Whether you’re buying, refinancing or selling a home, a home appraisal is an important part of the home financing journey. A home appraisal is used to determine the estimated value of a home. The appraisal process may seem daunting at first, so we’re here to help. We’ll dive into everything you should know about a home appraisal and how it works so you know what to expect during this process.
What is a home appraisal?
A home appraisal is an estimate of a home’s market value. It’s key to remember that an appraisal is not the sale or asking price of a home — it’s the estimated value of what the home may be worth. This can differ greatly from the seller’s asking price.
A home appraisal is conducted by a third party appraiser who assesses the home’s value based on several factors. In most cases, you’ll need a home appraisal if you’re buying, selling or refinancing a home. Remember that the appraisal is performed by a qualified, trained professional.
Mortgage lenders require a home appraisal to understand the estimated market value and condition of a home, which then affects how much money they’re willing to lend you. If you are unable to pay back your loan, the home serves as collateral. If the home appraises under the amount you plan to finance, this poses a risk for the lender and the homebuyer.
How do home appraisals work?
Appraisals for buying and selling
Home appraisals are requested by the lender and the homebuyer receives a copy of the appraisal. The cost of an appraisal varies by location, property, complexity of the appraisal, and is usually paid for by the buyer. If the appraised value matches the agreed purchase price, the transaction is rather straightforward. If the appraised value comes back below the agreed purchase price, then the buyer may want to reevaluate.
In the case of an appraisal that comes in lower than expected, the seller might lower the asking price or insist that the buyer make up the difference. From the seller’s point of view, there could be recent foreclosures or other market events that unfairly affect the value of their home. Ultimately, the buyer can either walk, negotiate a lower price with the seller or request a reconsideration of value .
Appraisals for refinancing
If you’re refinancing a home, your lender may require an appraisal. If the appraised value is below what is expected, they may deny your application. With mortgage types like FHA or VA loans, you may be able to refinance without a home appraisal. Just like with a purchase, you can request a reconsideration of value if the appraised value comes in lower than expected.
What do home appraisers look for?
There are many factors that affect the value of a home. Some items an appraiser will likely review include:
- The overall condition
- Size of the home
- Safety features
- Plumbing and electrical systems
- Home updates
- Nearby sales
- Any damages
- Material the home is made of
- Indoor and outdoor amenities
In short, the appraiser will take a comprehensive, holistic approach to determining your home's estimated value. Once the appraisal is complete, you’ll hopefully move on to closing on your home or getting the greenlight from your lender for a refinance. Getting a home appraisal is a pivotal part of this journey and will help you get closer to your goal!