What is a home appraisal? Everything you need to know

Do you know how much your home is worth? Many buyers use sales price as a starting point, but a home appraisal offers another viewpoint. Mortgage lenders typically require a home appraisal before approving a new loan. The appraised value is used to calculate the maximum amount of funds that may be borrowed for a mortgage or home equity loan.

If you're buying, selling or refinancing, it's important to understand what a home appraisal is used for and the steps you may want to take.

What is a home appraisal?

A home appraisal is the process of placing a value on a property by a state licensed or certified, independent expert. A professional home appraiser follows a set of uniform procedures when assessing the value of a property. Home appraisals are an important part of mortgage approval because lenders will only allow homebuyers to borrow up to a certain percentage of the appraised value of a home. Borrowers seeking a second mortgage or home-equity-based loan will also need a professional appraisal of their home before approval.

Types of appraisals

Some appraisal reports may incorporate a higher level of detail or focus on a specific feature of the property, such as the ability to generate rental income. Knowing the underlying reason for an appraisal may help you determine the type of report required.

• Full appraisal. For this type of valuation, the appraiser uses recent comparable sales, property records and a home visit to prepare their report. The appraiser will assess the property's exterior and also walk through the interior of the house to note any pertinent features that could affect home value.
• Exterior-only appraisal. Also known as a drive-by appraisal, in completing the appraisal the appraiser will conform to the same set of standards as they would for a full appraisal, however information regarding the subject property is obtained from public records. This type of valuation is generally not used for first mortgages.
• Rental analysis. A rental analysis may be added to a full appraisal to determine the potential profitability of a property used for income generation. The final report will estimate the anticipated rent for a home based on comparable rental units in the area, as well as the age and condition of the property.
• Broker price opinion (BPO). An opinion of a property's value given by a real estate broker. This valuation may sometimes support certain types of financing, such as a home refinance. A broker may also give their opinion of a property's value to assist a potential seller. A BPO is not an appraisal.

Appraisals are conducted by independent, licensed professionals who understand real estate valuation within a specific market. Appraisers must understand how to incorporate any differentiating characteristics between properties when it comes to the overall valuation. The appraiser considers a range of items in their evaluation, including:

Relevant data

• The recent sales of comparable properties within the subject's market (known as "comps")
• Features that influence home values, local amenities and schools

Outside the home

• Lot size, utility, and zoning classification
• Condition of the exterior, roof, gutters and downspouts
• Exterior amenities such as decks, pools and patios
• Driveway surface and car storage

Inside the home

• Condition of the floors and walls
• Total above grade living area or square footage
• The number of bedrooms and bathrooms
• Remodeled areas, such as kitchens and baths
• Finished vs. unfinished basement
• Materials used for walls, floors and windows
• Evidence of pests or termites

What's in an appraisal report?

After reviewing all relevant information, the appraiser will form an unbiased opinion of your property's market value. The appraisal report contains the estimated value of your home along with details about your property such as the size of your lot, the number of rooms, and the architectural style.

When you're anxiously awaiting the results of an appraisal, it's helpful to know that report preparation times vary depending on the size and complexity of the property. The U.S. Federal Housing Authority (FHA) notes that the appraiser may devote a few hours to an on-site visit. However, the entire home appraisal process, including research and report preparation, can take several business days.

According to the Consumer Financial Protection Bureau, lenders are required to provide homeowners with the appraiser's findings promptly after the report is completed and no later than three days before your loan closes. Once the lender reviews the report, the amount of the loan can be finalized. If a real estate transaction is delayed, an appraisal could expire. Due to fluctuations in the real estate market, an appraisal may only be valid for a short time, such as 90 to 120 days. Beyond that, you may need to have the home reappraised.

What do sellers need to do to prepare for an appraisal?

Here are some items to take care of before the appraiser visits the property:

• Touch up interior and exterior painting
• Tidy the landscaping by removing any branches or dead foliage from your yard and trimming shrubs
• Paint the front door and spruce up the entryway to enhance curb appeal
• Have receipts ready if the appraiser requests documentation for improvements you've made
• Deep clean the house
• Polish floors or replace worn carpeting
• Repair any damage ahead of the assessment so it won't get cataloged in the final report

Some homeowners may consider purchasing additional furnishings, however personal property items are not considered by the appraiser. Instead, you may want to spend your time and money on ensuring your home appears well-maintained. Taking care of minor repairs won't just affect your comfort or the aesthetics of your property, it will also help you get the most accurate appraisal possible.

