For homebuyers using a mortgage to finance their purchase, undergoing a home appraisal is typically required to secure approval for the loan and finalize the sale.

It's crucial to grasp what an appraisal entails and how it can be leveraged by participants in the process of buying or selling a home. Keep reading for the key details you should understand. 

What Is a Home Appraisal?

A home appraisal provides a professional estimate of a home's market value at a specific point in time. It is typically required by a lender once a home is under contract to ensure that the property's agreed sale price aligns with its current market value.

The appraisal primarily serves to confirm the property's value for the lender. For instance, a lender is unlikely to approve a $350,000 mortgage if the property only appraises for $300,000.

What Happens if a House Doesn't Appraise for Its Sales Price?

Should the appraisal value fall below the sale price, the lender may decline to finance beyond the appraised amount. This situation is known as an appraisal gap. For example, if the appraisal is $300,000 but the sale price is $350,000, the appraisal gap would be $50,000.

To address an appraisal gap, the buyer has the option to cover the difference in cash or negotiate with the seller to accept the lower appraised value. If the seller refuses to lower the price and the buyer lacks the necessary funds, the deal falls apart.

Who Hires the Appraiser?

Although individuals can independently hire appraisers for personal evaluations unrelated to a loan, lenders usually work with a specific network of approved appraisers based on the property's location. 

A home appraisal should provide a completely unbiased opinion. To ensure impartiality, lenders typically appoint a staff member to facilitate communication between the appraiser and the loan underwriter, thus preventing any undue influence on the appraisal.

What Does a Home Appraiser Look For?

Home appraisals may consider various factors, such as comparative market analyses of similar properties, the impact of the property’s condition or improvements on its value, and its potential income if used as a rental or other income-generating property.

Appraisers assess details like the age of the home, the size of the property, the number of bedrooms and bathrooms, and the size of the yard. They seek recently sold homes nearest to the property in question. 

Appraisers typically compare three to four recent sales. The more recent and geographically close the comparable sales, the more accurate the appraisal will be. However, for unique properties or in areas with few recent sales, "it might be necessary to broaden the search area to find comparable homes. Appraisers make on-site visits to assess the condition of a home and evaluate any features that might impact its value.  

Appraisal Requirements for Government-Backed Mortgages

When opting for government-backed loans, such as VA or FHA mortgages, the appraisal process includes additional requirements. For instance, the VA mandates that properties meet specific criteria, which include operational electrical and heating systems, a sound roof, no presence of lead paint, mold, termites, or dry rot, among other conditions. While VA appraisals provide detailed property condition data, they do not delve as deeply as a home inspection. 

Cost of Home Appraisals

The cost of an appraisal can vary based on the appraisal company, the property's location, its size, its condition, and the level of detail required by the lender or homeowner. The typical price range for a home appraisal is between $650 and $750, although extensive updates and larger homes can increase the cost up to $1,200.

Responsibility for Appraisal Fees

Typically, the buyer covers the cost of the home appraisal as it is usually mandated by the lender. However, if a private appraisal is requested by a homeowner or an executor of an estate, the person who commissions the appraisal is responsible for the payment.

Appraisal Fees and Timing

Appraisal fees are often included in the closing costs, which are due at the time of closing. However, these fees typically need to be paid upfront. The appraisal fee might be collected early on, as it's a cost that occurs before closing.

Responsibility for Appraisal Fees if the Deal Does Not Close

If a real estate transaction falls through after the appraisal, the fee becomes a sunk cost. The appraiser has already performed a service and has been compensated. Unfortunately, that expenditure is non-refundable.

In scenarios like a VA appraisal that identifies issues such as a faulty HVAC system or inadequate crawl space ventilation, the VA mandates these issues be resolved for loan approval. Typically, repair costs fall on the seller, but the veteran might choose to cover these costs to facilitate the transaction.

Locating a Home Appraiser

For required appraisals, your lender will usually select and contact the appraiser directly. For VA-specific appraisals, the process is initiated by the government agency. If you're seeking a private appraisal, a good starting point is an online search for local home appraisers or using the Appraisal Institute's search tool, which can help identify licensed appraisers in your area who are members of this professional body. 

Ready to navigate the homebuying process with confidence? Reach out today for expert guidance and ensure your real estate decisions are informed, strategic, and successful.