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Understanding home appraisals

What we'll cover

  • What a home appraisal is

  • How your home's value is determined

  • Home appraisal checklist

Buying a home is an exciting experience — but before you can bask in the joy of ownership, you have to tick a few tasks off your list.

One important step to tackle: getting a home appraisal.

A home appraisal provides your lender with an accurate estimate of the house's value. So, if you're in the midst of buying a home or planning to do so soon, you’ll want all of your questions about the real estate appraisal process to be answered.

What is a home appraisal?

In real estate, a home appraisal represents the estimated value of a home as determined by a professional appraiser. When purchasing a home , your lender may require an appraisal of the home you’re pursuing to determine its worth and how much to lend you.

An appraisal may also be required when refinancing your mortgage loan. For example, some loan products, like FHA streamline refinance loan, may not require an appraisal.

Home appraisal process:  How do home appraisals work?

If you are buying a home, after your offer is accepted, your lender will order a home appraisal report. The appraiser will visit the home and make assessments by walking around the property and going inside to take measurements as well as interior and exterior pictures.

In some cases, depending on the program and other criteria, you might qualify for a waiver (allowing you to opt-out of the appraisal process) or a drive-by appraisal, which consists of an appraiser simply performing an external examination of the property. These services may be offered as a convenience but would often be reliant upon the type of loan you’re seeking.

For instance, if you’re applying for a jumbo loan, a heftier obligation solely backed by the lender, it’s more likely a full appraisal would be required to ensure the value of the property.

If you’re seeking a conventional loan from a government-sponsored enterprise, like Fannie Mae or Freddie Mac, it’ll then depend on the agency’s due diligence. This will include a review of your application, a value estimation based on market research, and an assessment of risk, further factoring in your overall objective.

For example, if you were looking to do a cash-out refinance and you had less than 50% equity in the property, the agency would be more inclined to consider it a high-risk scenario and choose to perform a more detailed appraisal. The reason being is that they’ll want to ensure that the property (which would serve as collateral) would enable them to the recoup the loaned amount if you were to default on your payments. The same goes for if you’re a first-time homebuyer. Depending on your equity position, there’s a chance this option could become available to you.

Once the appraiser has reviewed all the details, they'll prepare a formal appraisal report, which includes the home's appraised value along with what the appraiser used to determine that value.

Your mortgage lender will receive a copy of this appraisal report and then provide you with a copy. It's smart to review the appraisal in case you have questions about how the value was determined and to make sure that the determined value meets your expectations. Generally, a house appraisal is good for 90 days – and can sometimes be extended up to six months – which should give you plenty of time to finalize the details of your mortgage.

A home appraisal provides your lender with an accurate estimate of the house's value.

How does a home appraisal determine a house's value?

The appraiser will make his/her value determination by examining the condition of the property and by looking at “comparables.” Comparables are the prices of recently sold homes with similar characteristics, within close proximity of the property. Appraisers use their own judgment and expertise to determine a reasonable home valuation.

What do home appraisers look for?

Home appraisal checklist

Here are some of the most common items appraisers look at when estimating a property's value:

  • Home age and overall condition

  • Layout, design and floor plans

  • Appliances, including their age and condition

  • Construction materials used to build the home

  • Size of the lot

  • Square footage of the home

  • Amenities, including fireplaces, decking, pool, etc.

  • Any updates, improvements or repairs that have been made

Aspects of your home commonly inspected by an appraiser: Quality of roofing, foundation, plumbing, and HVAC; Built-ins and upgrades to the original home; Square footage of the home and size of the lot; Condition of sprinkler system and quality of landscaping; Number of bedrooms, bathrooms, and fireplaces; Overall condition of the house

Are home appraisals different from home inspections?

While your lender might require an appraisal, a home inspection is a separate process that’s typically not required by the lender.

A home inspection does not assess the value of a home but focuses on looking for any potential trouble spots or problem areas that you should be aware of (like water damage, foundational cracks, or an outdated HVAC system) before signing off on a purchase.

You can use a home inspection to determine whether you want to follow through with the purchase. Plus, you can also use any flaws or defects highlighted in the inspection as a bargaining tool when negotiating your offer.

How should I prepare for a home appraisal?

The best way to prepare for the home appraisal is by understanding what’s involved. You might also want to do your own research on the home and its surrounding neighborhood to get an idea of what you think it’s worth. If refinancing, you should make sure the property is in clean and in good condition before the appraiser arrives.

How long does a home appraisal take?

The appraiser will schedule the appraisal based on availability. The day of the appraisal, they could spend about roughly an hour on-site. From there to the preparation of the appraisal report, it will all depend on the appraiser’s workload. The whole process can range from a couple of days to a few weeks, depending on the amount of volume the appraiser is managing.

What does a home appraisal cost?

Home appraisals aren’t free, and it’s important to note that you (the buyer) — not the seller — are responsible for paying the appraisal fee. The average cost  is between $300 and $425 for a single-family home and can be closer to $800 in large cities. Be sure to factor that price into your homebuying and closing cost budget.

Tip:  With a mortgage through Ally Home , we take care of scheduling your appraisal appointment after you pay a $550 deposit toward the total cost of your appraisal (which you can find on your Loan Estimate). If the total cost of the appraisal is less than $550, we’ll refund you. If the total cost is more than $550, you’ll need to pay the difference stated on the Loan Estimate at closing. Your total cost will never be more than $1,415.

What happens if the appraisal comes in too high or too low?

An appraisal report can reveal one of three things:

  • The home’s value is higher than the sales price you and the seller agreed on

  • The property’s value is equal to the sales price

  • The appraisal value is less than the sales price

The first scenario gives you an advantage, as it means you’re essentially getting a deal on the home. The second can give you reassurance you’re not overpaying for a property. But in the third instance, you might find that lenders aren’t willing to grant you a mortgage loan for more than what a property is worth. You’d then have these options to consider:

  • Negotiate the sales price down with the seller

  • Make up the difference with cash out of pocket

  • Walk away

If you’re concerned about these scenarios, you can always discuss them with your real estate agent who is there to help guide you through the mortgage process.

Know your home’s worth

A home appraisal is an essential process to ensure your lender (and you) fully understand your property’s value. After all, you want to make sure you’re getting the most out of your loan and your home.

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