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Guide to Home Appraisals for Mortgages

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

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.

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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:

  • Amenities
  • Condition
  • Interior
  • Structure
  • Upgrades

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
  • Location
  • 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.

The bottom line

A home appraisal provides benefits for both homebuyers and mortgage lenders, Wagner said.

“In addition to valuation issues, they may find out things about the property that they might not have otherwise been particularly aware of,” he said.

For example, a home could be advertised as a certain size, but the appraisal showed that it’s actually smaller or larger than marketed.

“There’s a number of aspects of the physical characteristics of a property that may come to light that were not obvious to the buyer at the outset,” he said.

Lastly, since an appraiser is analyzing market information to arrive at a home’s value, there’s not much of a need to worry about bias.

“The appraiser is the independent, impartial, objective party in the entire transaction,” Brenan said. “The appraiser is the only one whose compensation does not depend on whether the deal goes through or not.”

The information in this article is accurate as of the date of publishing. 

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Here are the Best Low- or No-Down-Payment Mortgages

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It’s an often-cited rule of thumb, but you don’t actually need a 20% down payment to get a mortgage. In fact, you can get a home loan with little money down, and even a no-down-payment mortgage.

Assuming you’re financially prepared for all of the other responsibilities of homeownership, consider the following mortgage programs.

No-down-payment mortgage options

USDA loans

The U.S. Department of Agriculture (USDA) insures home loans made by approved lenders to eligible homebuyers in designated rural areas. As the program states, USDA loans were created to improve the quality of life in rural areas by giving families the opportunity to own a “modest, decent, safe and sanitary” home as their primary residence.

There’s no required minimum down payment or mortgage insurance, but there are guarantee fees. A portion of the fee is paid upfront and is 1% of the loan amount; the other portion is 0.35% of the loan amount and is paid annually.

To be eligible, you must:

  • Have a low-to-moderate income for your area
  • Buy a home in a designated rural area
  • Have a preferred minimum 640 credit score
  • Have a maximum 41% debt-to-income (DTI) ratio

VA loans

The U.S. Department of Veterans Affairs (VA) also offers a no-down-payment mortgage option guaranteed through its VA loan program. These loans cater to active-duty military service members, veterans and eligible spouses, and are offered by private lenders.

Borrowers aren’t required to make a down payment, but there is an upfront funding fee — which ranges from 1.4% to 3.6% of the loan amount — to help offset the program’s costs to taxpayers. The loan must be used to purchase a primary residence.

To be eligible, you must:

  • Have a certificate of eligibility from the VA
  • Have a preferred minimum 620 credit score
  • Show proof of stable income
  • Have a maximum 41% DTI ratio

Low-down-payment mortgage options

Fannie Mae HomeReady® and Standard 97% LTV

Fannie Mae has two low down payment conventional loans: HomeReady® and Standard 97% LTV. The HomeReady® mortgage program is open to both first-time and repeat homebuyers, while the Standard option requires at least one borrower to be a first-time buyer.

Borrowers can’t earn more than 80% of their area median income (AMI) if applying for a HomeReady loan. Additionally, if all borrowers on either a HomeReady or Standard loan are first-timers, at least one of them must complete an online homebuyer education course.

Both programs also require private mortgage insurance (PMI) if you make a down payment of less than 20%, though PMI can be removed after you reach 20% equity.

To be eligible, you must:

  • Have a 620 credit score
  • Have a 3% minimum down payment
  • Have a maximum 50% DTI ratio

Freddie Mac HomeOne and Home Possible

Freddie Mac’s HomeOne mortgage is reserved for first-time homebuyers and doesn’t include any income restrictions. The Home Possible® loan is an option for first-time and repeat buyers with a low to moderate income.

Your income must not exceed 80% of the AMI for a Home Possible® loan. You may qualify without a credit score, but your minimum down payment rises from 3% to 5%. Cancellable PMI is required for borrowers who put down less than 20%.

There’s a homebuyer education requirement for both HomeOne and Home Possible® programs when all borrowers on the loan are first-timers.

To be eligible, you must:

  • Have a 3% minimum down payment
  • Have a minimum 660 credit score
  • Have a maximum 50% DTI ratio

FHA loans

The Federal Housing Administration’s (FHA) low down payment home loans require just a 3.5% contribution and a 580 credit score. You can also qualify for an FHA loan with a credit score of 500 to 579 if you have at least a 10% down payment. Other FHA loans, such as construction-to-permanent loans and 203(k) loans, have the same credit score and down payment requirements.

