Home Appraisal and Valuation: What You Need to Know

If you plan to buy a home, financing your purchase is likely part of the process. Securing a home loan will require an appraisal so that your lender can establish what the property you’re buying is worth. This home valuation is an important part of your home purchase, as it determines how much a mortgage company is willing to lend.

In a real estate transaction, a home appraisal assures the mortgage lender of a property’s value in a given market. It should not be confused with a home inspection, which helps the buyer identify potential issues with a home.

Appraisers consider the overall condition of a home, and they compare it with similar nearby properties. “When I talk about home appraisals I say the home inspection is for you – appraisers, they’re going to look for red flags to make sure specific things are in good enough condition for the bank to close on,” says Jenny Buhr, president of Doorsteps Midwest. 

Lenders do not want to lend more than a property is worth, as they can’t recoup the additional funds if the loan goes into default. They require an appraisal to verify the property’s fair market value and confirm financing for the requested loan amount. Buhr says that appraisers are “hired by the bank to determine the value of the home.”

There are a few basic steps in the home appraisal process:

1. An appraiser is hired. This is generally done by the mortgage lender for buying or refinancing purposes. The buyer pays the fee, but the lender chooses an appraiser from a vetted list. Lenders prefer appraisers who have a good reputation and know the local area.
2. The appraisal is scheduled. This is when the appraiser will view the property and gather information. This may include speaking with the seller’s real estate agent to clarify information about changes or updates to the property.
3. The appraiser conducts an analysis. This is based on information gathered about the property and an analysis of the market at the date requested.
4. The appraiser prepares and provides a final report. This is sent to the mortgage lender, who will share it with the buyer.

The first step in a home appraisal is the initial inspection. The appraiser will visit the property to do the following:

• Inspect the interior and exterior of the home.
• Measure square footage throughout the property to ensure it matches existing plans.
• Evaluate the home’s systems and structure. This includes the HVAC system, windows, water heaters and other appliances. They’ll also check for dampness, structural damage or foundation issues.

After the property has been inspected, the appraiser will collect relevant market data. This includes information on comparable properties (comps) and their values. 
When an appraiser looks at comps, they may consider similar homes that are the same age and size, as well as homes in a similar location. They may look at properties that are on a similar plot of land. This information helps determine the fair market value for the property that’s being financed. 

After the analysis is complete, the appraiser will prepare the final appraisal report for the lender and buyer. This information is shared on a Uniform Residential Appraisal Report and will include:

• Property description: This includes general information about the property, such as its age and size, along with notable defects and issues that may impact the final outcome. It will also have details on the foundation, appliances, condition, site specifications, notable materials, evidence of dampness or infestation, and other aspects.
• Market analysis: The appraiser can’t just look at the property. They also consider home prices and the real estate market. Market trends, neighborhood characteristics and area land use are among the factors that they consider.
• Comparable sales: The appraiser will look at recently sold properties within the vicinity and note what makes them comparable to the property being appraised. They will also point out differences between the property they are appraising and their comps.
• Valuation: The appraiser will use the sale prices of the comparable properties to determine a home value.
• Photos: The property’s condition will be documented with photos as part of the appraisal.
• Additional documents: The appraisal could include maps, floor plans or other pertinent information about the property if it has an influence on the home’s value.
• Appraiser’s certification: The appraiser testifies that they are performing the appraisal in good faith, using the accepted requirements and practices per the qualifying board.

According to the National Association of Realtors (NAR), home appraisal costs generally range from $300 to $800. The average cost is around $500. The factors that can influence appraisal fees include:

• Home size: A larger home requires more time and effort from the appraiser to survey.
• Home location and inventory: An appraisal may involve more work if comps are difficult to find. For example, the appraiser may need to do more research if the home is in a rural area with low inventory and few homes for sale.
• Home condition: The more an appraiser needs to dig into potential issues with the home, the more time they’ll need to spend prepping the appraisal.
• Multi-family vs. single-family residence: Evaluating a property with multiple residences means evaluating more spaces. For example, if you plan to purchase both sides of a duplex, the appraiser has to evaluate two separate homes.
• Time of year: In some areas, seasonal changes could make a home more difficult to appraise.

Location can also affect the cost of a home appraisal. For example, rural areas may have fewer appraisers who cover them. As a result, appraisers may need to travel farther to appraise properties. In these instances, they’ll need to be compensated for the additional time and expenses.

The appraisal fee is usually included in the mortgage closing costs and paid by the homebuyer. Payment is handled similarly when refinancing a home. If an appraisal is needed for another reason, the homeowner will generally have to pay the cost at the time of the appraisal.

