What Is a Home Appraisal?

A home appraisal is part of many transactions involving the purchase or sale of a home. It is a way to determine the fair market value of the home and for the lender to decide how much it’s willing to lend. While the lender typically orders the appraisal, the results—a detailed report prepared by a professional appraiser—can be used by both the buyer and seller to ensure that they’re getting a fair deal.

What Is a Home Appraisal?

A home appraisal is a report on the estimated fair market value of a home. Whenever you take out new debt to finance the purchase of a home, to refinance your mortgage on an existing home, or to receive a home equity loan, your lender may order an appraisal.

Even if you’ve already had an appraisal on your home, you may still be required to get a new appraisal to account for changes in the home’s value or of comparable homes that have sold nearby. 

The appraisal will be performed by an independent licensed or certified expert who must follow general standards in determining the home's value. The expert will share a copy of the report with your mortgage lender, who is required to share it with the borrower if they request it. However, note that appraisals can expire; if the sale doesn’t close within four months of the original appraisal, a new appraisal may be needed.

The Home Appraisal Process

The home appraisal process begins when the borrower asks their lender for a mortgage, refinance, or home equity loan. If the lender decides to extend you the loan, they’ll order an appraisal.

Steps Involved in a Home Appraisal

First, the lender will order a home appraiser, and then the borrower will need to schedule an appointment with the appraiser. On the date of the appointment, the appraiser will come to the home and may spend a few hours there.

After the on-site visit, the appraiser will need time to research the area and prepare their report. This should take several business days, after which they’ll have up to three business days to deliver a copy of the report to the applicant. In the meantime, the lender will also review the report.

Cost of a Home Appraisal

The borrower is usually required to pay all appraisal costs, and the amount will appear on their loan estimate in addition to other closing costs and fees.

According to Zillow, a home appraisal costs about $400, but the cost fluctuates between states and even between loan types. Appraisals for government-backed loans cost about $750 on average but with significant differences for VA loans (about $500 to $1,500) and USDA loans (about $775). 

The most common type of home appraisal for a conventional loan, the uniform residential appraisal report (URAR), costs roughly between $300 and $400.

Factors That Influence Home Appraisal Value

Several factors the appraiser considers can influence the home’s fair market value. Most importantly, the appraiser will compare the selling prices of comparable homes (or “comps”) nearby, adjusting for differences like the number of bedrooms and bathrooms.

The appraiser will use several data sources to understand the market. According to the National Association of Realtors (NAR), these could include county and municipal records as well as the MLS, a private database of listings and sales.

Other factors include the location and size of the home, including the lot size; the home’s age and condition, including any upgrades or improvements made to the home; and special features of the home, like a pool.

Finally, the lot itself will be considered, including its topography, landscaping, and any easements or unsightly external structures like power lines.

How Market Trends Affect Appraisal Value

The appraiser will use recent market trends to determine the most accurate valuation of the home. Their appraisals are subject to basic laws of supply and demand—namely if a particular area has a high demand for housing, the fair market value of a home in that area is likely to be higher. In contrast, low demand may result in a lower appraisal value.

Similarly, if your area has a lower housing supply, the appraiser may determine that the home’s value should be higher, but a supply glut would have the opposite effect.

Components of a Home Appraisal Report

Because the home appraisal report is so critical to the process—its findings can influence your lender to trust you with a higher loan amount—it must include several components. An appraisal that does not include these components or which contains inaccurate or incomplete information may not be sufficient.

Furthermore, because federal regulations govern mortgage lending, via the Fair Housing Act, and lending, via the Equal Credit Opportunity Act, the appraisal report must be compliant with these and other laws, according to the NAR.

The following elements must be present in the home appraisal report:

• The fair market value of the home
• The method of determining market value, such as the sales comparison approach or the cost approach (an estimate of the replacement cost of the home)
• The date the valuation was determined will keep the lender and appraiser compliant.
• A description of the home, including the characteristics described above
• An analysis of the market conditions in the neighborhood

Drilling down further, the report needs to include several exhibits: photographs of the home as well as the comps (for the latter, clear images from the MLS or another listing service are acceptable); an exterior building sketch that includes dimensions of the property and an estimation of the gross living area; and a street map of the area.

How appraisers analyze data to reach a valuation conclusion

The appraiser’s analysis compiles all the data they collected during the process and uses it to develop a valuation conclusion. Starting with the documented values of homes sold nearby, they’ll compare the home under consideration and adjust their estimate based on how the home’s characteristics stack up against the comps.

