Mortgage Appraisals: Home Assessments and Valuation

A home appraisal is an assessment of a property’s market value conducted by a licensed appraiser. Appraisals are a standard part of the mortgage lending process, allowing lenders to confirm that a home is worth enough to secure the loan. 

Why are Home Appraisals Important for Mortgages?

Banks and mortgage lenders rely on appraisals to ensure loans are secured against eligible collateral. An appraisal provides an independent, professional opinion on what a property would sell for under current market conditions. This protects lenders from issuing loans greater than what the property is worth.

According to the Consumer Financial Protection Bureau, appraisals help prevent predatory lending and inflated home prices. They are a key risk management tool lenders use to ensure fair lending practices. 

For homebuyers, appraisals also offer reassurance that they are paying a fair price supported by market data. This prevents buyers from overpaying and protects their interests in the transaction.

How Does the Home Appraisal Process Work?

The typical appraisal process involves four main steps:

1. Requesting an Appraisal

Lenders order appraisals through appraisal management companies (AMCs). The homebuyer usually pays for the appraisal fee, which averages $365 nationally. 

Appraisers are assigned to evaluate the property based on experience, locale, and availability. Turnaround times range from 1-3 days on average.

2. The Physical Inspection

The appraiser will schedule a visit to visually inspect the interior and exterior of the home. They will measure the home, take photos, and document their observations.

The inspection also verifies that the home dimensions match publicly recorded documents and that there are no discrepancies. 

3. Comparing Similar Properties

Appraisers will research recent sales of at least three comparable homes in the neighborhood with similar features. This helps determine the subject property’s value relative to other sales.

They will analyze closed sales going back 6-12 months for these “comps” and make adjustments up or down based on differences compared to the subject home.

4. Finalizing the Appraisal Report

Finally, the appraiser will synthesize their research, inspections, and analysis into a completed appraisal report. This will render an opinion on the market value of the home.

The report goes to the lender, who will approve the loan if the appraised value meets or exceeds the amount borrowed.

Who Performs a Home Appraisal and What Do They Look For?

There are three levels of certification for real estate appraisers:

• Licensed Appraiser: Can appraise non-complex residential properties under $1 million.
• Certified Residential Appraiser: Can value complex and luxury homes. 
• Certified General Appraiser: Qualified for all property types.

All appraisers must be state-licensed or certified with qualifications ranging from associate degrees to master’s degrees in related subjects like business or finance. They must have hundreds of hours of training and pass national exams.

When inspecting a home, appraisers will look at:

• Condition – They will note any damage, improvements needed, renovations, modernization.
• Layout and functionality – Room sizes, configuration, storage space.
• Quality and validity of any prior renovations. 
• Overall curb appeal and first impressions.

They will also verify story details like bedroom/bathroom counts.

What Factors Can Affect a Home’s Value in an Appraisal?

Many elements influence a home’s valuation during an appraisal:

1. Location

Similar homes in desirable areas tend to appraise for more. Factors like school districts, crime rates, commute distance, and amenities impact location values.

2. Size and Layout

Larger homes with open floor plans and favorable layouts typically appraise for higher amounts than smaller, chopped up homes.

3. Condition of the Property

Homes in excellent, move-in ready condition will appraise for more versus those needing heavy repairs or renovations.

4. Recent Renovations or Improvements

Upgraded kitchens, bathrooms, flooring, and landscaping can boost appraisal value. Outdated homes may appraise lower.

5. Market Conditions

When housing inventory is low and demand high, appraised values often trend higher in competitive markets.

How to Prepare for a Home Appraisal

Sellers can take proactive steps to maximize their home’s appraised value:

• Make all repairs – fix leaky roofs, cracked concrete, peeling paint.
• Curb appeal matters – landscape, power wash siding, declutter. 
• Clean thoroughly inside and out.
• Add neutral paint and decor for mass appeal. 
• Room-by-room deep clean for a great first impression.
• Make smart upgrades like new hardware or lighting fixtures.
• Document all renovations done.
• Gather permits, inspection reports, receipts for improvements.

Proper preparation highlights the home’s best assets for the highest possible valuation.

What Happens if Your Home Doesn’t Appraise for the Mortgage Amount?

There are a few potential scenarios if a home appraises lower than the purchase price:

• The buyer may negotiate with the seller to lower the price to match the appraised amount.
• The buyer brings more money to closing to cover the gap between appraisal and purchase price. 
• The buyer and seller meet somewhere in the middle on a new price both agree to.
• As a last resort, the buyer may exit the deal if no agreement can be reached. 

According to data from Freddie Mac, the median appraisal amount is 3.5% lower than the contract price nationally. About 15% of appraisals come under contract price.

Can You Dispute a Low Home Appraisal?

Homeowners who disagree with a low appraisal do have options:

• Ask the lender to order a second appraisal for review.
• Provide additional comps the appraiser may have overlooked supporting a higher value.
• Point out factual errors or problems with the first appraisal.
• File a complaint against the appraiser with the state licensing board.
• Consult an attorney about legal remedies available.

A successful dispute can overturn the original valuation in some cases. But appraisals are subjective, and appeals don’t always result in changes.

What are Some Tips to Ensure a Successful Home Appraisal?

To get the green light on financing approval:

• Price realistically based on comps so the appraisal matches contract price. 
• Understand the factors appraisers look for to maximize home appeal.
• Prepare the property thoroughly to show pride of ownership.
• Be flexible on negotiating price if the appraisal falls short.
• Provide proof of upgrades and renovations completed.
• Act quickly if the appraisal seems inaccurate or unfair.

With proper preparation, most homeowners can successfully navigate the appraisal process without major hurdles.

How Much Does a Home Appraisal Cost and Who Pays for It?

Homeowners can expect to pay an average appraisal fee of $365, although costs can range from $275 on the low end to $500 or more for larger homes. 

The mortgage borrower typically pays for the appraisal fee, either directly upfront or via a credit from their lender at closing. VA loans include the fee in closing costs. FHA loans require the fee paid upfront.

If a second appraisal is needed, the borrower may have to pay for this reappraisal out of pocket.

Conclusion

Appraisals are worth the cost as they help ensure home loans are properly secured and valued fairly. For homebuyers, a smooth appraisal process minimizes stress and delays in financing home purchases. Being an informed seller, buyer, or borrower makes appraisals a seamless step versus an obstacle.