If you’re buying, selling, or refinancing a home, you likely will need a home appraisal to establish the property’s fair market value.
An appraisal involves a licensed, third-party appraiser inspecting the home’s condition, location, size, and features as a basis for estimating its value. The appraiser also will look at recent sales of comparable properties — known as comps — in the same area, as well as factors such as the home’s proximity to services such as schools, medical care, and shopping.
Why Do You Need a Home Appraisal?
If you’re buying a home, expect your mortgage lender to order a house appraisal so it can confirm that the loan you’re applying for is appropriate. This also helps you confirm that you’re paying a fair price for the home.
If you’re selling a home, getting an appraisal before you list your home will help you set a fair price. During the sale, the buyer’s appraisal should confirm the price and help ensure a smooth transaction.
If you’re refinancing, the appraisal will help establish your home equity, which is the difference between what your home is worth and what you owe on it. If you’re looking to do a cash-out refinance, your home equity directly affects how much money you’ll be able to borrow.
Who Conducts an Appraisal?
The home appraisal is conducted by an unbiased, third-party appraiser licensed in the state where the property is located. Appraisers may belong to a professional organization like the Appraisal Institute, which issues credentials and offers a searchable database for finding an appraiser.
What an Appraiser Looks For
You can expect the appraiser to examine the interior and exterior of the property. Inside the home, the appraiser will inspect the following:
- Square footage.
- Number of bedrooms and bathrooms.
- Quality of the home’s heating, cooling, electric, and plumbing systems.
- Condition of the kitchen and bathrooms.
- Any updates or recent renovations.
Outside the home, the appraiser will note its:
- Physical condition.
- Location and proximity to schools, transportation, shopping, and medical care.
- Building materials used.
- Integrity of the roof, foundation, and chimney.
Understanding the Results of an Appraisal
The appraisal report will detail the factors that affected the home’s valuation, as well as some photographs to document the inspection. Keep in mind that the appraised value represents that appraiser’s evaluation and isn’t necessarily the final verdict of how much the home could sell for.
If you’re selling, a lower-than-expected appraisal could jeopardize the sale. Lenders typically won’t lend buyers more than a home’s appraised value. In such a case, you might need to renegotiate a lower sale price to close the sale, or the buyer may be able to cancel the sale. If the appraised value is higher than expected, you won’t be able to raise the price if you’re already under contract with the buyer.
If you’re buying and the appraisal comes in low, you can dispute the results. If that doesn’t work, you can try to renegotiate the sale price with the seller. If you no longer can borrow enough to buy the home, you either will have to make a larger down payment or take out a second mortgage, if qualified. You also could choose to cancel the sale under the appraisal contingency commonly included in the purchase and sale agreement.
Here are answers to some frequently asked questions about home appraisals.