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Understanding the Ins & Outs of a Home Appraisal

“How do home appraisals work?” may not be on everyone’s list of burning questions, but if you’re buying, selling or refinancing a house, it should be on yours. And there’s a whole host of questions that goes along with that one, from what you can expect to how much it costs to what’s in that appraisal report. We’re here to demystify the home appraisal process and answer the most common questions we hear so that this part of your mortgage process can go as smoothly as possible.

Common Questions Homeowners Ask about Home Appraisals

What is a home appraisal, and do I have to have one done for my mortgage?

In short, the appraisal process allows an unbiased, professional appraiser to determine the fair market value for a home. Different than the tax value, fair market value is an estimate of the home’s value based on specific interior and exterior aspects, real estate market trends, and comparable/recent sales in the surrounding area. Appraisals are used in buyer-seller transactions, known as purchase-money mortgages, and almost always used in mortgage refinance transactions.

Mortgage lenders require appraisals to ensure they aren’t lending more money than the home is actually worth, using the home’s appraised value and their permitted loan-to-value (LTV) percentages to determine the amount to lend to a borrower. An appraisal not only helps the lender but ultimately benefits everyone involved in the process. If you’re the buyer, it benefits you by confirming that the home’s value matches what you’re paying for it, and it may give you negotiating power. If you’re the seller, it helps you price your home appropriately on the front end.

Of course, if the transaction involves an all cash offer, there’s not going to be a lender involved. Still, if you’re the buyer, you might want an independent appraisal conducted to make sure you’re not paying considerably more than the home is worth.

Is an appraisal the same as a home inspection?

No. While both processes are important and may seem similar, there are key differences. A home inspection involves evaluating the condition of the home so that any needed repairs can be identified and completed prior to the purchase of the home and transfer or ownership. While the appraiser communicates with the lender regarding the value of the home, the home inspector communicates with the buyer and/or seller and their realtor(s) about problems that exist and repair recommendations.

How much does a home appraisal cost? Who pays the home appraisal costs?

Home appraisals generally cost between $300 – 400, depending on the geographic location. Some metro areas can run higher, as can certain rural areas if there are fewer appraisers available or if there is significant acreage associated with the property. The lender orders the appraisal and then the buyer pays for it, typically at closing.

When does an appraisal happen, how long does it take and how long is the report valid?

The home appraisal happens as part of the loan closing process, usually as soon as the purchase contract is signed or when the lender orders it to substantiate a refinance. The appraisal usually takes a couple of weeks to complete, though the actual appraisal event only lasts about 30-45 minutes. For conventional, FHA and USDA loans, appraisals are good for up to 120 days. For VA loans, appraisals are good for up to 180 days.

Who does the appraisal, and can I hire my own home appraiser?

Due to the Appraisal Independence Requirements (AIR) issued by Fannie Mae, an appraisal must be ordered under specific guidelines to ensure the inspection and value assigned by the independent appraiser are completely unbiased from any outside influences. This means your appraiser cannot have any ties to the buyer, the seller or the lender, so you cannot hire your own. You’ll need a certified home appraiser who is a neutral third-party and licensed by the state where the home is located. He or she will contact you to confirm the scheduled date and time. You’ll need to be home when they arrive, as the appraiser will need access to the home’s interior, and you can accompany the appraiser on the walk-through if you want.

Are there alternate types of appraisals?

You may be eligible for a hybrid, desktop or drive-by appraisal, depending on your lender’s requirements. These have gained in popularity as technology has advanced and as COVID-19 safety has become a priority during the pandemic. All of these are considered remote appraisals.

A hybrid appraisal allows the appraiser to use third-party materials, such as photos or videos from a home inspection, to complete the appraisal. A desktop appraisal is similar but doesn’t utilize a third party; rather, the appraiser pulls online property records and comparative information on similar homes in the surrounding community. (Understandably, though, a home in poor condition in a particular area will be worth less than a similar home in the area that’s in good condition.) A drive-by-appraisal, allowed by both the FHA and VA for mortgage refinances (and some home purchases), allows appraisers to drive by and examine the exterior of the home only, supplementing this information with online records and market comparables.

