A house appraisal usually occurs after a seller accepts an offer on a home and before closing on the sale. It often follows an inspection; there’s no need to pay for an appraisal if there’s something wrong with the home. In most cases, the buyer pays the fee for the appraisal at closing. In some cases, they may be able to get the seller to pay for it. If you’re a buyer or a seller faced with this expense, you may wonder why you have to get an appraisal and pay the fee. Learn more about the homebuying process to help you budget and plan for your next home purchase or sale.
Four Reasons for Appraisals and Fees
There are several reasons for appraisals. They are designed to benefit all parties involved.
They Give Lenders a Loan Guarantee
When you take out a mortgage loan, the property serves as collateral for the loan. If you stop making payments, the lender can take possession of the property. They may sell it and use the sale proceeds to pay off your debt. Appraisals prove to lenders that the sale price of a home aligns with its value. This assures the lender that the value of the property securing the loan is sufficient to allow the lender to recoup its losses in the event of a default. By knowing the estimated value of the home, lenders can extend a loan of a reasonable amount to buyers. That benefits the lender by enabling them to recover the money upon the sale of the home in case the buyer defaults and the home goes into foreclosure. Suppose a lender granted a buyer a loan of $400,000 on a home with a market value of only $200,000. Then, the buyer defaulted on the loan. The lender would find it difficult to recoup the loaned amount when reselling the home in foreclosure. Appraisals help to prevent this risky scenario and protect the lender’s assets. When lenders reduce their risk, they can (ideally) offer lower rates to borrowers.
They Ensure Unbiased Home Estimates
Lenders don’t visit neighborhoods and look at houses with you. They may not be experts on your local real estate market. The people and organizations lending you money might be thousands of miles away. Your loan might be sold off to investors all around the world. They’ll never inspect the quality of your home’s construction in person, and they can’t be confident that they’ll get their money back. To find out what your home is worth, lenders get an appraisal from an independent professional who is not emotionally or financially involved in the deal.
They Can Keep Buyers From Overpaying
Even though an appraisal is a lender requirement, the buyer assumes the house appraisal cost unless they negotiate for the seller to pay it. The appraisal fee accounts for the appraiser’s time and expertise in evaluating and photographing the property, estimating its value, and preparing an appraisal report. While buyers and sellers may not enjoy spending a few hundred dollars on an appraisal, the fee is small when compared to buying a home. Getting the estimated value of a home allows the buyer to negotiate a fair sale price. They can avoid paying much more for a home than it is really worth.
4. They Keep Sellers From Making Low-Ball Sales
Sellers also stand to gain from appraisals, even if they agree to pay the fee. When sellers know the market value of their homes, they can avoid accepting very low offers from buyers. As a result, they can increase their returns on the sales of the homes. That also helps them avoid seller’s regret.
What Does an Appraiser Do?
An appraiser estimates how much a home is worth. To come up with that number, they need to visit, evaluate, and document the property. That is usually done through a series of steps.
Property Walk-Through
In most cases, appraisers go inside the house to see the condition and features of the interior. Over a period of a few hours, appraisers will take measurements and photos to verify the house’s square footage and other characteristics. These include the layout, number of rooms, property materials, health and safety issues, and recent remodels.
Comparables Review
Appraisers also compare the home to other homes in the area. To do so, they look at recent sales and the characteristics of those homes, such as square footage, number of bedrooms and bathrooms, and location.
Appraisal Report
After visiting properties, an appraiser creates a report detailing the property in question. It includes the appraised market value and those of comparable properties. You’ll receive a copy of that report, usually within seven business days. It’s a good idea to read through it and save a copy for your records.
What Does the Appraisal Value Mean?
An appraisal needs to come in high enough to justify the loan you’re getting. In many cases, that value must match the purchase price on the contract. Again, lenders need to know that there’s more than enough value in the home to get their money back. A loan-to-value (LTV) ratio should be less than 80% to be on the safe side. If it is higher, you may be viewed as a risky borrower, which could mean you’d have to pay private mortgage insurance (PMI) as a result. If an appraisal comes in too low, your loan might not get approved as-is. To buy that home under those circumstances, you have a few options:
Review the appraisal report to find any errors; then, dispute the value. Find a different lending arrangement; for instance, through a smaller loan. Get another appraisal done, and hope for a higher estimate, but don’t expect appraisers to “help” loans go through. Make a bigger down payment to make up the difference. That can help you achieve a better LTV ratio.
What if a house appraises at a value higher than the purchase price? That’s usually not a problem (unless you’re the seller, and you’re asking for too little). Any additional value is additional equity in your home. However, appraisals often come in near the agreed-upon purchase price.
How to Choose an Appraiser
For most loans, your lender will hire an appraiser. That means the fees will depend partly on whom your lender uses. You might not be able to shop around for a less-expensive option. Before the mortgage crisis, some appraisers were accused of inflating home prices to help loans get approved. That was sometimes done at the request of lenders themselves. Mortgage brokers and real estate agents may have had an incentive to choose appraisers who returned the answers they wanted—but not necessarily the most accurate answers. Since then, appraisers have become less willing to “help” deals go through. You can check the credentials of the person who will conduct your house appraisal. Conduct a search by location or license number through the National Registry of Appraisers. If the search reveals pending investigations for the appraiser, raise this issue with your lender to ensure that you will work with someone who is reputable.
