If you're in the market for a house, then it's likely that you've heard of something called the "home appraisal." A home appraisal is a critical step in the homebuying process for both the buyer and the lender, because it determines the value of that sizable purchase you are about to make. So, before you fall for a listing your love, it’s important that you understand what the appraisal identifies and the difference between that and a home inspection.
Here are the basics of what you need to know, and how it may impact the purchase of a home:
A home appraisal is an estimate of the value of the property you are purchasing or refinancing. National standards govern not only the format, but the qualifications and credentials of appraisers. An appropriately-licensed appraiser will be selected by the lender, but they are an independent, third-party with no loyalty to either the borrower or the bank. This relationship ensures fairness and objectivity when your property is evaluated.
As part of the appraisal process, the appraiser will conduct and on-site, visual inspection. In addition, they consider factors such as neighborhood, materials, square footage and local market economy and its impact. They may also conduct interviews with homeowners, lenders and others who are knowledgeable about the property. They will compare the home’s sale price against other like-properties recently sold in the area (comps) and inspect certain features to validate that the home meets the criteria established in the purchase offer.
Generally speaking, home appraisals can average anywhere between $300 and $800. This is a one-time fee and may differ depending upon where you live and the type of property you are purchasing. It’s important to understand the associated costs and the range, because paying for the home appraisal is the buyer’s responsibility.
Home appraisals are required by your lender for a few very good reasons. The first is to determine the value of your home.
Most purchase agreements contain a clause requiring that the appraised amount of the home be equal to or greater than the purchase price. This adds some limited protection for the buyer in the event that the home appraises for less than the agreed upon selling price.
For example, it’s not uncommon for buyers to make an offer that exceeds the appraised value of a home when buying in a competitive market, because a higher offer improves the odds of it being accepted by a seller. When the home ultimately ends up appraising for less than the agreed upon purchase price, the buyer has couple of options.
Most commonly, the buyer and seller renegotiate the price of the house. If the seller is unwilling to take a lower offer, more in keeping with the appraisal, the buyer can choose to pay the difference in cash. When this isn’t possible, the buyer could back out of the deal as long as they have written an appraisal contingency into the original offer for the property.
The second reason for conducting an appraisal is to determine whether the home meets the specifications for the mortgage loan type. Each loan program has its own requirements regarding the overall condition of the home and the valuation. An appraisal will determine whether the property meets these standards.
Because an appraisal considers the condition of the home in the valuation, some buyers may think they don’t need a home inspection. In reality, a home inspection is quite different from an appraisal and covers additional facets that are also very important to factor into the buying experience.
Home appraisals and home inspections have similarities. Both are conducted by independent professionals and are paid for by the buyer. More importantly, both take into account the condition of the home.
However, an appraisal is primarily obtained to determine the market value of the property to protect both the lender and the homebuyer from purchasing above the home’s worth. A home inspection provides no valuation of the property, but it more acutely accounts for condition issues.
A home inspection includes an in-depth review of the home to protect the buyer from purchasing a property with serious defects. The inspector will evaluate structural and mechanical components of the home, and even appliances, to identify deficiencies or improvements that should be considered and may need to be mitigated prior to finalizing the deal or closing on the property.
Many buyers include language requiring an inspection, and any subsequent findings, into their purchase contract. In some cases, if the estimated value of repairs crosses a defined threshold, it again allows the buyer to renegotiate with the seller. Most commonly, the seller would agree to finance certain repairs or to reduce the purchase price, but if an agreement cannot be reached, the buyer has the choice to walk away from the home.
The primary point of an inspection is to make the buyer aware of defects and potential hazards before the sale is final. However, an inspection is usually not required by a lender, while a home appraisal is always a key stepping stone in the mortgage process.
When it comes to purchasing your new home, the most important thing to understand about the appraisal process is that it is required by your lender to determine the value of the property and whether it meets the conditions of the loan. The appraisal can protect you from spending more on a property than it is really worth; providing you with peace of mind as you make what may likely be the largest investment of your lifetime.
The articles in this blog are for informational purposes only and not intended to provide specific advice or recommendations. When making decisions about your financial situation, consult a financial professional for advice. Articles are not regularly updated, and information may become outdated.