A “home appraisal” is a comprehensive report that determines the value of your property based on a number of factors, ranging from gross living space, to the view and the year a property was built.
If you plan on purchasing a new home with a mortgage or refinancing your current loan (or even getting a reverse mortgage), you will most likely need to order an appraisal. It might also be required for a home equity loan.
Typically, a bank or mortgage broker will handle this for you, but you will still have to foot the bill unless the cost is built into your mortgage rate.
The appraisal is a key component of the home buying process, and important to both you and your lender. The bank will want to know that the home financing they provide can be supported by the collateral, and you’ll want to make sure you’re not paying more than the home is worth, within reason.
Home Appraisal Costs
Often when you apply for a mortgage, a deposit is requested by the lender early on to cover the cost of the appraisal. This is how they keep you invested so you don’t go elsewhere during the process.
Home appraisals typically cost anywhere from $250 to $750, with most falling somewhere in between $300 and $600. The cost will vary based on property type, location, and square footage.
Multi-unit properties and properties in rural areas will usually cost more to be appraised than a single-family residence in a densely populated area.
Additionally, a condo appraisal will generally cost the same as a home appraisal, despite the former often being much smaller. This could be because appraisers must still assess the entire building/complex, which can be time consuming as well.
If the property is a multi-million dollar home, your appraisal could cost over $1,000, and if the loan amount is in the multi-million dollar range, you may also be on the hook for a second appraisal.
How Is My Home Appraised?
The most common type of appraisal is the Uniform Residential Appraisal Report, or URAR. It consists of interior and exterior photos, comparison sales (comps), and a complete cost breakdown of the property, such as square footage, the number of bedrooms and bathrooms, and any home improvements. This type of appraisal is a blend of both a market and cost approach to determine its fair market value.
The cost approach establishes the value of the home by determining what the cost would be to rebuild the structure from the ground up. The value approach determines value using comparison sales in the immediate area that have sold within a recent period of time.
When the appraiser arrives at your home, they will take both interior and exterior photos of the property and jot down lots of notes as they move from room to room. If it’s mortgage refinance, there’s a good chance you’ll meet the appraiser.
The home appraisal process may take an hour or less (some appraisers look around longer than others). They will also take photos of recently sold, comparable homes in the neighborhood that are being used in the report.
These other properties are comparison sales, or “comps” as their known in industry speak, which are recent sales of like homes. They are broken down in the appraisal report as well, and compared to the subject property side-by-side.
Each comparison sale is given or deducted value in a number of categories based on how it stacks up against the subject property. The net value of the comparison sales are then averaged to come up with a median appraised value for the subject property.
Are Mortgage Appraisals Accurate?
A recent trend in the industry has been relying on appraisal management companies, which critics claim rely on appraisers that aren’t familiar with the neighborhoods they work in.
This is where arguments start because a lot of times the real estate agent and/or mortgage broker will disagree with the comps used in the appraisal, especially if the property doesn’t appraise at value.
They’ll claim that they should have used X property (a higher valued one) instead of the cheaper ones in the report. But the independent appraiser is the one in charge, not the interested party trying to get a sale.
The same type of thing may happen when a borrower is refinancing a mortgage and hoping to get a favorable value. If it falls short, the homeowner may argue the appraiser’s decision. Of course, it will likely fall on deaf ears.
Ultimately, you will be at the mercy of the appraiser’s valuation analysis, which can certainly range depending on the comps they use.
Whether that’s accurate or not is debatable, but what is likely is that different appraisers will come up with different values. It’s doubtful that two appraisers would come up with the exact same price. However, they’ll likely be fairly similar to one another, and ideally not material to the outcome of the loan.
The value of the subject property is one of the most important factors when it comes to securing financing. Banks and mortgage lenders need to ensure your property is in good condition, and truly worth what you or your broker say it’s worth because it’s the collateral for the loan.
Any possible valuation inconsistencies will likely cause investors to shy away from purchasing the mortgage, leaving the bank or lender with a vacant property and a major loss if the property declines in value.
Even Donald Trump could agree to buy a shack and fail to obtain a mortgage because the property itself simply isn’t marketable.
Do Homes Sell for Their Appraised Value?
The answer is that it depends. It’s entirely possible for a home to sell at its exact appraised value, but appraisals are typically ordered by the bank (an appraiser selected) after a buyer and seller agree to a certain purchase price.
What generally happens is the appraiser affirms the value found in the purchase contract.
Sometimes they’ll assign a slightly higher value, and other times they won’t be able to find a value to substantiate the sales price. This can happen if the buyer offered a lot more than asking to beat out other bidders.
It’s not to say they paid too much, it’s just that the other comparable properties sold for significantly less in the professional opinion of the appraiser.
In that case, the buyer and seller may need to go back to the drawing board in order to resolve the valuation inconsistency.
What If the Appraisal Is Lower Than the Purchase Price?
One issue that happens pretty frequently is the appraised value coming in lower than the agreed upon purchase price. This is a common problem because buyers will often overpay for their dream home, either because of a bidding war or because of an emotional attachment. Whether it’s truly overpaying is a question for another day.
For example, if you agree to buy a home for $200,000, and apply for a loan with 20% down, you’d need a loan amount of $160,000 and a $40,000 down payment. That equates to a loan-to-value ratio of 80%, which is simply $160k divided by $200k.
Now imagine the lender comes back and tells you that the property only appraised for $190,000. Your $160,000 loan amount based on the new $190,000 value would push the LTV to ~84%. And yes, lenders use the lower of the sales price or the current appraised value.
They don’t care what you’re willing to pay for it. They care what an independent appraiser says it’s worth in case they foreclose on you and wind up with it one day.
