There are many factors that can lead to a mortgage denial when you’re trying to buy a home. One of the most common things that can stand between you and an approval is an issue with the property’s appraisal.
But what is an appraisal? And why do home appraisals matter so much during the home buying process? This guide answers those questions and more.
What is a home appraisal?
An appraisal is a written estimate that details a professional appraiser’s opinion of a home’s value. When you buy a home, your mortgage lender will more than likely require a home appraisal before approving the loan.
“Appraisers are reporters of the market,” said Stephen Wagner, 2019 president of the Appraisal Institute in Chicago. “They interpret the actions of buyers and sellers in the marketplace.”
All 50 states require appraisers to be certified or licensed to provide appraisals to mortgage lenders who are federally regulated, according to the Appraisal Institute. Appraisers receive their credentials after passing an examination administered by their state’s appraisal board.
When choosing an appraiser, government-sponsored enterprise Fannie Mae has specific requirements for mortgage lenders. They need to select from professionals who not only meet the certification or licensing requirements, but also have experience in and knowledge of the local real estate market and the specific property type being appraised.
Many appraisers use the Uniform Residential Appraisal Report, the most common form used in real estate appraisals.
What do appraisers look for?
Before visiting a property, an appraiser gathers upfront information related to the property. Once they begin the appraisal assignment, they typically review the property’s:
But not all appraisal assignments look the same, said John Brenan, vice president of appraisal issues with The Appraisal Foundation in Washington, D.C.: “Some require an appraiser to personally inspect the interior of a home. Some only require an appraiser to personally inspect the exterior of the home.”
The homebuyer doesn’t have to be present for the appraisal. In many cases, a real estate agent will provide access to the home if necessary, he added.
The U.S. Department of Housing and Urban Development (HUD) requires appraisals for FHA loans to be more in-depth than those for conventional loans. Appraisers hired by FHA lenders must establish an unbiased opinion of a home’s value and determine whether it meets the FHA’s minimum property standards — by inspecting the home’s foundation and major systems, for example.
The U.S. Department of Veterans Affairs follows a similar process for VA home appraisals. The appraiser must determine the value of the home and review the property’s condition to assess whether it meets the VA’s minimum property requirements.
Appraisers typically determine a home’s value by using one of three common methods:
- The sales comparison approach, which involves reviewing recent home sales and homes currently for sale that are similar to the property being appraised. The appraiser makes adjustments to the home’s value based on its condition, features and quality.
- The cost approach, which involves calculating what it would cost to build that same house on a similar lot, minus depreciation. This method can be helpful for appraisals on relatively newer homes, according to Brenan.
- The income approach, which involves taking the rental income of the property being appraised, or a comparable property, to determine a value that would provide the rate of return that the typical investor would require for a similar home. As Brenan noted, this approach is typically used for commercial property appraisals.
The most commonly used method for real estate transactions is the sales comparison approach. When using this approach, appraisers consider several factors, according to the Appraisal Institute, which include:
- Conditions of the sale
- Economic characteristics
- Expenditures made immediately after the purchase
- Financing terms
- Market conditions
- Non-property components of value
- Physical characteristics
- Property rights being transferred
- Use and zoning
Homebuyers usually pay for an appraisal as part of their closing costs. An appraisal fee can run about $300 to $400, but it can vary depending on the state, property type, loan type and the complexity of the appraisal assignment. For example, the VA has a state-by-state fee schedule for home appraisals. The appraisal fee is $450 in Georgia and $525 in New York.
There isn’t a “shelf life” on appraisals, Brenan said. However, each lender has guidelines it follows that dictate how old an appraisal report can be for mortgage lending purposes.
Why appraisals matter to the homebuying process
An appraisal establishes a home’s value. This number is important to your mortgage lender because it affects the loan you need to purchase the home.
Lenders rely on a house appraisal to determine whether the sales price makes sense and to calculate the homebuyer’s loan-to-value ratio.
[An appraisal], as described by Wagner, “is a risk mitigation tool at that point, to make sure that somebody’s not paying too much for a property or that the lender isn’t going to lend too much against the property.
Put another way, a home appraisal is designed to ensure that the collateral for a mortgage — the house — is adequate enough to justify the loan amount, Brenan said. The appraisal also helps establish value in the event of a foreclosure sale, should the lender need to take the property back because the borrower defaulted on the mortgage.
Aside from mortgage approval, other reasons you might need an appraisal include:
Can you skip a home appraisal?
In certain circumstances, you may be able to sidestep the home appraisal requirement when getting a mortgage to purchase a home.
Conventional mortgage borrowers may be able to get what’s called a property inspection waiver (PIW) mortgage, which is a loan that goes through the underwriting process without an appraisal. It’s also known as an appraisal waiver mortgage.
With a PIW mortgage, the lender can use existing information about the property’s estimated value to originate a loan, rather than ordering a new appraisal. However, the homebuyer would need to supply a 20% down payment in most cases.
How to dispute a home appraisal
An appraiser’s opinion of value isn’t necessarily the end of the line, Brenan said.
If you’re not happy with your appraisal — for example, the home value comes in lower than expected — you have the option to dispute the appraiser’s findings.
Let’s say you’re looking to buy a home priced at $300,000 but the appraisal comes in at $250,000. After your lender has given you a copy of the appraisal report to review, you can request another appraisal if you’re not satisfied with the results. It’s helpful to provide any evidence you may have that disputes the appraiser’s findings, such as a recent comparable sale or missing square footage.
Keep in mind that your lender isn’t obligated to honor your request. But if it does, you’ll be responsible for the additional appraisal fee.
“If the borrower or a real estate agent or whoever wants the appraiser to consider additional information, go through the lender, share that information,” Brenan said. “The appraiser will review it and notify the lender if it warrants any type of change.”
If your lender decides to stick with the original appraisal or no changes occur after it’s reviewed, a few things can happen. Using the example above of an appraisal coming in lower than the sales price, you would either need to come up with the difference in cash or renegotiate with the seller on a lower price. Otherwise, the loan could be denied.
It’s also important to remember that although a house appraisal is part of your homebuying process and you’re responsible for paying the fee, you aren’t the appraiser’s client. In terms of a home purchase or refinance, the lender is required to order the appraisal and can’t accept an appraisal ordered by a borrower — “that is to avoid any possible bias or undue influence,” Brenan said.
Home appraisal vs. home inspection
While they both involve taking a critical look at a home, an appraisal and inspection aren’t the same.
An appraisal examines the elements and features that help determine the value of a home. But an inspection evaluates the home’s structure, interior and exterior to assess its condition and recommend any necessary repairs. Unlike appraisals in most cases, home inspections can be optional. Inspection fees range from about $300 to $500, though it can change based on a number of factors, such as the size and age of the home.
An appraiser is generally looking for things that impact value, such as the quality, design and floor plan, Wagner said.
“Appraisers do not inspect properties to the depth and level that a home inspector might, wherein as a home inspector is … testing plumbing and electrical and kind of almost seeing behind the walls, if you will,” he explained.