FHA loans require upfront and annual mortgage insurance premiums (MIP). The upfront premium is 1.75% of the loan amount; the annual premium ranges from 0.45% to 1.05%, is divided by 12 and paid in monthly installments as an addition to your mortgage payment. Borrowers who put down at least 10% only pay mortgage insurance for 11 years; putting down less means you’ll pay MIP for the life of your loan.

To be eligible, you must:

  • Have a 580 credit score and 3.5% down payment
  • Have a 500 to 579 credit score and 10% down payment
  • Borrow within your county’s FHA loan limits
  • Have a maximum 43% DTI ratio

Good Neighbor Next Door

The Good Neighbor Next Door program from the U.S. Department of Housing and Urban Development (HUD) allows homebuyers in certain public service professions to buy a home at a 50% discount. If you qualify for and use an FHA loan to buy a home, the down payment is only $100, instead of the minimum 3.5% that’s usually required.

Eligible borrowers must buy a home located in a HUD revitalization area and commit to live in the home for at least three years. They must also sign a silent second mortgage for the discounted amount, though no payments are required if all program requirements are met.

To be eligible, you must:

  • Be a full-time pre-K through 12th grade educator, emergency medical technician, firefighter or law enforcement officer
  • Buy a home in a HUD revitalization area
  • Qualify for a conventional, FHA or VA loan
  • Live in the home for at least three years

Pros and cons of no or low down payment

Pros

Cons

  • Buy a home sooner. It can take years to save up for a larger down payment. By contributing 0% down or the lowest possible amount, you can reach your homeownership goal in less time.

  • Avoid depleting your savings. If you limit how much money you contribute to your home purchase, you can leave some of your emergency savings intact. Lenders want to know that you can weather financial hiccups, such as a job loss or income reduction.

  • Start out with less equity. The less money you put down, the less home equity you’ll have initially. This means your ownership stake in your home is much smaller, which may lead to pocketing less money if you need to sell in a few years.

  • Take out a larger mortgage. A no- or low-down-payment mortgage means you’ll be close to financing 100% of your home’s purchase price. A larger mortgage means a higher monthly payment amount.

  • Pay more in interest over time. The more money you borrow, the higher your interest rate typically will be. This also means you’ll pay more in interest over the life of your loan.

FAQs about mortgage down payments

Yes, there will be closing costs to pay on your home loan. Mortgage closing costs can range from 2% to 6% of your loan amount. You can pay these costs out of pocket at the closing table, or ask your lender about a no-closing-cost mortgage. With this type of loan, your lender will either increase your mortgage rate or add the closing costs to your loan amount, instead of having you pay those costs upfront.

It depends on the type of mortgage. Conventional loans require private mortgage insurance when you put down less than 20%, and it can be canceled after you’ve built at least 20% equity in your home. All FHA loans require mortgage insurance premiums, but if you put down 10% or more, you can get rid of MIP after 11 years.

Reach out to your loan officer and real estate agent for help identifying any down payment assistance programs you might qualify for. You should also check with your state’s housing finance agency.

Many loan programs let you use monetary gifts from family members, friends and others to help cover your down payment, but there must be a specific paper trail for the gift. The donor will need to submit a gift letter to show that you won’t have to repay the money being gifted to you. Consult your lender for specific guidelines.

Yes, your down payment amount can affect your mortgage rate. The less money you put down, the riskier you can appear to lenders, and they can account for this risk by raising your mortgage rate.

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Fact Checked By: Deborah Kearns

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5 Home Loans for People With Bad Credit

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

You don’t need a perfect credit score to get a mortgage — there are home loans for people with bad credit. But before getting this type of mortgage, find out how a lower credit score affects your overall borrowing costs.

Buying a home with bad credit

It’s possible to buy a home with bad credit — you could have a credit score as low as 500 and still qualify for a mortgage. The lower your credit score, though, the fewer lending options you’ll have and the higher your mortgage rate will be.

FICO scores, the credit scores used by most lenders, typically range from 300 to 850. Having a lower credit score translates to higher risk for a lender, and vice versa. Any score 669 or lower is considered “fair” or “poor.” Here’s a breakdown:

  • Exceptional: 800 and higher 
  • Very Good: 740-799
  • Good: 670-739
  • Fair: 580-669
  • Poor: 580 and lower 

Lenders like to see high credit scores because it exhibits an ability to manage debt, make on-time payments and use credit responsibly. Your creditworthiness will come into question if you plan on buying a home with bad credit, but it doesn’t have to hold you back from homeownership.

5 home loans for bad credit

Consider one of the following home loans for bad credit.

