What Is a Home Appraisal?

Whether you’re applying for a mortgage to buy a home, refinancing your existing mortgage, or selling your home to anyone other than an all-cash buyer, a home appraisal is a key component of the transaction.

If you’re a buyer, owner, or seller, you’ll want to understand how the appraisal process works and how an appraiser determines a home’s value.

An appraisal for an average home usually costs $300 to $450, which is usually paid by the buyer.

Key Takeaways

An appraisal is an unbiased professional opinion of a home's value and is required whenever a mortgage is involved in buying, refinancing, or selling property.
A qualified appraiser creates a report based on an in-person inspection, research into recent sales of similar properties, current market trends, and the details of the home, including its size, condition, floor plan, and amenities.
The borrower usually pays the appraisal fee, which averages $300 to $450.
When the appraisal value is lower than expected, the transaction can be delayed or even canceled.

What Is a Home Appraisal?

An appraisal is an unbiased professional opinion of a home's value. Appraisals are almost always used in home transactions and are common in refinance transactions.

If it is a purchase-and-sale transaction, the appraisal is used to determine whether the home's contract price is appropriate given the home's condition, location, and features. In a refinance transaction, the appraisal assures the lender that it isn't loaning the borrower more money than the home is worth.

Mortgage lending discrimination is illegal. If you think you've been discriminated against based on race, religion, sex, marital status, use of public assistance, national origin, disability, or age, there are steps you can take. One such step is to file a report to the Consumer Financial Protection Bureau (CFPB) or with the U.S. Department of Housing and Urban Development (HUD). Note that the home appraisal process is also subject to bias. Push back if you think your home's price has been unfairly devalued.

Lenders want to make sure that homeowners are not overborrowing because the home serves as collateral for the mortgage. If the borrower should default on the mortgage and go into foreclosure, the lender will sell the home to recoup the money it lent. The appraisal helps the bank protect itself against lending more than it might be able to recover in this worst-case scenario.

The Home Appraisal Process and Cost

Because the appraisal primarily protects the lender's interests, the lender will usually order the appraisal to be done. The borrower generally pays the fee.

An appraisal typically costs several hundred dollars, although the fee can vary depending on the size and condition of the property and the level of detail required.

According to the Appraisal Institute, an association of professional real estate appraisers, a qualified appraiser should be licensed or certified—as required in all 50 states—and be familiar with the local area. Per federal regulations, the appraiser must be impartial and have no direct or indirect interest in the transaction.

What Does a Home Appraiser Look At?

A property's appraisal value is influenced by recent sales of similar properties and by current market trends.

The home's amenities, including the number of bedrooms and bathrooms, the floor plan's functionality, and the square footage are also key factors.

The appraiser must perform a complete visual inspection of the interior and exterior and note any conditions that adversely affect the property's value, such as needed repairs.

What Is in an Appraisal Report?

Most appraisers use the Uniform Residential Appraisal Report from Fannie Mae for single-family homes.

The report asks the appraiser to describe the interior and exterior of the property and the neighborhood. It asks for the prices of comparable sales nearby.

The appraiser also provides an analysis and conclusions about the property's value based on their observations.

The appraisal report must include:

A street map showing the location of the appraised property and comparable sales
An exterior building sketch
An explanation of how the square footage was calculated
Photographs of the home’s front, back, and street
Front exterior photographs of each comparable property used
Other pertinent information such as market sales data, public land records, and public tax records that have been used to determine the property's fair market value.

When refinancing a mortgage, if the appraisal value puts your home equity at less than 20%, you’ll be required to pay for private mortgage insurance (PMI).

What Homebuyers Need to Know About Appraisals

When you’re buying a home and are under contract, the appraisal will be one of the first steps in the closing process. If the appraisal comes in at or above the contract price, the transaction proceeds as planned. If the appraisal comes in below the contract price, it can delay or derail the transaction.

