When you’re buying a home using a mortgage, refinancing your existing mortgage, or selling your home to anyone other than an all-cash buyer, the home appraisal is a key component of the transaction. Whether you’re a buyer, owner or seller, you’ll want to understand how the appraisal process works and how an appraiser determines a home’s value.
What Is a Home Appraisal?
An appraisal is an unbiased professional opinion of a home’s value. Appraisals are almost always used in purchase and sale transactions and commonly used in refinance transactions. In a purchase and sale transaction, an appraisal is used to determine whether the home’s contract price is appropriate given the home’s condition, location, and features. In a refinance, it assures the lender that it isn’t handing the borrower more money than the home is worth.
Lenders want to make sure that homeowners are not overborrowing for a property because the home serves as collateral for the mortgage. If the borrower should default on the mortgage and go into foreclosure, the lender will recoup the money it lent by selling the home. The appraisal helps the bank protect itself against lending more than it might be able to recover in this worst-case scenario.
The Appraisal Process and How Appraisal Values Are Determined
Because the appraisal primarily protects the lender’s interests, the lender will usually order the appraisal. A property’s appraisal value is influenced by recent sales of similar properties and by current market trends. The home’s amenities, the number of bedrooms and bathrooms, floor plan functionality and square footage are also key factors in assessing the home’s value. The appraiser must do a complete visual inspection of the interior and exterior and note any conditions that adversely affect the property’s value, such as needed repairs.
Appraisers are required to report on their descriptions of the interior and exterior of the property, the neighborhood, and nearby comparable sales. The appraiser then provides an analysis and conclusions about the property’s value based on his or her observations. An appraisal costs several hundred dollars, and generally, the borrower pays this fee.
What Homebuyers Need to Know
When you’re buying a home, and you’re under contract, the appraisal will be one of the first steps in the closing process. If the appraisal comes in at or above the contract price, the transaction proceeds as planned. If the appraisal comes in below the contract price, however, it can delay or derail the transaction.
Chances are neither you nor the seller wants the transaction to fall through. As the buyer, you have an advantage in that a low appraisal can serve as a negotiating tool to convince the seller to lower the price so the transaction can move forward. The bank won’t lend you or any other prospective buyer more than the home is worth.
What Home Sellers Need to Know
As a seller, a low appraisal, if accurate, means you will have to lower your home’s price to get it sold. Lenders won’t approve loans for more than a home is worth, and holding out for an all-cash buyer who doesn’t require an appraisal as a condition of completing the transaction is unlikely to net you a higher sales price. No one wants to overpay for a home.
The Bottom Line
When everything goes smoothly, the home appraisal is just another box to tick on a loan-closing checklist. When the appraisal value is lower than expected, the transaction can be delayed or even canceled. Regardless of which situation you encounter in your home buying, selling or refinancing experience, a basic understanding of how the appraisal process functions can only work in your favor.