Importance of Home Appraisals in Real Estate Transactions

While home appraisals are typically used by lenders—in fact, the lender is considered to be the client—they’re useful to all the parties involved in the transaction.

What Buyers Need to Know About Home Appraisals

A home appraisal is usually one of the last steps in the home buying process. Once the buyer has found a home they like and the seller has accepted their offer, then the buyer will need to take out a home loan. At this point, the lender will order a home appraisal.

It’s possible, and even likely, that the appraisal will be higher or lower than the amount that the buyer and seller agreed to. If the appraisal is higher than the accepted offer, this could benefit the buyer, as the difference would become equity in the home.

A lower-than-expected appraisal could jeopardize the transaction and create an appraisal gap. Because the lender will only lend up to the appraised amount, the buyer may need to make up the difference some other way, and if the appraisal gap is wide enough, the buyer may not be able to afford it.

What Sellers Need to Know About Home Appraisals

For sellers, the home appraisal is less important because it occurs after a deal has already been made. As noted above, the exception is if the appraisal comes in significantly under the buyer’s offer, which may affect the buyer’s ability to close on the sale.

However, if you plan to sell your home, getting a home appraisal may increase its value. The appraiser may determine that your home is worth more if you have clear documentation about the repairs and improvements you’ve made to the home, whether to the structure, fixtures, or the overall lot. 

Home Appraisals for Refinancing Homeowners

Homeowners who want to refinance their home will likely need to agree to a home appraisal. The result will determine whether your home has maintained or improved its fair market value, the latter of which could lead to more favorable loan terms.

On the other hand, with a lower-than-expected appraisal, you might not get approved for the refinance, or you might only get approved for a lower amount.

Common Issues and Solutions for Home Appraisals

If there is a significant difference between the home appraisal and the agreed purchase price, the buyer and seller may want to figure out why and try to rectify the issue.

A lower appraisal value can complicate a transaction because the lender will only extend a mortgage for up to the appraised value. If the buyer and seller agree to a purchase price of $400,000, and the appraisal comes in at $350,000, the buyer will need to offer an additional $50,000 to make up the difference from the loan amount. And that’s not including the down payment.

Some other ways around a low appraisal value include:

• The buyer and seller agree to a new, negotiated purchase price.
• The buyer and lender can agree to another appraisal to secure a different valuation.
• The buyer and seller can agree to a seller’s financing arrangement that functions like a private loan for all or part of the sale price.

In addition, if you feel that the low appraisal resulted from an error, you can appeal the decision to your lender. 

Appraisal bias

Appraisal bias occurs when an appraiser bases their assessment of a neighborhood or property on prohibited factors like race and ethnicity. Also known as valuation bias, appraisal bias can result in substantially lower property valuations even when the home is in perfectly good shape.

Appraisal bias can take several forms. It can target the home’s current owner, resulting in an unfavorable evaluation based on that person’s racial or ethnic identity. It can also be introduced when describing the surrounding area, such as by noting the racial demographics of a nearby neighborhood or commercial zone.

Because the borrower is entitled to a copy of the appraisal report, they can appeal the decision if they believe that race or ethnicity was improperly considered.

Appraisal errors

There are a lot of reasons why an appraisal might be flawed. After you’ve reviewed your copy of the report, if you notice any errors that could change the appraiser’s conclusion, you can take the report to your lender and request an appeal. This process, called a reconsideration of value (ROV), accounts for information that was missed or inaccurately recorded by the appraiser.

Lenders aren’t required to grant an ROV, nor are they required to consider a second appraisal even if you pay for it. Suppose you believe that the low appraisal violated federal law, such as the Fair Housing Act’s prohibition of discrimination based on race, ethnicity, religion, sex, national origin, familial status, or disability. In that case, you may be able to file a complaint with a federal or state authority. Direct your complaints about your lender to the Consumer Financial Protection Bureau (CFPB); about violations of your civil rights to the Department of Housing and Urban Development; and an improper or malicious appraiser or appraisal to your state’s real estate appraisal board.

The Bottom Line

If you’ve reached the point of your home buying process when it’s time to get a home appraisal, the process should be almost complete. While an appraisal can make things tricky if its estimate doesn’t align with the purchase price, it can also confirm a high valuation for the home, giving buyers and homeowners a small boost of equity. And while an appraisal will cost extra on top of what you’re already paying, it’s a small price to pay for the financial confidence that comes from homeownership.