Most home buyers use mortgage loans when buying a house. That means most home buyers will have to go through the appraisal process at some point. There’s no way around it. It’s a standard requirement imposed by lenders.
In this article, we will answer three of the most frequently asked questions on this subject:
- What is a home appraisal?
- How does it tie into the broader home-buying process?
- What does an appraiser do during his visit?
Let’s start with a basic definition and move on from there.
1. What Is a Home Appraisal?
What is a home appraisal? It is a written estimate of a property’s value in the current market, as determined by a licensed appraiser. In a typical real estate transaction, the appraisal is requested by the buyer’s mortgage lender. The lender wants to ensure the property is worth the amount that the buyer / borrower has agreed to pay for it. The process results in an appraiser’s report.
Lenders typically base the loan amount on the appraised value of the home, not on the asking price. That’s why the appraisal process is so important to both the buyer and the seller. The appraiser’s report can determine whether or not the deal goes through. It’s an important document that affects negotiations as well as the final outcome.
2. How Does it Tie Into the Home Buying Process?
Recap: What is a home appraisal? It’s a professional evaluation of a house to determine the current market value. It is performed by a licensed appraiser who receives special training in property valuation. It’s a critical part of the mortgage process, because the lender will base the loan on the appraiser’s report.
Now let’s put the appraisal into the broader context of the home buying process.
Scenario: John and Jane Buy a House
House hunters John and Jane find a house that checks all of their boxes. So they make an offer to buy it. After a bit of negotiation, the seller accepts their offer.
Next, John and Jane will give their lender a copy of the purchase agreement. The lender will then schedule a home appraisal, to determine the market value of the property being purchased.
John and Jane are using a mortgage to buy a house. This means they’re not putting up very much money, compared to the lender’s contribution. Even if the buyers put down 20% (which is considered a large down payment), their lender is still making an 80% investment. So they want to make sure the house is worth what John and Jane have agreed to pay. That’s where the home appraisal comes in.
So the lender contacts a licensed appraiser and has him visit the property to determine its current value. The appraiser’s fee is usually paid by the buyers, as part of their closing costs. These fees typically range between $300 and $600.
3. What Does the Appraiser Do, Exactly?
Recap: What is a home appraisal? It’s a formal evaluation of a property to determine its current market value. It usually takes place shortly after the buyer and seller have agreed on a price. The buyers then give their lender a copy of the purchase agreement, and the lender orders an appraisal to be completed.
But what does the appraiser actually do? How does he determine the current market value of the home? Here are some of the common practices and techniques used during an appraisal:
- The appraiser will look at tax records to see the sale history of the home, if applicable.
- He will look at the tax assessor’s current assessment of the property, which is the value assigned for tax purposes.
- He will also look at comparable sales or comps, which are similar homes that have sold in the same area over the last few months.
- The home appraiser will view the property inside and out, making note of any value-adding features. These are upgrades and improvements that might add value to the house. Outdoor living space (decks, patios) and kitchen upgrades are common examples.
- He will also consider any unique features, such as a waterfront view or a larger lot — anything that might make the house worth more than the comps. So he’s looking at the comps, he’s looking at the tax records, and he’s examining the property itself.
- He may also take pictures of the home during the appraisal process, so he can measure the quality and condition of the property. He will compare these to pictures of the comparable sales.
- He will probably drive through the neighborhood to look at the other houses that have sold recently, so he can better compare them to the home being appraised.
Based on all of this research, the appraiser will come up with an appraisal amount for the home. This is the amount he thinks the property is worth in the current market. He will give this report to the buyer’s lender, who will then make a lending decision based on the information.
Appraisal Reports & Possible Outcomes
Let’s get back to John and Jane, our hypothetical home buyers from earlier. The couple’s mortgage company has the home appraised, and the appraiser says the house is worth $400,000.
If this amount is equal to or greater than the amount John and Jane have agreed to pay, the mortgage loan will move forward. In this scenario, the purchase price has “met” the appraised value.
But if John and Jane agreed to pay $450,000 for the house, they have encountered a problem. They’ve offered more for the house than the home appraiser says it is worth. So their lender probably won’t give them a loan for $450,000. The appraiser has told the lender it’s not worth that much.
If the house appraises below the purchase price, there are three possible outcomes:
- The seller can lower the asking price to meet the appraisal, so that the buyer’s mortgage can go through.
- The buyer can pay more out of pocket. (It’s generally not wise to pay more for a property than it’s worth.)
- If the seller refuses to lower the price, the buyers can simply walk away from the deal. It’s a common scenario.
Conclusion & Summary
We’ve covered a lot of information in this tutorial. Here’s a quick review of the home appraisal process:
- The buyer makes an offer to buy a house.
- The seller accepts the offer.
- Both parties sign a purchase agreement that includes the mutually agreed-upon price.
- The buyer presents the purchase agreement to the mortgage lender.
- The lender requests an appraisal to determine the current market value of the property.
- The appraiser evaluates the condition of the home, property features, tax assessments, and comparable sales.
- The appraiser will determine what the home is worth in the current market and create an appraisal report.
If the contract price “meets” the appraised value (which means the appraiser says the home is worth at least what the buyer is offering), the mortgage loan will move forward.
If the home appraises for less than the amount offered, the buyer and seller will have some tough decisions to make. In many cases, the seller will lower the asking price to reflect the appraisal. But not always. If the seller refuses to do this, the buyers will have to decide whether they want to pay the difference or simply walk away.