Understanding the Appraisal Process

Blog posted On January 25, 2018

Purchasing or refinancing a home will typically require a home appraisal to determine its current value.  The appraisal should be conducted by a qualified appraiser who is licensed or certified in the state and familiar with homes in the area.  Fannie Mae requires an appraisal from an appraiser who has worked with similar properties in the area.  The appraiser operates independently from the buyer and seller to make an unbiased decision. 

An appraisal differs from a home inspection in that an appraiser determines the value of the house and the inspector determines what repairs are needed and what they will cost.  Both the appraiser and the inspector check the conditions of all major systems, like HVAC, and structures, like roofing, in and around the home.  The inspector will report any damages and make repair recommendations, estimate the costs of needed repairs, and in some cases these reports will influence the value of the home.  The appraiser will compare the price of the home for sale with the value of other homes in the area and give the buyer, seller, and lender a detailed report on how the value was calculated.

Appraisal fees generally range from $450 to $750, depending on the market.  In most cases, the buyer will be responsible for the cost of the appraisal.  The final appraisal report is based on the size and condition of the home, the number of permanent fixtures like lights and faucets, details about any renovations completed by a previous owner, notes about the surrounding community, maps and photographs as needed, and the detailed market analysis based on comparable homes. 

In most cases, the appraisal is one of the first steps in the closing process.  If the appraisal value is at or above the contract price, then the transaction can proceed, however if the appraisal comes in below the contract price the buyer has an opportunity to cancel or delay the transaction.  Most buyers and sellers would like the transaction to proceed, so if the appraisal is low this usually gives the buyer a chance to negotiate.  The seller can also request a second opinion with another appraisal.   In the case of a conventional refinance, a low appraisal might prevent the transaction from moving forward.  Other options apply based on the loan program, and the homeowner should consult a real estate professional for further information.

Sources: Investopedia, PennyMac