What is an appraisal?

A man and a woman are standing in an empty house, looking over the specs of the home...Image: A man and a woman are standing in an empty house, looking over the specs of the home...

In a Nutshell

An appraisal is an estimate of a home’s current market value, calculated by comparing the property to other homes that recently sold in the area. Mortgage lenders often require an appraisal to ensure they don’t give a borrower a bigger loan than the property is worth.
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When you buy a home or refinance a mortgage, an appraisal is usually an important step in the process.

Before your lender finances the home purchase, it’ll require an appraisal. An appraisal helps the lender gauge the condition of the home and establishes its fair market value.

We’ll go over the home appraisal process and what to expect when a mortgage lender orders the appraisal.

What is a home appraisal?

An appraisal is an estimate of the value of the home. To calculate this value, an appraiser compares the property to other recently sold homes in the area. The appraiser may inspect the property to determine its condition and other features.

An appraisal gathers enough information about the property to develop an opinion on the home’s value. This protects the lender by ensuring that the lender doesn’t finance a mortgage that’s more than the property is worth. That way, if a borrower doesn’t repay the loan, the lender can recoup its losses by foreclosing on the property and selling it.

But while a home appraisal often includes a physical review of the property, it’s not the same as a home inspection.

A home inspection protects the homebuyer by looking more deeply into the home’s physical condition, systems and components to uncover defects that may not be obvious to prospective buyers.

What does an appraiser do?

Most appraisers must be state licensed or certified to offer home appraisals. Requirements vary by state.

Home appraisal procedures include comparing the property to recent sales of similar homes in the area. Homes with comparable age, quality and amenities help the appraiser figure out the home’s fair market value. This is referred to as the “sales comparison approach,” or comparable sales.

An appraiser may visit the property as part of the process, but sometimes they rely more on technology. Check with your lender to see what type of appraisal they’ll request. There are several ways to conduct an appraisal.

  1. Traditional on-site appraisal — Some lenders require appraisers to perform an interior inspection of the property. When an interior inspection is needed, the appraiser contacts the homeowner or sales agent to schedule an inspection of the interior and exterior of the property.
  2. Drive-by appraisal — If the lender doesn’t require an interior inspection, the appraiser may do an exterior-only appraisal, also known as a drive-by appraisal. During a drive-by appraisal, the appraiser examines the property from the outside — usually from a public roadway — to estimate the home’s value.
  3. Hybrid appraisal — A hybrid appraisal allows the appraiser to use information from a third-party source to complete the appraisal without ever physically visiting the property. For example, they might use photographs from the home inspection or view the interior and exterior of the home virtually.
  4. Desktop appraisal — In a desktop appraisal, the appraiser uses information available online to determine the property’s value. This information might include property records, floor plans and more.

What to expect from an appraisal

You can expect the physical inspection of an appraisal to take between 20 to 45 minutes or longer if the house has unique features or is difficult to measure. But the entire process, from the time the inspection is performed until you receive the appraisal report, usually takes one to two weeks.

After the appraiser gathers the information necessary to complete their work — either virtually or in-person — they’ll put together an appraisal report that includes an opinion on the property’s value.

If the appraised value is equal to or greater than the home’s purchase price, you should be able to continue with the purchase or refinance process. But a home appraisal that comes in lower than you or the seller expected leaves you with the following options:

  1. Negotiate with the seller. You may be able to get the seller to lower their purchase price. This might not be an option in a hot housing market where buyers are getting into bidding wars over homes.
  2. Come up with extra cash. The most a mortgage company will usually lend is the home’s appraised value minus your down payment.
  3. Withdraw your offer. This means walking away from the deal and potentially losing any deposits.

Appraisers generally aren’t allowed to redo their appraisal just because one party to the transaction disagrees with the result. But it’s always a good idea to review the appraisal report carefully to ensure you agree with the appraiser’s findings. After all, appraisers are only human, and they can miss important information about the property.

What do appraisers look for?

Appraisals typically focus on the following areas:

  • Comparable local home sales
  • Square footage
  • Lot size
  • Number of bedrooms and bathrooms
  • Visual features, such as a lake view or a view of a major highway
  • General damage
  • Outdoor amenities, such as a deck or pool
  • Heating and cooling systems
  • Size and condition of garage and driveway
  • Quality of the construction

How to prepare for a home appraisal

As a homeowner, there are several things you can do to prepare your home for an appraisal and increase its value.

  • Make minor repairs: Minor issues like leaky faucets or unsecure stair railing, for example, can lower the valuation of your property. It’s a good idea to make these repairs before your appraisal.
  • Paint: A fresh coat of paint can easily give your home an updated look.
  • Clean: Get rid of any clutter you may have and tidy up to ensure your home is not only presentable, but also accessible for the appraiser.
  • List home improvements or upgrades: If you’ve made major improvements or upgrades to your home like adding a kitchen or bathroom, for example, create a list of these updates to give to the appraiser.