Chances are that neither you nor the seller wants the transaction to fall through. As the buyer, you have an advantage in that a low appraisal can serve as a negotiating tool to convince the seller to lower the price. The bank won't lend you or any other prospective buyer more than the home is worth.

What Can Go Wrong with a Home Appraisal?

Appraisals can help buyers avoid overpaying for homes, but a seller may feel that a low appraisal is inaccurate and be reluctant to drop the price.

If a bad appraisal is standing between you and your home purchase or sale, consider getting a second opinion by bringing in another appraiser. Appraisers can make mistakes or have imperfect information, and appraisals can be affected by bias.

You can also try presenting a factual case for a higher valuation to the original appraiser. A persuasive case can result in a revised evaluation.

What Home Sellers Need to Know About Appraisals

As a seller, a low appraisal means you may have to lower your home’s price to get it sold. Holding out for an all-cash buyer who doesn't require an appraisal as a condition of completing the transaction is unlikely to work. Even cash-rich buyers don't want to overpay for a home.

If your neighborhood has experienced recent distress sales, it can lower your home's appraisal value. If you feel that your home’s value has been dragged down by the sale of nearby foreclosures and short sales, you may be able to convince the appraiser that your home is worth more. That may work, especially if the home is in significantly better condition than those properties.

Getting an appraisal is a required step when giving a home to a family member as a gift of equity.

What Refinancing Homeowners Need to Know About Appraisals

If you're refinancing a conventional mortgage, a low appraisal can prevent you from doing so. The home needs to appraise at or above the amount you want to refinance for your loan to be approved.

If your existing mortgage is an FHA mortgage, you can refinance without an appraisal through the FHA streamline program—a great option for underwater homeowners.

Frequently Asked Questions

How Long Does a Home Appraisal Take?

It will take the appraiser an average of seven to 10 days to look at the property, complete the research process, prepare the appraisal report and deliver it.

The appraiser will visit the property and spend an hour or two inspecting the interior and exterior, measuring the square footage, and evaluating the home's features and fixtures.

Additional research will include a comparison of other similar homes that have been sold recently (known as "comps").

After doing the physical inspection and running the comps, the appraiser writes an appraisal report. The amount of time it takes for the entire process depends on the complexity of the appraisal and the appraiser's workload or schedule.

What Does a Home Appraisal Cost?

Home appraisals typically cost between $300 and $450. The home's location, size, and condition factor into the cost. Appraisers may work on a flat fee or hourly basis.

If the appraiser expects to be paid a percentage of the home's value, it signals an unethical practice and should be avoided.

What Happens After the Appraisal?

If all goes well, the appraisal gets slipped into the pile of paperwork and the closing process takes one step forward.

The next step is mortgage underwriting. The underwriter reviews the entire loan file to make sure everything is in order and that all the required documents have been submitted.

The underwriter then assesses the risk associated with the loan and either denies or approves the loan based on all of the information submitted.

What Lowers a Home Appraisal?

The home's location has the biggest impact on the valuation. The value will be negatively impacted if the home is in an undesirable neighborhood or situated next to a junkyard, power lines, or a busy street. The value will be higher if it's on a pretty, well-tended street and close (but not too close) to a good supermarket.

You can't change the property's location, but you can positively influence other factors in a home appraisal. For instance, you can spruce up your curb appeal, make sure the house is clean and tidy, and take care of any light repairs, cosmetic issues, and routine maintenance items.

Theoretically, a messy house shouldn't have the least effect on a home appraisal. But appraisers are human, too. They may be affected, if only unconsciously, by clutter and dust.

The Bottom Line

When it goes smoothly, the home appraisal is just another box to check on the closing checklist. When the appraisal value is lower than expected, the transaction can be delayed or even canceled.

Regardless of which situation you encounter in your home buying, selling, or refinancing experience, a basic understanding of how the appraisal process functions can only work in your favor, especially if you're buying your first home.