Timing and Importance of Home Appraisals in the Mortgage Process

Getting a home appraisal is a standard part of real estate transactions. That’s true whether you’re buying, selling, or refinancing. Mortgage lenders order appraisals to determine the home’s fair market value. The result can influence how much they’re willing to lend to a borrower. The appraisal process may feel overwhelming, but it’s just one of many steps to refinancing or closing a home sale. Here’s what you can expect regarding timing, cost, and how it could impact the mortgage process.

What Is a Home Appraisal?

When someone buys a home, they typically make a down payment and then use a mortgage loan to cover the rest. The property itself serves as collateral – if the homeowner stops making their mortgage payments, the lender can repossess the home. A home appraisal, used to determine a home’s value, plays a vital role in the mortgage process.

How Is a Home Appraisal Different From a Home Inspection?

During the home appraisal process, a licensed appraiser will assess:

• The external condition of the home
• The home’s square footage, number of bedrooms, age, location, and other factors that could affect its current fair market value
• Comparable sales, also known as “comps,” which are recent sale prices of similar properties in the area – comparable properties and local market conditions can affect the home's value.

A home inspection is much more thorough. A licensed home inspector will closely examine the roof, heating and air conditioning units, plumbing, electricity, and other major systems. Although mortgage lenders generally don’t require home inspections, buyers typically order them to ensure there are no unwanted surprises ahead.

How Does the Appraisal Fit into the Loan Process?

If an appraisal finds that the home is worth less than the sale price, the lender is at risk. As a result, they may reduce the amount they’re willing to lend to the buyer. Remember that the property serves as collateral, so mortgage lenders want the home’s value to meet or exceed the purchase price. If you want to refinance or purchase a new home, your lender will initiate an appraisal to ensure the home’s worth aligns with the loan terms. A low appraisal could complicate the mortgage process.

If the buyer has an appraisal contingency in their contract, they could back out of the deal if the home is found to be worth less than the purchase price. Buyers who still want to move forward with the sale will likely have two options:

• Renegotiate a lower purchase price with the seller
• Make a larger down payment to cover the gap between the purchase price and the loan amount

What Are the Long-Term Implications of the Appraisal?

Again, the appraisal determines the fair market value of a home. If you end up buying the house, the appraisal amount and your purchase price could affect your resale price down the road. It’s important to note that the appraisal value is different from the assessed value. An assessment is what determines the homeowner’s property taxes. The more the home is worth, the more you can expect to pay in taxes. Local jurisdictions determine tax rates and assessments.

When Is a Home Appraisal Ordered?

When a buyer makes an offer and the seller accepts it, the mortgage lender orders an appraisal from an appraisal management company, which sends a licensed appraiser to undertake an objective and unbiased assessment of the property. If the lender has a heavy workload, there could be a delay in scheduling the appraisal, but once it has been ordered, the appraiser will typically contact the buyer fairly quickly to get something on the calendar. While the appraisal itself only takes up to a few hours to complete, it can take one to two weeks to produce the report.

What if the Appraisal Report Comes in Low?

It’s wise to review the report closely if the home has a low appraisal. According to the Federal Deposit Insurance Corporation, the report may:

• Include errors
• Exclude important information about the property
• Contain biased information.

You can ask the lender to reassess the valuation if you suspect any of these factors. If you have any factual information to support your case, be sure to include it. That might be photos that show home updates or improvements you think should increase its value or comps from similar homes nearby that sold for more than the appraisal amount. Seeking a second home appraisal could render a different result.

According to the FDIC, If you hit a dead end and suspect foul play—like lending discrimination—you can file a complaint with the U.S. Department of Housing and Urban Development. You can also file a separate complaint with the Consumer Financial Protection Bureau if your lender hasn’t adequately addressed your concerns.

How Much Does a Home Appraisal Cost?

While mortgage lenders generally require and order home appraisals, it’s usually the buyer who covers the cost. The closing costs often include the appraisal fee. According to HomeAdvisor, the typical price range for a home appraisal is $313 to $423.

How Can Borrowers Prepare for an Appraisal?

Before making an offer, buyers can work with their attorney, Realtor ® or real estate agent to ensure that an appraisal contingency is in place. This can protect buyers from being locked into a home sale after a low appraisal. Buyers can also ask the lender if a second appraisal is possible if they’re unhappy with the initial report.

How Can Homeowners Can Prepare for an Appraisal?

If you hope to refinance your home loan, your lender will likely order an appraisal. Sellers can expect the same after accepting an offer from a potential buyer. Be sure to notify the appraiser of any home upgrades you’ve made that could potentially increase its value. Home improvements such as repairing an old roof might result in a higher appraisal amount.

A higher property value could also lead to a lower loan-to-value ratio for those refinancing. (This compares the amount you owe on your mortgage to your home’s appraised value.) If you’ve been carrying private mortgage insurance, you may have enough equity to drop it.

The Bottom Line

Whether you’re in the home-buying process or looking to refinance or sell your home, a property appraisal usually comes with the territory. Gearing up ahead of time can make for a smoother real estate transaction.