Home appraisal vs. home inspection

A home appraisal is often required by mortgage lenders and focuses on the value of a property. A home inspection, on the other hand, is optional and evaluates the condition of a property. While an appraisal will report the fair market value of your house, an inspection will point out what items may have flaws and need to be repaired.

Both an appraisal and an inspection are usually paid for by the buyer because they’re the ones who will benefit from them. An appraisal estimates the house’s value, ensuring it isn’t worth less than the loan amount, so the buyer can take out the loan to pay for it. An inspection provides them with the information they need to walk away from the sale, buy the house in the condition it’s in or negotiate with the seller to make repairs.

What is in a home appraisal report?

The home appraisal report is a detailed document that states the fair market value of a property based on factors like location, quality, condition and market conditions in the area. It’s compiled by an appraiser after they perform an in-depth exam of the house.

In most cases, lenders will require an appraisal report to ensure they’re providing the right home loan amount to the prospective homeowner. Most appraisers use Fannie Mae’s Uniform Residential Appraisal Report, which includes the following:

  • Property address and neighborhood name
  • Market conditions
  • Details about the home’s foundation
  • General description, with information like year built, number of stories and design style
  • An exterior and interior description
  • Number of bedrooms and bathrooms
  • Comparable properties in the neighborhood that have recently sold, with details about those homes

How much does an appraisal generally cost?

While lenders are usually the ones that require the appraisal and choose the appraiser, homebuyers pay for them. The appraisal is an expense that’s not based on the outcome of the appraisal. You pay the appraiser for unbiased work and not to get a specific outcome.

According to HomeAdvisor, an appraisal on an average single-family home may cost around $300 to $400, though it may be slightly more depending on several factors, including …

  • Size of the home — Larger homes may take longer to review.
  • Condition — If the property is damaged, it will take more effort to appraise than a home in good condition.
  • Availability of comps — If there are no comparable homes nearby on which the appraiser can base an estimate, it’ll take more time for the appraiser to use an alternative approach and cost more.

What’s next?

If your home is appraised at or above the asking price, you probably won’t have as many questions as if the appraisal comes in with a lower value than the asking price.

Finding out the home you want to buy was appraised for less than the agreed-on purchase price is never ideal. That’s why it’s a good idea to include an appraisal contingency in your purchase offer. An appraisal contingency clause in a purchase contract allows the potential buyer to back out of the transaction (and have their good faith deposit returned) if the property appraisal doesn’t meet or exceed the purchase price.

Keep in mind that while an appraisal is designed to protect the lender, it can also protect you from spending more on a property than it’s worth. This can provide you with peace of mind as you make what may be the largest investment of your lifetime.

Want to learn more? Check out some of our top mortgage lenders for first-time homebuyers.

  • Homebridge Mortgage: Homebridge offers resources that specifically cater to first-time homebuyers.
  • Rocket Mortgage: Consider Rocket Mortgage if you’d prefer an online-first experience.
  • PennyMac Mortgage: PennyMac offers a wide variety of home loans and shares current rates on its site, which can be helpful for people looking to buy their first home.
  • USAA Mortgage: USAA is a good option for military members and their families. 

FAQs about home appraisals

What is a home appraisal?

A home appraisal is a professional, unbiased opinion of a home’s value that is performed by a licensed appraiser.

Why do I need a home appraisal?

A home appraisal ensures the price you’ve agreed to pay for a home is fair. If you take out a mortgage, your lender will likely require it.

How much does a home appraisal cost?

On average, an appraisal may cost between $300 to $400. Factors like the home’s size, condition and availability of comparable sales will all play a role in the cost of an appraisal.

How do I prepare my house for an appraisal?

To prepare your house for an appraisal, make minor repairs, apply a fresh coat of paint and tidy up. Also, don’t forget to create a list of major improvements and upgrades to give to the appraiser.

How long will the appraisal process take?

The physical exam in an appraisal usually takes between 20 to 45 minutes. But the entire process from when the visit occurs until you receive the appraisal report may take one to two weeks.

Is a home appraisal required?

Most mortgage lenders require home appraisals. It helps lenders ensure that a prospective borrower’s loan isn’t too high, and it protects lenders against potential losses.

Who pays for the appraisal?

The prospective buyer usually pays for the appraisal.

What happens if a house appraises for more than purchase price?

If a house appraises for more than the purchase price, the prospective buyer is agreeing to pay the seller less than the fair market value of the home. Their mortgage amount won’t change.

What happens if a house appraises for less than the purchase price?

If a house appraises for less than the purchase price, the closing process might be delayed or even stopped altogether. The buyer may ask for a new appraisal, pay the difference in cash, renegotiate the purchase price with the seller or walk away from the sale.

About the author: Anna Baluch is a freelance personal finance writer from Cleveland, Ohio. You can find her work on sites like The Balance, Freedom Debt Relief, LendingTree and RateGenius. Anna has an MBA in marketing from Roosevelt Un… Read more.