Anyway, this could be a problem as your loan would now require private mortgage insurance because the LTV would exceed 80%, and that’s if the lender could even offer you a loan above 80% LTV. Often they can’t.
The solution would be to either ask for a review of the appraisal, renegotiate the purchase price (lower) with the seller, look into other loan programs, or put more money down, assuming you have extra cash on hand. Of course, you might wonder if you’re overpaying for the property if it doesn’t come in “at value.”
Using our same example, if you decided to move forward with the full purchase price and wanted to keep your loan at 80% LTV, you’d only be able to get a $152,000 loan. That means you’d need to come up with $48,000 for the down payment, as opposed to the original $40,000. The upside is a slightly lower mortgage payment.
You could try to get the seller to lower the sales price too, but that might be a losing endeavor in a hot market. However, if there’s not a lot of interest in the property, you might be able to get somewhere using this approach.
If you’re selling your home, keep this in mind to avoid dealing with low appraisals, which can lead to buyer fallout and eventual home price reductions.
Appraised Value Higher Than the Purchase Price?
The opposite could also happen, though it won’t amount to much more than a slight ego boost, and perhaps some additional home equity.
If your appraisal comes in higher than the purchase price, give yourself a pat on the back and breathe out. You’ve cleared one major hurdle in the mortgage process.
However, your lender isn’t going to let you borrow more because of it. Remember, they’ll use the lower of the sales price or appraised value.
So really, nothing changes. You just might feel a little better knowing the property actually appraised.
The terms of your loan should remain the same. This is true of short sales as well. You won’t get extra borrowing capacity just because you’re buying below fair market value.
Be Present When Your Home Is Appraised
If you already own your property and are getting it appraised for a refinance, it can be helpful to be there on the day. If it’s a purchase, the current owners likely won’t invite you over.
Anyway, once the lender schedules the appraisal date, make plans to be there to help show the appraiser around the property. You’ll likely need to let them inside.
I also recommend cleaning up the property (curb appeal) to ensure it looks its best, and also being courteous and friendly with the appraiser. Real estate agents should extend the same courtesy.
Sure, some may argue that it shouldn’t make a difference if you’ve tidied up around the house, or whether you offer the appraiser a glass of water or a coffee. But for me, it never hurts to be kind.
Besides, a home that is clean and uncluttered can feel bigger and more expensive than a similar home, and that might be just enough to get a borderline value to where it needs to be.
The same holds true for home inspections, which are separate from the appraisal. It can pay off big to be present when the home inspector arrives.
The Appraisal Review
Once a home appraisal is ordered, if there are valuation issues the bank or lender may order a review of the appraisal. The review will be conducted by another appraiser or simply by the use of an AVM, or Automated Valuation Model. This is where many borrowers get into trouble.
If the review comes in low, or if the property is deemed incomplete, hazardous, or unique in any way, a bank may decline the loan and deny financing to the potential borrower. Even if the borrower has outstanding credit and assets galore, a faulty, unique, or overvalued property can kill the deal.
That’s why it’s always important to use a qualified appraiser who assigns a realistic value to your home so there aren’t any surprises when it’s do-or-die time. It’s better to know the true value of your home upfront before you sign any contingencies or purchase contracts. And remember that the quality of your appraisal will determine the quality of your review (unless it’s automated).
The review appraiser will always find the home’s value based on what is given to them. If they receive a poor appraisal report, they will likely assign a poor value. I’ve seen brokers submit multiple appraisals and receive completely different values based solely on the original appraisal itself.
As of January 26th, 2015, Fannie Mae let lenders use a proprietary tool called “Collateral Underwriter,” which provides an automated appraisal risk assessment complete with a risk score, risk flags (potential overvaluation), and messages to the submitting lender that warrant further review.
CU works by leveraging an extensive database of property records, market data, and analytical models to analyze appraisals for quality control and risk management purposes.
In the future, lenders may be granted waiver of representations and warranties on value so they can lend more freely, at least when it comes to questionable property values.
How Long Is an Appraisal Good For?
Wondering how long an appraisal is good for? It’s a tricky answer because most appraisals aren’t portable, meaning if you get one, you can’t take it to another lender anyway.
So first you have to consider whether you’ll be using your old appraisal with the same lender that ordered it. If you are, you might be able to use it within a 12-month period, but chances are the lender will need to update it if it’s been longer than four months.
By update, I mean reinspect the exterior of the property and determine if the property value has declined since it was originally appraised. Banks need to ensure they’re not giving you an old, higher value.
A situation where you could use an old appraisal would be if you were thinking about refinancing with a certain bank, then pulled out for one reason or another. Then a few months later, decided to go through with it again. But as noted, it would need to be with the same lender.
Also consider that the value might be higher, and you wouldn’t get to take advantage of that if you reused your old appraisal.
For Fannie Mae and Freddie Mac, you’re looking at four months, at which point the property would need to be reinspected and the appraisal updated.
For FHA loans, there is a 120-day validity period for appraisals, which can be extended for another 30 days if certain conditions are met. If an appraisal update is performed before the original appraisal expires, it can be good for as long as 240 days.
For VA loans, the validity period is typically six months and appraisals expire once the loan transaction has closed. This means you can’t use the same appraisal for a purchase and a subsequent refinance, even if it’s within a six-month period.
For USDA loans, appraisals must be completed within 150 days of loan closing. If they are any older, they might be valid again once updated.
The takeaway is that most of the time you can’t use an old appraisal, so don’t bank on it. Just try to close your loan the first time around.
Although an appraisal is irreplaceable, you can do some quick research on your own by using a free internet house values tool that generates a quasi-property appraisal in a matter of seconds by simply typing in the home address.
Read more: How accurate is a Zestimate?