The Home Appraisal Process
Whether buying a home or refinancing, an appraisal is a significant step in the process. Read on to learn more about what an appraisal is, how the process works, how much it costs and what to do after the results of the appraisal come in.
What Is An Appraisal?
An appraisal is the estimated value of a home determined by an inspection of the property and comparison of recently sold homes in the area to estimate the value.
Before you complete the home buying, selling or refinancing process, it’s required that you first get an appraisal, which gives an estimate of the value of the home in question. The findings from an appraisal determine the amount a mortgage lender will let you borrow for the property. In a purchase transaction, it protects the buyer from paying more than the house is worth. In a refinance, it prevents the lender from giving the homeowner more money than the home is worth.
Real Estate Appraisal Vs. Home Inspection
While both occur before you purchase the home, there are a few differences between an appraisal and an inspection. For one, a home appraisal is required by the lender, while an inspection is recommended but not mandatory. Because of this, you are responsible for finding a home inspector and scheduling the inspection. Meanwhile, the lender will schedule your appraisal for you.
Another way the two differ is in their purposes. An appraisal determines the home’s value, while an inspection determines its condition. Because of this, their processes are different. In the most basic terms, a home inspection dives more into the functional parts of the home, using special equipment to find problems that may not be seen by the naked eye. An appraisal does a more surface-level review of the home, along with research on similar, recently sold homes in the area. These homes are known as comparables, or “comps.”
Who Appraises The Home?
Appraisals must be conducted by a licensed, third-party appraiser who has no connection to the buyer, seller or lender. That way, all parties can be sure the determined market value is fair, unbiased and free of any influence from any party that could benefit.
The lender usually orders the appraisal, but the borrower is the one who pays for it. The appraisal fee is an upfront, out-of-pocket expense that will not be refunded if either party fails to move forward with the sale.
How Much Does A Home Appraisal Cost?
Most appraisals cost about $650-$700 here in Chaves County.
The Home Appraisal Process
Before the lender can order the appraisal, you must put an offer in on the home, have it accepted and sign a purchase agreement. After that, the appraisal process can begin, starting with the lender ordering the appraisal.
Once the appraisal is ordered, an appraiser will come to inspect the home. Depending on the type of loan you get, they will inspect certain parts of the home for specific reasons. They’ll inspect the home to learn more about its features, to ensure things like heat and electrical are working properly and that there are no safety issues. Certain loans, like FHA loans and VA loans, may have more specific appraisal criteria than others since many of the issues they find during the appraisal must be completed before the buyer moves in. We’ll discuss some of the appraisal criteria for different loans later in this article.
Once the appraiser completes their inspection, they will review comps to come up with the fair market value of the home. The appraiser will create a report that should contain a detailed description of the property, including its condition and its basic and unique features. The report may also include general data on the market and the location of the home, other properties used as comps and information that supports the appraiser’s findings and final valuation. You will receive a copy of the report for your own records.
If the home appraises at or above the purchase price, the loan will be processed as usual. If the home is appraised lower than the agreed-upon purchase price, more steps will need to be taken since the lender cannot lend more money than the home is worth. We will discuss what you can do if this happens further in blog post.
After the appraisal is done and the purchase price is officially set (either by continuing on in the process of renegotiating), the lender will finalize your loan terms. You’ll receive a Closing Disclosure that details your down payment and closing costs and then you’ll close on your loan.
If this all sounds like too much hassle, there may be a way to bypass the process altogether, but this doesn’t happen often. In some rare cases, usually when working with Freddie Mac and Fannie Mae, it’s possible to skip the appraisal process and use a waiver.
Home Appraisal Checklist: What Do Appraisers Look For?
The appraiser’s job is to assign a total, fair market value to the property. In order to do this, they need to look for certain things that can affect the price or impact the lender’s decision to loan you money for the home. These are:
- Health and safety hazards
- Structural integrity of the home
- The condition of the home
- Upgrades or improvements
- Visible defects
- Any conditions set by the lender
Appraisers can order any inspections they feel are necessary, such as a roof, pest inspection or water inspection if there are signs of potential issues. If the appraisal or inspection finds any conditions that don’t meet the lender’s requirements, they’ll have to be corrected before you can move in.
