If you’re buying a home and your offer has been accepted, one of the next steps is verifying the value of the home. As part of that process, your lender orders a home appraisal.
It gives you a trained professional’s point of view on the fair market value of the home to make sure it’s in line with the purchase price.
What Is a Home Appraisal?
A home appraisal is an unbiased report on the worth of a house in the fair market, performed by a trained and licensed individual.
Appraisals are needed to ensure the homebuyer, the home seller and the mortgage lender receive the accurate and true value of the real estate in question.
In most residential property transactions you are able to choose your real estate agent and your lender. However, in today’s regulatory world, you don’t get to pick your appraiser. Instead the appraiser must be chosen by the lender to provide a level of independence from the buyer and seller.
In order to ensure that appraisals are impartial, the Appraisal Independence Requirements, or AIR, prohibits a lender’s loan production staff from having direct contact with—or influence upon—any appraisers.
To reduce the risk of violating AIR, lenders now hire appraisers via appraisal management companies. These companies work with many residential appraisers in order to cover a more diverse housing market and to reduce the risk of improper influence.
Who orders and pays for the appraisal?
Your lender orders the appraisal to be performed by a licensed appraiser through an appraisal management company. However, you, the borrower, are typically required to pay for it – outside of escrow. Usually with a credit card.
The cost appears on the Closing Disclosure as part of your closing costs.
What determines a home’s value?
When estimating a property’s value, appraisers consider:
- Comparable properties that have sold recently, especially those that are similar in size and location to the home you are buying. Their sale prices are usually the most important factor.
- General condition and age of the home
- Location of the home, including views or other remarkable features
- Size and features of the home and property, including the number of bedrooms and baths
- Major structural improvements such as additions and remodeled rooms
- Features and amenities such as swimming pools and wood flooring
What’s the difference between an appraisal and an inspection?
An appraiser does not necessarily look for potential defects in the home. That’s the responsibility of the home inspector. You hire an inspector directly if you are purchasing a home and want an itemized report of potential repairs or problems with the property.
The appraiser instead focuses on whether the home’s agreed-upon purchase price is in line with what it is worth.
How Can You Improve Your Home Appraisal Process?
As a buyer, you can make sure that the home appraisal process protects you by taking a careful look at the Final Report of Value. If there are portions of it that you don’t agree with, such as findings that differ from your inspection report, or inaccurate comps, be sure to speak up.
If there is a significant difference between the agreed selling price and the appraised value of the home, your bank may choose not to fund the mortgage and the deal could fall through. Buyers can typically solve this problem by bringing additional “cash to close,” which is essentially increasing your down payment by the difference between the sales price and the appraisal value, or negotiating the sales price.
As a home seller, you will also want to be ready for the appraisal process. Itemize any recent improvements that you have made to the home and complete any planned do-it-yourself projects before the appraisal. Don’t be afraid to highlight the upgrades and positive features of your home to the appraiser.
Appraisals are a very important part of obtaining a mortgage loan. I’d be more than happy to help you learn more about the other steps involved in buying a home so you can navigate them with confidence. Please contact me to find out more about this important step in the home buying process.