Understanding Home Appraisals: Everything You Need to Know

How Home Appraisals Estimate the Value of a House

Home appraisals are professional estimates of the market value of a home.

A home appraiser is a licensed, impartial third party who visits the home, records details about its size, features, and condition, and compares it to similar properties in the area that have sold recently.

The purpose of the home appraisal is to get an accurate property valuation, which is very important when getting a mortgage.

What Is a Home Appraisal?

A home appraisal is a professional third-party estimate of a home's value. Home appraisers complete coursework and take an exam to show they know how to properly determine a home's fair market value under current market conditions.

Home appraisals are important to make sure a house is worth what a buyer is paying for it. This is also critical for mortgage lenders, as the loan has the home as collateral to guarantee the loan. If a home is worth too little, then it wouldn't protect the lender from financial loss because it couldn't be sold to repay the full loan balance in the case of foreclosure.

What Happens During the Home Appraisal Process?

During the appraisal process, a home appraiser visits a home to record key details about the property, the home's condition and safety. The appraiser then prepares an appraisal report showing how it compares to similar properties that were recently sold.

The appraiser then estimates what the subject home's current fair market value is based on recent sales in the area, adjusting for differences between the properties.

What's in the Home Appraisal Report?

In addition to what appraiser thinks that the home is worth on the open market, an appraisal report typically includes:

• A description of the property, including its location, size, age, features, and interior and exterior condition.
• A summary of local market trends, including whether property values appear stable.
• A description of the neighborhood and location, including zoning rules.
• Information about access to utilities and whether the home is in a flood zone.
• A market analysis including information about recently sold properties, their features and sales price, and how this home compares.

In some cases, an appraisal may also contain other information, such as comparable rent schedules for rental properties or insight into what the home would cost to build today.

How Long Until the Home Appraisal Report Is Ready?

How long does an appraisal take? There's no one answer to this question because every real estate appraisal is different, but the typical time range is around three to 10 days.

However, certain factors can make the real estate appraisal process take longer. For example, if the home is being used as a rental property, this can lengthen the time estimates because an appraiser must consider potential rental income rather than just the home's features.

If a buyer wants to move quickly in closing on a loan, a lender can sometimes request a rush appraisal. This will increase the home appraisal cost, but it can speed the process along.

What Do Home Appraisers Look For?

During a real estate appraisal, the appraiser is looking at the big picture and focusing on the features that have a major impact on what a home would sell for. Some of the key things an appraiser considers include:

• The age, location, and size of the home: These are the most important factors in determining a home's value. Larger, newer homes in high-demand locations are generally worth more than smaller, older homes.
• The home's condition: While appraisers don't focus much on small details like what paint color is on the walls, they do want to assess whether the home is updated and well-maintained.
• Home improvements: Homes that have been remodeled and upgraded are worth more than those that are outdated. Appraisers give the most weight to big-ticket updates, such as remodeled kitchens and bathrooms or home additions.
• The home's major systems: Appraisers want to make sure the roof is in good condition, the HVAC system is functioning properly, and the home has working electric and plumbing. While they don't do a full inspection, they keep their eyes out for obvious problems like signs of a water leak.

Homeowners don't have to do much to prepare for a house appraisal, but they should make sure the home is clean and free of clutter that could make seeing its features more difficult.

How Long Does a Home Appraisal Visit Take?

Home appraisers are usually at a home for a few hours at most, although larger or unique homes with many features can take longer to appraise.

If the appraiser has difficulty scheduling a visit with the homeowners or faces other problems, such as being unable to enter due to unsecured pets or uncooperative tenants, the process can take longer.

What Hurts a Home Appraisal?

Anything that negatively impacts a home's fair market value -- the amount a buyer would be willing to pay for it -- will hurt the home's value in an appraisal. Some factors are:

• Structural problems
• Major systems not working properly
• Outdated features
• Deferred maintenance

How to Prepare for a Home Appraisal

If you own a home that is being appraised, there are a few things that you should consider doing to get the property ready before an appraiser comes, such as:

• Cleaning the inside and outside of the home. Your home might not appraise as highly if it is dirty, so make sure you dust, clean the bathrooms and counters, and do your best to make it look inviting.
• Making minor repairs. Deferred maintenance can be a red flag about a home's condition, so make minor fixes like repairing leaky faucets or broken door handles.
• Making sure everything is accessible. Clear clutter that could make it hard for the appraiser to see features, and make sure all of the rooms of the home can be accessed.

Can a House Appraisal Be Disputed?

Sometimes a home appraisal comes back at a lower value than expected. This creates an appraisal gap, which is the difference between the market value of the home and the amount the buyer is paying.

An appraisal gap can complicate a home purchase because it affects the home's loan-to-value ratio. That's the ratio of the amount borrowed versus the fair market value of the home. If the home value comes in too low, you may not meet the lender’s maximum LTV ratio.

If a buyer is purchasing a $500,000 home with a $50,000 down payment, and their lender allows a max 90% loan-to-value ratio, the buyer has a serious problem if the home appraises at $425,000. The lender would only loan the buyer 90% of the $425,000 fair market value, or $382,500.

Even with the $50,000 deposit, the buyer would be short and would need to bring another $67,500 to the table. Most buyers can't and won't do that, so buyers often make their offer contingent on (or conditioned upon) a satisfactory home appraisal.

It's sometimes possible to appeal the valuation and ask the appraiser to reconsider the estimate of the home's fair market value, but this isn't always successful.

Appraisals can also come in higher than anticipated, but this usually won't cause problems for a home sale because the buyer and seller already have an agreed-upon price.

Still, an appraisal is a high-stakes part of the home buying process, and one that could lead to a deal falling apart if the appraised value comes in too low.

Home Appraisal FAQs

Still need to know more? Here are some additional details about home appraisals that go beyond the definition.

How Much Does a Home Appraisal Cost?

The cost of a home appraisal varies but is usually around $5300 to $7500. Home buyers usually cover the fees for a home appraisal, which are often paid at closing as part of the closing costs.

What's the Difference Between a Home Appraisal and a Home Inspection?

A home appraisal is conducted by a licensed home appraiser and is intended to determine a home's fair market value. An inspection is conducted by a licensed inspector and is intended to identify problems with the home's condition, such as a pest infestation or a broken air conditioner.

While appraisers also look briefly at major systems and consider a home's condition, that's just to determine if there is a problem that affects the home's value, not to give the buyer details on potential future repair costs.

How Long Is a House Appraisal Good For?

Most home appraisers are good for 90 to 120 days, depending on the appraisal type and the lender's policy. Appraisals are not good for very long because market conditions can change quickly. If more than a few months have passed, you may need a new appraisal or pay to update the old one.

Do You Have Questions About a Home Appraisal?

Buyers and sellers need to understand the role a home appraisal plays in real estate transactions. Freedom Mortgage can help you learn more about how an appraisal will affect your home purchase and answer any other questions you may have about the process. Reach out today to get answers and get started on getting a home loan.