluate, thus costing more
- The value of the property since it can be hard to find comparable sales for very expensive property
- The condition of the
property since extensive damage to a home means extra effort for the appraiser
- The location since costs will be higher in larger
cities or areas with high living costs
- Exceptional or unique locations since there may be fewer comparable sales
- Exceptional or unique features since it is harder to find comparable homes
- The time of year since snow, floods, hurricanes or storms can make it more difficult to access the property
Professional appraiser fees are subject to some governmental regulation. The Dodd–Frank Wall Street Reform and Consumer Protection Act imposes a requirement that the appraisal fees must be reasonable and customary for the geographic market.
How Long Do Appraisals Take?
The amount of time it takes to prepare a home appraisal depends on the type of loan involved. While a real estate appraisal for a conventional loan is likely to be completed in a week or so, other types of loan appraisals can take longer. That's because they are government-backed, and the government wants more documentation.
Federal Housing Administration (FHA) loan appraisals will take longer than conventional loan appraisals since they have to discuss whether the house meets minimum requirements for health and safety. Veterans getting VA loan appraisals will also have to wait a little longer. These loans must also meet certain standards for amount of living space as well as having adequate heat and water available, all of which must be addressed in the appraisal.
Can You Challenge an Appraisal?
Since a low appraisal puts a cap on how much of a mortgage is available for a home, the seller may be willing to challenge a low appraisal. A homebuyer faced with a low appraisal on a dream home might also decide to object.
If you are in this circumstance, read the report carefully and identify any discrepancies or things that the report did not cover, including incorrect square footage or number of rooms listed, upgrades made to the property that were not included in the report and issues with comparable sales. If the comparable properties were sold many months before or are located in less desirable neighborhoods, it is worth discussing.
If you find discrepancies, the first thing to do is to contact the mortgage lender in writing. Reaching out in writing is more effective and provides a record of the exchange. Let the lender know about your issues and see whether it will raise them with the appraiser. Sometimes, a party gets a second higher appraisal to help convince the lender that the first one was in error.