Fannie Mae HomeReady

Fannie Mae’s HomeReady mortgage program is an option for both first-time homebuyers and repeat buyers with limited access to down payment funds and a fair credit score. This conventional home loan has cancellable mortgage insurance for those who put down less than 20%, and gives borrowers the option to use boarder or rental income to help them qualify. If all borrowers on a loan are first-timers, at least one borrower is required to complete a homeownership education course.

Eligibility requirements include:

  • A minimum 620 credit score
  • A minimum 3% down payment
  • A low- to moderate income

FHA Loans

Mortgages backed by the Federal Housing Administration (FHA) could be considered bad credit home loans because they make it easier for low-credit-score homebuyers to get a mortgage. FHA loans have a low down payment requirement, but you’ll pay mortgage insurance premiums (both upfront and annual) for the life of your loan. If you put down at least 10%, you can get rid of mortgage insurance after 11 years.

Eligibility requirements include:

  • A minimum 10% down payment for a 500-579 credit score
  • A minimum 3.5% down for a 580+ credit score
  • Borrowing within your county’s FHA loan limits

USDA loans

The U.S. Department of Agriculture (USDA) insures mortgages funded by approved lenders through the USDA home loan program. There’s no minimum required credit score, but a 640 score could help you get approved automatically if you meet employment and income requirements.

Eligibility requirements include:

  • No minimum required down payment
  • Meeting local income limits
  • Buying a home in a designated rural area

VA Loans

The Department of Veterans Affairs (VA) also offers bad credit home loans through approved lenders for active-duty service members, veterans and eligible spouses. The VA doesn’t have a specific credit score requirement, but lenders may require a minimum 620 score. No down payment is required. Additionally, most borrowers will have to pay an upfront funding fee to offset the cost of VA loans to taxpayers.

Eligibility requirements include:

Non-qualified mortgage loans

The loans discussed above are all qualified mortgages, meaning they meet certain requirements that establish a borrower’s ability to repay a loan. There are also non-qualified mortgage (non-QM) loans, which have more wiggle room for high-risk borrowers, such as accepting credit scores below 500.

Eligibility requirements include:

  • Demonstrating your ability to repay the loan
  • A minimum down payment up to 20%
  • A maximum debt-to-income ratio of up to 55%

How to get a home loan with bad credit

Use the following list of tips as a resource to help you get a bad credit home loan.

  • Avoid applying for new credit. A new auto loan, credit card or personal loan application means you’ll have new inquiries on your credit reports, which can drop your credit score.
  • Dispute any credit report errors. Finding and disputing inaccurate information on your credit reports could improve your credit score and help lenders see you as a less risky borrower.
  • Pay your bills on time. Your payment history makes up the biggest chunk of your credit score at 35%, according to FICO. Making on-time payments can help boost your score and demonstrate your creditworthiness as a borrower.
  • Lower your outstanding debt load. Pay down your credit card and loan balances. Lenders don’t want to see that your income is stretched too thin to afford a mortgage. Keep your credit usage below 30% of your maximum credit limit across each of your accounts.
  • Don’t close any accounts. Closing old accounts, especially credit cards, shortens your overall credit history and can negatively impact your credit score.
  • Have your rent payments reported to the credit bureaus. As long as you’ve been maintaining an on-time rental payment history, having your rent payments reported to the bureaus may boost your score.
  • Make a larger down payment. A larger down payment can compensate for a lower credit score. Don’t completely drain your cash reserves, though. Keep three to six months’ worth of living expenses in a savings account for emergencies.
  • Pay for mortgage points. If you have the extra cash, consider buying mortgage points to lower your interest rate and overall loan costs. One point is equal 1% of your loan amount and can lower your rate by up to 0.25%.

Should you get a bad credit home loan?

Home loans for bad credit come with more risk for lenders, so you can expect to pay more as a borrower. Crunch the numbers with a mortgage calculator to help you determine whether to move forward with a bad credit mortgage or wait until your credit profile improves.

Here’s an example of how your credit score can affect your costs on a 30-year, fixed-rate mortgage:

 620 credit score760 credit score
Mortgage rate4.84%3.25%
Loan amount$200,000$200,000
Monthly payment
(Principal and interest)
$1,054.17$870.41
Total interest cost$179,501.82$113,348.55

As you can see, improving your score from “fair” to “very good” could amount to a mortgage payment that is nearly $184 less each month, saving you more than $2,200 each year and more than $66,000 in interest over the term of your mortgage.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

By clicking “See Rates”, you will be directed to LendingTree. Based on your creditworthiness, you may be matched with up to five different lenders in our partner network.