How much does a home appraisal cost?

While an appraisal is required by the lender, the buyer generally covers this cost. Expect to pay between $350 to $600 for a full home appraisal, according to HomeGuide. An exterior-only appraisal may cost less while an appraisal for a government loan, such as an FHA mortgage, may be priced higher than average due to additional requirements. Appraisal costs also vary based on the size of the home, its location and any conditions or features that may require additional time and effort to value.

How long does an appraisal take?

While the appraiser may spend up to a couple of hours or less at your home, they must also do research and report preparation. Of course, the first step is getting on the appraiser's busy schedule. Ask your lender when an appraisal is ordered in the loan process to make sure you have time to prepare. If you have not received a call from the appraiser as expected, follow up with your lender or reach out to the appraiser to confirm the timing. After the appraiser visits, plan to check in with your lender within a week or so to ask if they've received the final report.

Difference between home appraisal and home inspection

When you're entrenched in the home buying or selling process, you may hear about both an appraisal and an inspection. Appraisals and inspections are necessary components of a real estate transaction but have different purposes, tasks and types of reporting.

Purpose

• Appraisal. A certified home appraiser evaluates the overall value of a property in relation to the surrounding real estate market.
• Inspection. A home inspector is engaged to perform a visual inspection of a property to identify potential issues or defects.

Process and tasks involved

• Appraisal. The appraiser tours the home, evaluates sales of similar homes in the area and examines property records to provide their value assessment. Appraisers may also measure the income-generating potential of a home if used as an investment property.
• Inspection. The inspector typically performs a visual review of the home's major systems, including the heating, plumbing, cooling, and electrical systems. They will also inspect any readily visible areas of the home's foundation, exterior, living areas, basement and attic.

Reporting

• Appraisal reports may be used by one or more of these parties to a real estate transaction:
  • Lenders use a home's appraised value to set loan parameters.
  • Municipalities and towns rely on home appraisals to calculate property taxes.
  • Buyers will request a recent home appraisal to ensure they're not overpaying for a property.
• Inspection reports are typically used by these parties:
  • Buyers will inform the seller that they wish to perform a home inspection before closing. If the inspection report identifies any areas of concern, the buyer may ask the seller to make repairs, renegotiate the sales price or terminate their offer if an inspection contingency is included in the agreement of sale. Experts recommend that homebuyers find and pay for their own inspection to guarantee that they receive an objective, unbiased report.
  • Sellers will sometimes have their home inspected before listing their property, particularly if they've lived there for a long time. This allows them to get a jump-start on making any necessary repairs to improve the marketability of their home.

How do I select an appraiser?

Due to federal regulations, homebuyers, sellers and realtors don't choose appraisers if the process is part of a mortgage transaction. Instead, lenders contact an independent third-party organization that will select an appraiser from a database of licensed professionals. This ensures that the appraiser is qualified, independent and unbiased.

If a homeowner needs to arrange an appraisal, they can perform a search using a professional organization or ask for a referral from a real estate professional or lender. Many people also ask trusted friends and family for referrals or look at recommendations online. Before hiring an appraiser, always ask if they are certified and ask about pricing. It may be helpful to compare several options before making a final selection.

Can I appeal an appraiser's report?

If you disagree with the appraiser's findings, first check the report. After all, appraisers are human, and we all make mistakes.

Sometimes, homeowners believe the appraiser's valuation of their home is inaccurate you can appeal the results by requesting a "reconsideration of value."

Because appraised home values affect real estate transactions, it's important for the numbers to be accurate. When an appraisal comes in lower than expected, the buyer may not qualify for the mortgage they need, or they may be asked to increase their down payment. This happens because the lender reduces the amount of the loan based on the appraisal report.

Market price vs. appraised value

An appraised value can deviate from the market price of a home due to a number of reasons. While the appraised value is viewed as an objective, fair value of your home based on internal and external characteristics, the market price is simply the amount someone is willing to pay that is accepted by the seller.

An appraised value is used to ensure that a home purchase price is justified by the condition and type of property changing hands. Alternatively, market value is driven by ever-changing factors like supply and demand, the area's amenities or even the school district.

Ready to find your home sweet home?

If you're thinking about dipping a toe into the real estate market, it's important to understand the purpose of a home appraisal. For buyers, the appraised value of a home can ultimately influence the amount of your mortgage. Sellers can use an independent home appraisal to help justify their asking price.

Starting the homebuying process? Learn more about your home loan options with Citizens.