Here are a few things the appraiser looks at on the outside of the home:
- Total land area or acreage of your property
- Condition of the roof and foundation
- Condition of the chimney
- Condition and type of driveway surface
- Home’s curb appeal
- Quality of the landscaping
- Condition of the pool, if there is one
- Type of garage
- Home’s structural integrity
You can expect the appraiser to look at these things when they inspect the inside of the home:
- Amount of livable space
- Number of bathrooms and bedrooms
- Working HVAC system
- Type of basement or crawl space
- Built-in appliance upgrades
- Any lead or peeling paint, but only if the house was built prior to 1979
- Quality of the electrical and plumbing
- Material and conditions of the walls, floors and windows
- Evidence of termites or pests
- Energy-efficient features
- General upkeep of the home
- Permanent upgrades
Keep in mind the appraiser will not consider moveable objects in their assessment. Anything that isn’t nailed down is considered personal property that you can take with you when you move. It is not considered a part of the home.
There are also certain rooms the appraiser may exclude from their measurement of livable space or bedroom count. For example, basements and garages are typically not included in the square footage of the home and a room must have a closet and window to be considered a bedroom.
FHA Appraisal Checklist
FHA home appraisals are slightly different. If you’re looking to get an FHA loan, many repairs must be completed prior to closing. This impacts both the buyer and the seller because the home loan process absolutely cannot progress until a few repair items are completed. Let’s discuss what those are:
- Exposed floorboards and wall studs to be secured
- Chipped or peeling paint, especially lead-based paint if built before 1979, must be scraped and painted
- Water damage must be addressed, including any plumbing, roof or foundation issues associated with the damage
- Holes in the roof or siding must be repaired
- Driveway or sidewalk damage must be corrected
- An outlet within 10 feet of a water source that has only a regular two-prong plug
- A grounded plug or a GFI outlet designed for bathrooms, kitchens, garages and anywhere outside where you need an electrical outlet must be installed
VA Appraisal Checklist
Like FHA appraisals, VA home appraisal inspections have their own standards for acceptable home conditions. In addition to the standard, conditional loan appraisal requirements, VA home appraisals will require:
- Clean drinking water, a water heater and a sewage system
- Working electricity, heating and air conditioning
- Sound roofing
- Sound foundation
- Pest and termite inspection
- Appropriate living spaces, including the bedroom, living room and kitchen
Just like FHA or conventional home appraisal, any repairs or safety or health concerns will slow down and possibly put a halt to the home buying process until they are addressed by either the buyer or seller.
A home appraisal must be completed by a VA-certified appraiser, assigned by the Department of Veterans Affairs.
How You Can Prepare
In addition to checking the exterior and interior condition of the home, the appraiser will also look for anything needing repairs. Here are some spots to check out before your appraisal, and how you can prepare:
- Check your electric garage door opener to make sure it’s working
- Secure a handrail on steps or stairwells
- Secure second-floor doors with decks
- Secure a railing to any and all raised decks
- Ensure all utilities are functional with no safety issues
- Ensure water, electricity and air conditioning are functional
- Address any plumbing issues, roof leaks or stains
- Check for cracks in the walls, ceiling or foundation
- Check for water intrusion through the foundation
- Ensure your roof is sound and has at least 3 years of economic life remaining
This is by no means a complete checklist of repairs that might need to be addressed before a home appraisal. It is, however, a list of the most common issues that may arise either before or during the appraisal inspection.
By addressing any repairs or upgrades before the appraisal inspection, you’ll be better equipped for a smooth home buying process, and possibly, a higher home value.
Your Home’s Appearance
Curb appeal can impact a home’s value, so it’s considered in the appraisal. In fact, the overall appearance of your home can affect the final appraisal value. A home that looks like it’s been taken care of may have a positive effect on the appraiser’s opinion of the condition of the home. If the appearance of the home makes the appraiser feel welcome, comfortable or any other positive emotion, they may actually subconsciously put a higher value on the home. On the other hand, if they are put off by the home’s appearance or find it cold and unwelcoming, they may assign a lower value to the home. To avoid the latter, follow these tips for improving the appearance of your home before an appraisal:
- Mow your lawn, trim bushes, rake the leaves or shovel the pavement to create a clean – and safe – appearance.
- Plant new flowers, lay new mulch and touch up outside paint to quickly update the exterior.
