What you should know about home appraisals

No matter if you’re buying a new home, selling your current one, or refinancing your mortgage, you’re going to need to know the home’s value. This way, the lender can make an informed decision on how much money to loan while buyers and sellers can both be confident the required financing won’t fall through. In order to know how much your home is worth, you’ll need an appraisal. We’ll go over what that means, why it’s important, and what to do once you have the information. 

What is a home appraisal? 

A home appraisal is when a third-party professional assesses your home’s value and reports it to all the people involved in a real estate transaction. The buyer, seller, and lender all need to know how much the home is worth in order to set up the complicated real estate transaction for success. Lenders want to make sure they’re not lending more money than the home is worth, buyers want to make sure they’re paying the right price, and sellers want to make sure an offer won’t fall through due to a low appraisal. Having an unbiased opinion about what the home is worth gets everyone involved on the same page so there will be no surprises later. 

How do home appraisals work? 

More than anything, a home appraisal protects the lender by helping them determine the appropriate amount of money to loan out. A lender will request and book the appraisal, but the borrower will often pay for it. In some purchase agreements, the seller might agree to pay for it as a concession to the buyer.

All 50 states require that appraisers be certified by their appraisal agencies and that they have no personal connection to the property that may sway their analysis. Once they have appraised the property, they’ll prepare an appraisal report and deliver it to the lenders, seller, and buyer. 

The appraiser is required to do five things:

1 Perform a complete visual inspection of the interior and exterior areas of the property

2 Inspect the neighborhood

3 Inspect each of the comparable sales from the street (or a larger area)

4 Research, verify, and analyze data from reliable public and/or private sources

5 Report their analysis, opinions, and conclusions in an appraisal report

Appraisals are not necessarily in-depth, detailed inspections. But, generally, the more sale-ready the home, the higher the appraisal so it’s always a good idea to boost a home’s curb appeal and do cosmetic improvements wherever you can. 

The three types of appraisals

Not all appraisals are the same. There are three main types of appraisals for different properties and transactions. 

Market approach

Also known as Sales Comparison Approach, this method is based on a comparison with similar property sales in the area. Must include at least 3 sales closed in the past 12 months.

Income approach

This approach allows investors to estimate the value of a property based on how much income it will bring in. Divide the net operating income of rent by the capitalization rate to estimate a value.

Cost approach

As the value of the property is dependent on completion of the project, most construction lenders require this method. To calculate the value, take the cost of improvements less the amount of depreciation plus the estimated value of the site if vacant.

white and brown concrete house near green trees under blue sky during daytime
A home appraiser will compare your home to similar homes in the area to get a sense of what other buyers would pay for it—these comparisons are called comps

How do appraisers make their conclusion?

Besides the property itself, appraisers will look at comparables, or “comps,” to get the full picture of the home’s value. Comps are properties deemed similar enough to the your property to use in estimating the your property’s value. In the market approach, 3 comps are required, but most appraisal reports include 6 comps.

Here are the comps appraisers use:

Size At the most basic level, similar size means similar square footage, and the same number of bedrooms and bathrooms

Location Location means not only proximity, but also the neighborhood and school district

Style Appraisers will try to compare a rambler to other ramblers, and a split-level to other split-levels

Recent sales Depending on the market, “recently sold” can mean anywhere between 90 days and 6 months as the outer limit

Because no two homes are 100% identical, appraisers often bracket the characteristics of the home to determine the value.

For example, if there is no comp that is the same size as your home, the appraiser may select one comp that is slightly larger and another that is slightly smaller in order to determine the value of your home that lies in the middle.

Your home appraisal checklist

Your best bet for a favorable home appraisal is to prepare. Here’s what we suggest you do before, during, and after the appraisal to help you get the result you want. 

  1. Document all the home improvements you’ve completed 
  2. Increase curb appeal by cleaning, painting, or just doing light gardening
  3. Finish minor repairs like broken light switches, holes in drywall, creaky floorboards
  4. Work with the appraiser on their schedule
  5. Don’t bother the appraiser during the inspection

How does appraisal value affect my loan?

The most important thing to know is that your mortgage lender can only provide a loan based off of the lower of the appraisal value or the purchase price.

So, if the appraisal value comes in lower than the price you offered on your contract, you might be in a situation where you have to make up the difference between the two prices.

For example, let’s say you offer to buy your future home for $500,000 and plan to put 5% down. In this scenario, you are planning to put $25,000 down and receive a loan of $475,000 from your lender.

Then, imagine that the appraisal value comes back at $480,000. Since most mortgage lenders can only lend up to 95% of the home’s value, that means your new loan amount is a maximum of $456,000.

Since your contract requires $500,000 for the house (assuming there are no contingencies), that means your new downpayment is $44,000 ($500,000 – $456,000).

The good news is that all buyers have a right to receive a copy of the appraisal and contest the appraisal should they find inaccurate information or better comparables to appeal the appraisal value.

landscape photography of bungalow house
A home appraisal is not the same thing as a home inspection, but it’s a good idea to do minor preparations for the best result

What to do if your appraisal comes out low

A home appraisal is just one person’s opinion and can be appealed, but it’s not necessarily easy. You can write a written appeal to the lender and request a new appraisal, but you’ll need to have overwhelming evidence that the appraisal is wrong. We go in depth about what to do with a low appraisal here

Wrapping up

Remember, appraisals mainly help the lender determine the risk of the loan but knowing how much the home is worth helps everybody in the transaction. It’s in your best interest to prepare, no matter if you’re the buyer or seller. Know how much your home is worth so you know what to expect when it comes to the actual purchase price of the home.

Want to learn more about appraisals?

Or visit Flyhomes Mortgage

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Seattle, WA 98101
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