• Location: Access to great schools or desirable neighborhood amenities can have a positive impact on a home’s appraised value. At the same time, an undesirable location could have the opposite effect.
• Age of the home: While some older homes may need renovation, an old house that is well-maintained and updated may appraise similarly to a brand-new home.
• Home style: Outdated design, both inside and out, can lower the appraisal value.
• Number of bedrooms and bathrooms: More bedrooms and bathrooms will translate to a higher value. A two-bedroom home can’t be compared with a house with five bedrooms. Assuming both homes are in a similar location and condition, they will almost never appraise anywhere near each other.
• Usable above-grade square footage: More usable and livable space will increase the appraisal value.
• Mechanical, electrical and plumbing systems: Modern systems like a zoned HVAC system and tankless water heater could bolster the appraisal, while outdated systems may lower the value.
• Garage and storage space: Off-street parking is highly valued, particularly in urban and cold-weather areas. Similarly, many buyers want a home with sizable closets and good storage space.
• Recent updates: Home renovations, particularly bathroom and kitchen renovations, are highly valued in the market and can increase the appraised value.
• Current market: Seasonality, home inventory and market conditions can all affect a home appraisal.

• Lender-required repairs: In some cases, a lender may require specific repairs to provide financing. Repairs to structural issues, or issues related to health, code or safety, may be required for mortgage approval.
• Floor Plan: Outdated floor plans or those that don’t offer much privacy can be an issue, particularly if they limit the home's functionality.

Yes. For a conventional loan, the appraiser must follow the Uniform Standards of Professional Appraisal Practice (USPAP) and regulations with every appraisal. Some lenders and different types of loans, such as FHA and USDA mortgages, may have other requirements in addition to the USPAP.

If you plan to refinance, your home appraisal can impact the interest rate that you qualify for. This is because the loan-to-value ratio (LTV) is determined in part by the home’s fair market value. A lender assumes less risk in a refinance where the borrower has more home equity and may offer a better interest rate.

An appraisal that comes back above the purchase price is good for the buyer, as it indicates that the home’s value is higher than what the buyer will pay. While the buyer may realize more equity than expected in this situation, it won’t change the total loan amount or the required down payment. 

However, if the appraisal comes back at less than the sale price it could impact the deal. “If the value of the home is less than what you offered for it, the bank is only going to give you a home for what it appraises for,” says Jenny Buhr of Doorsteps Midwest.

If the buyer has an appraisal contingency in place, they may be able to renegotiate the sale price or walk away from the deal. However, if they have waived this contingency, they will need to make up the difference in cash to go to closing. A buyer could be at risk of losing the home and their earnest money deposit if they’ve waived the appraisal and cannot come up with the required funds to move forward. 

The mortgage lender orders the appraisal and shares it with the buyer. When you sell your home, you do not typically get a copy of the home appraisal. However, a low appraisal might be shared with a seller if an appraisal contingency is in place and the buyer wishes to renegotiate. 

Yes, you can appeal an appraisal if you feel that the appraisal contains errors. That being said, there has to be clear evidence that counters the appraisal. This includes failing to note an important repair or addition, or incorrect square footage. It could also involve the use of poor comps or comps that may be outside the area of the appraised home.

• Focus on curb appeal. Cleaning and freshening up the appearance of your home can influence how the appraiser conducts their walk-through. Mow the lawn, rake leaves and clean up the flower beds.
• Address needed maintenance and repairs. Doing this before the appraiser makes an evaluation can help achieve the best possible outcome. Obvious issues like broken windows, missing handrails or electrical problems should be handled before appraisal. Major structural issues and damage should be addressed or disclosed, as these can be factors in the appraisal process. 
• Clean and declutter. You likely already gave your home a deep clean when it was staged for showings, but if not, now’s the time to make sure it’s as tidy as possible. 
• Share your home improvements and renovations. Provide documentation of any updates that you’ve made to get the best possible appraisal. Improvements you’ll want to note could include kitchen or bath renovations, as well as a new roof, appliances or heating and air conditioning systems. 

How much does a home appraisal cost? A home appraisal typically costs $500, with prices that range between $300 and $800. A home’s size, location and condition can all impact the cost of a home appraisal. 

How long does a home appraisal take? A home appraisal typically takes seven to 10 days from the appraiser’s visit to the final report.

What do home appraisers look for? A home appraiser will conduct a visual inspection of the property, both inside and out. They will consider the number of bedrooms and bathrooms, and the overall condition of the home. The home’s size and any improvements that have been made also factor into an appraisal.