What is an appraiser looking for during the home appraisal visit?

In general, appraisers are looking at the general condition of the home and property, including the lot size, as well as any significant upgrades. Some factors they may consider include:

• Number of bedrooms, bathrooms, windows and closets
• Floor plan and square footage
• Amenities, such as fireplaces or decks, and home renovations, including eco-friendly features
• Safety and health conditions (i.e., working HVAC, smoke detectors and handrails on stairways)
• Upgrades, including a finished basement, a remodeled kitchen or bathroom or the addition of a pool
• Visual inspection of both the interior and exterior of the home
• Structural soundness of the home
• Quality of the roof, garage, siding, porches, foundation, crawl space, etc.
• Signs of water damage or termites
• Habitability of the home

What’s in the appraisal report and do I get a copy?

Once the home appraisal is complete, the appraiser completes a formal appraisal report with their analysis of your home’s fair market value. You’ll receive a free copy of the appraisal report at least three days before your loan closes. Your lender receives a copy as well. In addition to your home’s value, the report includes details on the condition of your property, street maps, photographs and information on the market valuation and comparable properties. If you’re purchasing new construction, the appraisal will be based on similar, existing area homes, as well as home building documents and plot plans. Speaking of comparable properties, ideally, the value will coincide with the home’s proposed sales price, but read on for what to do if this isn’t the case.

What if the appraisal comes in low? Can I dispute the appraisal amount?

Hopefully the appraised value will at least match the purchase price. If you don’t agree with the appraised value and feel your appraisal came in too low, you can contact the lender and challenge the report. While it’s possible the lender may order a second appraisal, typically the appraisal can only be successfully disputed if viable comparable properties were not included in the original report or if you have information to support inaccuracies of the appraisal report. Ultimately, a low appraisal may mean that the seller can agree to lower the home’s sales price or that the buyer has room to renegotiate on the purchase price. If you end up buying the home for less than what it’s appraised at, you can gain equity on the purchase and possibly lower closing costs. For a refinance, if the appraisal report comes in below what you expected, it can have an impact on the to loan-to-value ratio and how much of a home loan refinance your lender will qualify you for. Another impact of a low (or high) home appraisal for a refinance is how much equity you ultimately have in the home and whether it puts you above or below 20% equity, which determines the need for Private Mortgage Insurance (PMI).

Why does the tax assessment value differ from the home appraised value?

It is important to understand the difference between the subject’s property appraised value versus the tax assessed value. Tax jurisdictions vary in the methods used to assess property values, but local governments typically impose property taxes based on a tax assessed value which is separate and apart from the appraised value of your home. Your tax assessed value may be higher or lower than the appraised value which may result in a higher or lower monthly payment. It is particularly challenging for homeowners and lenders to project monthly payments with new construction properties which lack a tax history, and this can lead to larger discrepancies in the projected payments versus actual payments. If you have concerns about your local government’s tax assessed value, you may be able to appeal that value and your property appraisal may help substantiate the basis of the appeal.

How can I prepare for an appraisal?

The appraisal process can differ depending on whether you’re the buyer, the seller, or you’re refinancing. If you’re the home buyer, it’s wise to keep an eye on local home values and to connect with a qualified real estate agent who can guide you through the process. As the seller or refinancer, here are some tips to prepare:

• Embrace the magic art of tidying up: clean, de-clutter and perform some basic upkeep.
• Take care of needed repairs, especially if you have an older home or if not doing so would create safety issues.
• Maximize the interior by rearranging furniture and letting in natural light; incorporate mirrors and artificial light where appropriate to brighten the space.
• Maximize the exterior by working on landscaping and just generally increasing curb appeal.
• Attend the appraisal and provide the appraiser with a list of home improvements you’ve completed over the years. .

Hopefully we’ve answered your burning questions and the home appraisal process will go off without a hitch. Whether you’re refinancing, buying or selling, talk to us about the entire mortgage process – including the home appraisal – so that we can tell you about our competitive rates and help get the best mortgage for you.

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