If you’re like millions of potential home buyers looking to finance their home purchase with a mortgage, a home appraisal is a must-do. While the appraisal process might seem straightforward, it can be stressful, too, especially if the appraisal comes in too low. The best way to use a home appraisal to your advantage is to understand what it is, how it works, and the associated costs.
In this article, you’ll learn more about what an appraisal is, who pays for it, how long it takes, and what could potentially hurt your appraisal.
What is an appraisal?
An appraisal determines the fair market value of a property. Typically, it is done by a professional real estate appraiser, who estimates the value of a property by looking at comparable properties and recent sales in the area.
An appraisal protects the buyer from paying too much above the actual value of the property. But more importantly, it protects the lender from shelling out more money to the borrower, whether for a purchase or mortgage refinance. No lender will approve a mortgage for $450,000 if the home is only worth $300,000, for example. That is why, once a home is under contract, a lender will typically require an appraisal to determine whether the agreed sale price reflects the actual value of the property.
Home inspection vs. appraisal
Don’t confuse an appraisal with a home inspection. A home inspection, usually hired and paid by the buyer, focuses on the property’s condition. It’s a more in-depth process, and a good home inspector can tell you if there are problems to be addressed and repaired, including plumbing and structural damages.
An appraisal, on the other hand, is an assessment of a property’s fair market value. A real estate appraiser does take into account any visible defects and damages, but it’s purely to help determine the property’s fair market value.
How much does a home appraisal cost?
The average cost of home appraisals in the U.S. varies across states and cities. Generally, most single-family homes will cost you around $300 to $400. While multifamily or larger units may cost an upward of $600.
The cost of an appraisal depends mainly on the following factors:
- The size of the home
- The type of home
- The location of the home
- The condition of the property
- The amount of work and time required
These factors affect the time and effort of appraising a house, which impacts the cost. For example, a large home with multiple living spaces will cost more as it might take the appraiser longer to assess the property properly. Meanwhile, a house with unique characteristics may cost more due to the difficulty in finding similar comps within the same area.
Who pays for an appraisal?
In most cases, the buyer covers the cost of an appraisal. Generally, the mortgage lender appoints an appraiser, and the charge will be included as part of the closing costs. You, as the buyer, will receive a copy of the report, which may serve as a useful tool for renegotiation if the appraised value falls below the price you’ve agreed to pay.
How long does an appraisal take?
Depending on the loan program, state laws, and the type of appraisal ordered by your lender, a typical appraisal process can take anywhere from a few days to two weeks. Note that, however, you must have a signed contract before your lender can order a home appraisal.
A real estate appraiser will visit the property and put together a report based on anything they notice during the process, as well as similar sales in the area. While there’s not a set of items the appraiser specifically looks for, an appraiser will evaluate the home structure, HVAC systems, neighborhood characteristics, lot size, amongst other things.
If the appraised value is above or at the sale price, your loan request will be processed as expected. But if the fair market value is too low, you may have to renegotiate with the seller, increase your down payment, or find a cheaper property. This is why many people will include an appraisal contingency in the sales contract – the buyer can walk away without losing money if the appraisal comes in too low.
What do appraisers look for?
The goal of an appraisal is to determine the fair market value of the property. To achieve this, appraisers tend to inspect specific areas or features that impact the property’s price. These include
- Health and safety hazards
- The structural integrity of the home
- The condition of the home
- Upgrades or improvements
- Visible defects
- Any conditions set by the loan program and lender
- An appraiser can also request a more specific inspection such as pest, roof, or even structural inspection if there are pretty visible issues in the property.
Below are some key things appraisers tend to look at when doing an exterior inspection of a building.
- Total land area or acreage of your property
- Condition of the roof and foundation
- Condition of the chimney
- Condition and type of driveway surface
- Home’s curb appeal
- Quality of the landscaping
- State of the pool, if there is one
- Type of garage
- Home’s structural integrity
It is common for appraisers to look at the following areas when they inspect the inside of the property:
- Amount of livable space
- Number of bathrooms and bedrooms
- Working HVAC system
- Type of basement or crawl space
- Built-in appliance upgrades
- Any lead or peeling paint, but only if the property was built before 1979
- Quality of the electrical and plumbing
- Material and conditions of the walls, floors, and windows
- Evidence of termites or pests
- Energy-efficient features
- The general condition of the home
- Permanent upgrades or improvements
One thing to keep in mind is that appraisers only focus on immovable in their reports. Anything that isn’t permanently attached to the building is considered personal property and does not count as part of the home.
Loan programs like Veteran Affairs (VA) and Federal Housing Administration (FHA) come with slightly different appraisal checklists. It would be best to ask your lender for more information about your desired loan program appraisal checklist.
What hurts an appraisal?
While your home may be in pristine condition with updated fittings, there are several things that can make your home appraisal come back lower than expected. For instance, simply having a unique or rural house can hurt your home appraisal, as it is difficult to assign a value to a rural or unique house due to a lack of comparable data. The appraisal could also come in lower if the property has outdated appliances and HVAC.
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Elijah O. Agor, CFP
Elijah O. Agor is a real estate, 1031 exchange, and mortgage writer. He is a certified financial planner, former loan originator, and chief realtor for Dsquared Realty. In the past, Elijah advised first-time and seasoned home buyers on real estate and mortgage decisions in the Greater Atlanta area. Since hanging up (burning) his suits and ties, Elijah now works to make mortgage and real estate topics understandable and jargon-free.