When you are buying a home, once the seller has accepted your offer, one of the key parts of the process from there is getting the home appraised. A home appraisal is done by a professional who is licensed or certified, and the appraisal value is determined by the property condition and the market value of the neighborhood as a whole.
If you are buying a home, and you need a mortgage loan to purchase it, the bank will require that you get the home appraised first so that they do not loan you more money than the property is worth. Here, we will look at the appraisal process and why it is so important in the home buying process.
What is a Home Appraisal?
A home appraisal is an inspection of the property and its location to determine the value of the property. A licensed professional conducts the appraisal. The appraiser is an unbiased third-party, who the buyer is usually responsible for paying, though sometimes the home seller will cover the costs — that is determined when the offer is submitted.
A mortgage lender requires an appraisal before giving you a loan because they do not want to give you more than the property is worth. This is important to keep in mind when giving offers on homes because, in a seller’s market, buyers may end up offering more than the total value in order to get the home. If you did offer more than the home is appraised for, you will either need to cover the excess amount yourself or try to renegotiate with the seller to bring the offer down to the appraisal value.
When you are refinancing your home or taking out a home equity loan, lenders will also require an appraisal, so they do not give more than the value, too.
If you are planning on putting your home on the market, getting an appraisal beforehand is also helpful because it will give you a good idea of what you should make your asking price for. This can potentially speed up the sale process for you.
Why Banks Require Appraisals
The home itself is the collateral for the mortgage loan, so if the buyer defaults on the mortgage and the bank ends up foreclosing, the home will be sold by the lender to get the money back that it lent out to begin with. Therefore, if you were to borrow more than the appraisal value, the bank would not be able to get its money back should something like this happen. The appraisal is to protect the mortgage lender, but the buyer still has to pay the fees to get the appraisal.
The house can also be used as collateral for other loans, so if you plan to apply for a loan that requires collateral, you will need to have the home appraised before you are approved for that loan too.
The Home Appraisal Process
The entire process for a home appraisal can take up to ten days, depending on how complex the appraisal of the property is and their schedule. The appraiser will come to the property and spend time looking over its interior and exterior, evaluate all of its features and measure the square footage.
They then spend time comparing the home to others that are similar and have recently sold in the area, looking at how much those homes sold for. Once they finish all of this, they will spend time writing the appraisal report. After the appraisal is complete, the mortgage loan application gets moved to underwriting, where the lender confirms that they will give you the loan amount you need to buy the house.
Appraisals cost between $313 and $420, depending on the location and size of the property. They usually charge either a flat rate or an hourly fee and should let you know which one when you contact them.
Buyers beware: if you find an appraiser who wants to be paid based on a percentage of the property value, they are unethical, and you should avoid them and find a different appraiser.
What an Appraisal Report Includes
When an appraiser finishes their assessment of the property, they provide a detailed report about the value of the home. The report includes a map that shows the property and the comparable sales they used to determine prices in the area. They discuss the trends in the local market, looking at things like if the prices are currently up or down and if they are rapidly moving in either direction. They explain how the square footage was calculated and a summary of the characteristics of the home, which includes the condition of the property and any home improvement projects the seller did recently that may have influenced the property value. If they found any defects or structural problems in their inspection, those will be noted. However, appraisers are not home inspectors, so you will still need to hire an inspector for a detailed analysis of any problems and defects in the property.
How Appraisals Impact Home Sales
Since the amount that a bank is willing to lend you for a mortgage is based on the home appraisal, this should be one of the first steps in the closing process. If the appraiser values the home at or above the offer amount, then everything can proceed as planned. But if the appraisal value is below what you offered the seller, it can completely derail the purchase.
Whether the seller is willing to accept a lower offer or not is entirely up to them. Sometimes there is a seller who thinks that the low appraisal is not accurate and is unwilling to reduce the price. You can seek a second opinion on the appraisal to see what another home appraiser values the home at, but this does not always change things.
About the Author
Auz Burger is a freelance writer who specializes in real estate and home DIY projects. She has a BA from Washington State University and has been writing and editing professionally for over a decade.