What is a home appraisal, and why do I need one?

Peter Warden
Peter Warden
The Mortgage Reports Editor
July 5, 2018 - 5 min read

In this article:

What is a home appraisal? And why is it so important?

  • A home appraisal ensures that you don’t overpay for a property
  • Most mortgage programs require home appraisals
  • Appraisals may identify other problems with the property, such as zoning issues

A home appraisal protects both you and your mortgage lender and prevents you from paying too much for a house.

What’s a home appraisal?

Mortgage lenders usually require a home appraisal to put a value on the property. Professional appraisers inspect the home and compare it to recent sales of similar property nearby.

They judge how much the differences (plot, location, upgrades/amenities, square footage ...) between those properties and “your” home are worth. Ultimately, appraisers come up with a fair market value for the property.

Related: My home appraised for less than its purchase price (what now?)

Lenders often require an appraisal because they want to be certain that the home is worth its purchase price, and can be sold to cover losses if you default on your mortgage.

Of course, lenders don’t end up paying for their appraisals. More often, it’s the home buyer. However, in some areas, the seller traditionally picks up the tab.

Appraisers are on your side

This cost means many purchasers see appraisals as undesirable. At best, they’re yet another charge on the long list that makes up closing costs. At worst, a low appraisal can torpedo a deal, snatching a dream home from a keen buyer.

Related: How can I avoid a home appraisal when I apply for a mortgage?

However, there’s another way of looking at them. They stop you from paying too much for a property. And why would you want to pay over the fair market value for your next home? As importantly, many home buyers use a low appraisal to renegotiate the purchase price. That can see them saving themselves way more than the appraiser’s fee.

No-appraisal situations

People buying a home with their own cash aren’t obliged to have an appraisal. Many choose to do so because they aren’t experts in the property market and don’t want to pay too much.

Those who are experts, notably professional developers, rarely bother. They reckon they know as much as any appraiser. And, anyway, what’s the point of establishing the market value of a home if you’re going to tear it down and build a new one? You just need to know the going rate for development land.

When borrowers don’t need an appraisal

Mainstream mortgage lenders will always require an appraisal when you’re buying a home. But they sometimes won’t insist on one when you’re refinancing.

Related: What is a mortgage refinance, in plain English

The choice is with the lender. However, the general rule is that appraisals aren’t always needed when the total amount of the loan when refinanced is $250,000 or less.

Lenders are least likely to require an appraisal when you want a “rate-and-term” refinance. That means you pay your closing costs out of pocket and improving on your mortgage terms without increasing the balance. if you wrap the refinance costs into a new loan, it’s called a “limited cash-out” home loan.

Lenders are most likely to require an appraisal when your loan-to-value exceeds 80 percent or when you apply for a cash-out refinance. They are least likely to require one when you have a lot of equity or do a streamlined refinance, which means refinancing with the same program and mortgage insurance.

What you get and what it costs

Typically, a home appraisal report includes:

  1. Explanation of the valuation — Like math students, good appraisers show their work
  2. A brief overview of the local market’s trends — Are prices currently going up or down? If so, how quickly?
  3. Summary of the home’s characteristics — Its condition, size and any improvements that have been carried out
  4. Other considerations — Has anything else about the home or its neighborhood affected the valuation?
  5. Structural problems and defects — Any issues that the appraiser noticed that affected her valuation

Related: What's my house worth (4 ways to find your property value)

It’s important to recognize that home appraisers are not home inspectors. Don’t rely on their expertise to uncover structural problems because they won’t always have any. And, in any event, it’s not their job to look for them.

Appraisers typically value your property in several ways: the most-common “comparables” valuation, as detailed above, finds a value by comparing the subject property to other nearby sales. The “replacement cost” is what it would take to replace the home on that lot. And the “rental schedule” arrives at the value by considering rental income.

How much does a home appraisal cost?

A HomeAdvisor survey of home appraisal fees in 2018 calculates that the national average is $330. But, of course, that average is drawn from a broad range.

Related: Can I get a new appraisal to remove mortgage insurance?

Typically, you’ll be lucky to pay less than $250 for an appraisal and unlucky to pay more than $450. However, if you require a particularly detailed report on an exceptionally large home with unusually complex valuation issues, you could easily end up paying four figures.

Don’t panic! Home Advisor says most people pay between $288 and $374. Considering you’re getting a trained and certified professional to undertake a site visit, carry out an inspection and write a report, you may think that’s pretty reasonable.

Can you influence the outcome?

Before the financial crash of 2007-08, many appraisers felt pressure to inflate their valuations. Subsequent state and federal legislation sought to put an end to that. Many property professionals misinterpreted the 2010 federal law and now believe they’re not allowed to interact with appraisers. That’s not true.

Writing for Huffington Post, The Appraisal Foundation President David S. Bunton says the legislation contains exclusions “that specifically allow for communication with the appraiser.

Related: How reliable are online home value estimators?

For example, the laws specifically permit a party to the transaction requesting an appraiser to correct errors in an appraisal report and to provide additional clarification or explanation for information in an appraisal report.

“In addition, these laws allow a party to the transaction to request that an appraiser consider additional information about the property, including additional comparable sales information.”

“Appraiser’s Package”

The National Association of Realtors recommends that agents and sellers should prepare a package of documents and make it available to appraisers when they arrive for the inspection. The NAR suggests that package should contain copies of as many as possible of the following:

  • Plats — Detailed maps of the near neighborhood
  • Surveys
  • Deeds
  • Covenants
  • HOA documents
  • Floor plans
  • Specifications
  • Inspection reports
  • Neighborhood details
  • Recent similar-quality comparables
  • Detailed list and dates of upgrades, remodels and costs — with invoices, where possible
  • Energy-efficient green features
  • Sales contract

The more of those a seller and agent provide, the more accurate the appraisal might be.

Dos and don’ts on home appraisal day

Sellers and agents may attend an appraiser’s inspection. However, they should only answer questions and provide information. Trying to bribe or intimidate could see you prosecuted. The appraiser is not allowed to divulge anything confidential at this point. So don’t ask!

You may, however, ask to check the appraiser’s credentials and satisfy yourself that she has the requisite local knowledge to reach a fair valuation. That’s important, because some appraisers jump at any opportunity to grab a job, even if he or she does not know the area.

Related: FSBO (Your complete guide to "for sale by owner" transactions)

So it’s a good idea to check the office address and make sure it isn’t in the next county. If you have well-founded doubts about either the appraiser’s knowledge or credentials, you can ask the lender to send someone else.

Such situations are relatively rare. Most appraisers strive to deliver exactly what they’re paid for: a valuation that reflects the fair market value of the home.

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