Why Is An Appraisal Important?

If you’re buying a home, an important component in the loan process is the home appraisal. Since a home appraisal determines the value of the home, it also plays a role in how much a mortgage lender is able to lend you for your home financing. Pretty big deal, right? There are several things you should know about home appraisals, such as how they are performed, what the appraiser is looking for, and what the results of the appraisal might mean for you in your home loan process.

What is a home appraisal?

A home appraisal is a comprehensive report on a home, done by an expert appraiser, which determines the fair market value of the home. The report is based on a number of factors, including, but not limited to:

  • The size of the living space
  • The values of surrounding homes or comparable sales
  • The neighborhood
  • The year it was built

An appraisal is completed for most home loan transactions, and it may vary for some home refinance transactions, but is definitely completed every time someone is purchasing a home.

In the home-buying world, once you and the seller have agreed on a purchase price, your lender will order the appraisal from a 3rd party appraiser. The homebuyer is responsible for the cost of the appraisal, which typically ranges from $200 to $500.

How are appraisals done?

The first part of the appraisal process is the real estate inspection. The appraiser examines the house’s interior and exterior, taking measurements and recording data about the house as mentioned above. Many things can affect the value of a home. Property improvements as simple as a new kitchen faucet can increase the appraisal value, while a kitchen full of dirty dishes or a lackluster lawn could negatively impact the appraisal value (because first impressions are a big deal when buying a home).

The appraiser will then compare the property in question to other properties in the area that have recently sold. The selling prices for those other homes reflect the overall value of homes in the area, and will directly affect the appraisal value of the property.

What do the appraisal results mean for you?

It would be a pretty amazing coincidence if the appraised value came out to be exactly the same as your offer price, but that would be pretty unlikely… There are two potential types of outcomes that have very different impacts. Example:

  1. You and the seller have agreed upon a purchase price of $150,000, and the appraisal value of the property comes out to $155,000. This is great news for the buyer. Assuming everything else is in order, you can proceed to close your loan as planned with $5,000 of instant built-in equity already in your home.
  2. But what if the appraisal comes back with a value lower than the offer price, like $130,000? This can create a delay in the deal and can be inconvenient for both buyer and seller. You’ve technically offered to pay more on the home is worth, and because the mortgage lender won’t be able to give you a loan for more than the home is worth, the deal may get dicey. There are a few possible solutions to get your purchase back on track: you can put more money towards your home down payment to reduce the overall loan amount, you can try to negotiate with the seller for a lower purchase price, or you can have the appraisal reviewed.

What is an appraisal review?

Appraisers can sometimes make mistakes, heck we’re all human, so if there is a problem with an appraisal, a review may be in order. There are two types of appraisal reviews:

  1. Desk Review
    • An appraiser (not the same one that did the original appraisal) goes over the file and the data used in the appraisal to make sure the value obtained is logical and properly supported
    • Usually takes between 1 and 2 days
  2. Field Review
    • The field appraisal review is the method of review that will get the most accurate results
    • An appraiser will essentially go the property in question and perform another appraisal to determine the accuracy of the first appraisal
    • Typically costs about as much and takes as much time as an appraisal

If an original appraisal is unfair or inaccurate, a review can help to resolve any issues created in your loan process.

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