Mortgage 101
November 30, 2021

What is a Home Appraisal?

Whether you’re planning a home purchase or refinancing your mortgage, an appraisal is an important aspect that shouldn’t be taken lightly. Even if you don’t know what one is, chances are you’ve heard the term before. Before you have an appraisal done, be sure you know what goes into one, the difference between appraisals and inspections, and why they matter.

What Exactly is an Appraisal?

An appraisal is an unbiased, third party, professional opinion regarding a property’s true value. The professional who does the appraisal (also known as an appraiser) should be certified or licensed and be familiar with the local area. The appraisal is used to establish whether the property’s listing price is suitable based on its condition, location, and features in comparison to recent sales of similar properties. It often happens during the escrow period, about a week or two before closing.

What’s the Difference Between Appraisals and Inspections?

While both appraisals and inspections are tools used to determine the condition of a property, the processes are very different.

Appraisals are used to determine the objective market value of the property while inspections help to identify issues with the home’s overall condition. An inspector is looking for problematic aspects of the property, such as issues with the foundation, mold, plumbing, or electrical problems.

While inspections are recommended, a home appraisal is required by most lenders. The appraisal protects the lender from providing more money than they might be able to recover in a worst-case scenario, such as a borrower defaulting on their mortgage.

What Goes into an Appraisal Report?

Appraisers typically use the same report for single-family homes: the Uniform Residential Appraisal Report from Fannie Mae. This report covers all the internal and external factors that contributes to the property’s value. In meticulous detail, the appraiser describes both the interior and exterior of the property, the neighborhood, and nearby comparable sales properties.

Some things an appraisal report may include are:

• The home’s amenities and their conditions (garage, pool, etc.)

• The number of bathrooms and bedrooms in the home

• The home’s floor plan functionality

• The home’s square footage with an explanation of how the square footage was calculated

• A street map showing the appraised property and comparable sales properties used

• Energy-efficient features

• Permanent upgrades

• An exterior building sketch including landscaping

• Photographs of the property’s front, back, and street scene

• Front exterior photographs of each comparable property used

Why Appraisals are Important

Appraisals are necessary when obtaining a mortgage because lenders will use the appraised value of a property to determine if your loan amount is in line with its market value.

Lower Appraisals

If the appraisal comes in below the listing price, it can delay the process and potentially lead to a pending sale. If you’re the buyer and an appraisal is lower than the listing price, you may be able to use this to negotiate a lower price with the seller.  

A common reason for a lower home appraisal is its location. The value of the home can be negatively impacted if it’s in an undesirable neighborhood or next to a junkyard or a busy street. Although the location is unmovable, your home’s curb appeal, staying up to date with maintenance and repairs, and keeping the house as clean and tidy as possible can be helpful to increase your home’s value.

Equal or High Appraisals

If the home’s value is the same or more than the listing price, the transaction continues as planned. This outcome benefits the home buyer. Say $150,000 is the agreed upon price. If the home is appraised for $165,000, the buyer still purchases the home for $150,000 and the remaining $15,000 turns into equity.

Now that you know the basics of home appraisals, we hope you’ll feel confident and prepared for yours. Don’t forget, we’re here to help you accomplish your home financing goals and needs. Contact us to be put in touch with one of our Loan Originators to start your journey today.

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