- Add soft touches to the interior decor with blankets or plush throw pillows to add a hint of comfort.
- Declutter the home. Even if it doesn’t change the physical measurements of the home, decluttering can make a room feel bigger and more usable.
- Replace such hardware as drawer handles and doorknobs to add more shine.
- Set your thermostat to a comfortable temperature to increase comfort and showcase how the heating or cooling works.
- Remove any off-putting odors, including garbage, items in the fridge, cooking, dirty laundry or pets.
- Clean the home to make sure the appraiser are seeing every feature in its best light.
Understanding Appraisal Values
An appraisal can make or break a home sale. It can move you to the next step in the home buying process or take you back to the negotiation table. Read on to learn what it means when you get an appraisal value that’s different than expected and what to do.
What Happens When A Home Appraisal Comes Back Higher Than Expected?
When the appraisal comes back higher than expected, it greatly benefits the home buyer. That’s because they’ll pretty much be getting a deal on the home and have more home equity. For example, if the buyer and seller agree on a purchase price of $150,000 and the home is appraised for $165,000, the buyer still purchases the home for $150,000 and automatically moves in with at least $15,000 of equity in the home. And since the lender will be loaning at or less than what the home is worth, the process can continue toward the closing table.
The seller will not know if the home appraised for higher than the asking price. That way, they can’t try to demand more money (which would be in breach of the purchase agreement) or back out of the deal to sell the home for more later. The seller will only know the results of the home appraisal if it comes in lower than expected because it could affect the sale of the home.
How Do I Deal With A Low Appraisal?
A low appraisal can prevent the loan from moving forward or slow down the process because the lender cannot lend more money than the home is worth. This can be a problem if any of the parties involved are relying on this type of financing. If the appraisal comes back low, don’t panic just yet. You may have a few different options, whether you’re buying, selling or refinancing the home. Here’s what you can do:
- If you’re buying the home, you can try to negotiate with the sellers to decrease the price at or near the appraised value.
- As a buyer, you can pay the difference between the appraisal and the selling price out-of-pocket.
- If you’re a buyer, you may choose to walk away from the deal and keep your eye on the house in case the price drops. The owner may have trouble selling the home at a higher price than the appraised value and may drop the price or come back to renegotiate with you.
- If you’re the seller, you can dispute the valuation or order a second appraisal and hope for the best.
- If you’re doing a cash-out refinance, you might be able to lower the loan amount and take less cash out of your home.
Why Does A Home Appraisal Come Back Lower Than Expected?
Plain and simple, a home appraisal may come back lower than expected because the home isn’t actually worth what the sellers are asking. There are several other reasons an appraisal may come in low:
- Bad or outdated comps
- A lack of comps
- An inexperienced appraiser
- Home improvements that didn’t add as much value as originally thought
- Unrealistic expectations of the seller or real estate agent
Sometimes, people make home renovations that they think will increase the value of their home. However, there are certain features and improvements that add more value and some that don’t. A pool is a great example. An appraiser compares your home to other similar homes in the area; therefore, if your home is the only three-bedroom with a new pool, there’s nothing to compare it to. That means the pool doesn’t actually add to your home’s value. In other instances, the pool could make it harder to sell your home or decrease the value because potential buyers see it as more of a burden than a luxury. Some people don’t want to deal with the time and money required to properly run and maintain a pool.
How Long Does A Home Appraisal Last?
A home appraisal is good for a total of 120 days (4 months). If you do not close on your home within that time, you will need to have another appraisal. Some people may be afforded an extension, but only in certain circumstances and only if they’re eligible.
An appraisal has a shorter lifespan because market conditions change. Home sales 6 months ago might be drastically different from those in recent months, especially if the real estate market is volatile.
The Next Steps After A Home Appraisal
After your home appraisal is complete, the appraiser will assign a monetary value to the property based on the findings in the inspection and comparables in your area and then send their findings to the mortgage lender.
Your loan amount will be based on the number that the appraiser assigns to the property, so if they say the home is worth $190,000, your lender will only loan that exact amount. This is unfortunate for the seller if they have the home listed at a higher price, as the lower home appraisal will affect their chances of getting that amount on the home loan.
However, if the home is appraised at or above the asking price, the loan will be processed and you will be able to begin closing on your home.