If you are getting financing from a lender, whether buying, selling, or refinancing a home, one of the most critical steps in the process is the home appraisal. This professional evaluation determines the fair market value of a property, ensuring that buyers, sellers, and lenders have a clear understanding of what the home is worth.
Whether you’re purchasing your first home, refinancing your mortgage, or selling a property, the appraisal can impact loan approvals, pricing negotiations, and financial decisions.
So let’s break down what a home appraisal is, how it works, and why it’s essential in real estate transactions.
What Is a Home Appraisal?
A home appraisal is an unbiased estimate of a property’s value conducted by a licensed or certified appraiser. Lenders use the appraisal primarily to ensure they are not lending more money than the home is worth. It’s worth noting – the appraiser does not work for the lender, they are a neutral third party.
During the process, the appraiser assesses factors such as:
- Location – neighborhood, proximity to amenities, and overall desirability
- Property Condition – age, structural integrity, and upkeep of the home
- Size and Features – square footage, number of bedrooms/bathrooms, and unique features
- Comparable Sales (referred to as “Comps”) – recent sale prices of similar homes in the area
At the end of the evaluation, the appraiser provides a detailed report with the home’s estimated value. This report is then used by lenders, buyers, and sellers to guide their decisions.
Why Are Home Appraisals Important?
1. Protects Lenders from Over-Lending
When a home buyer is using financing (aka takes out a mortgage), the lender wants to ensure the home’s value matches or exceeds the loan amount. If a home is appraised lower than the agreed-upon purchase price, the lender may:
- Lower the loan amount to match the appraised value
- Require the buyer to pay the difference in cash
- Deny the loan if financing the home becomes too risky
Without an appraisal, lenders could issue loans based on inflated prices, increasing the risk of financial loss in case of foreclosure.
2. Ensures Buyers Pay a Fair Price
For home buyers, an appraisal prevents overpaying for a property. If the appraisal comes in lower than the purchase price, buyers have options:
- Negotiate with the seller to lower the price
- Challenge the appraisal if they believe there were errors
- Make up the difference in cash, if they still want the home
Without an appraisal, buyers might unknowingly purchase a home for more than its market value, which could make it harder to build equity or resell later.
3. Helps Sellers Set the Right Price
For sellers, an appraisal can help determine a realistic asking price based on market value. Overpricing a home could lead to:
- A longer time on the market
- Fewer interested buyers
- Possible price reductions over time
By getting an appraisal before listing, sellers can price their home competitively and attract serious buyers.
4. Crucial for Refinancing
When refinancing a mortgage, lenders require an appraisal to determine the home’s current market value. The appraisal helps determine:
- If the home’s value supports the new loan amount
- Whether the homeowner has at least 20% equity to avoid PMI (Private Mortgage Insurance)
- If the borrower qualifies for better loan terms (such as a lower interest rate)
If the appraisal is lower than expected, homeowners may not qualify for a refinance or may need to adjust their loan terms.
5. Protects Against Fraud
Home appraisals help prevent real estate fraud by providing an objective property valuation. Without appraisals, dishonest sellers, buyers, or agents could manipulate prices to benefit themselves, leading to financial losses for buyers and lenders.
How Does the Appraisal Process Work?
1. Lender Orders the Appraisal
If a buyer is financing the purchase, the lender hires an independent appraiser.
If a homeowner is refinancing, their lender also requires an appraisal.
Sellers can order an appraisal before listing a home to set a fair price.
2. The Appraiser Evaluates the Property
The appraiser inspects the home inside and out.
They assess location, condition, features, and upgrades.
They compare the property to recent sales of similar homes (comparables or “comps”).
3. The Appraisal Report Is Issued
The appraiser provides a detailed report with the home’s estimated value. Your loan officer will typically provide this PDF report to you.
If the value is equal to or higher than the loan amount, the transaction moves forward.
If the value is lower, the buyer, seller, and lender must decide how to proceed.
What Happens If the Appraisal Is Too Low?
A low appraisal can create challenges in your transaction! If the appraised value is less than the purchase price, buyers and sellers have several options:
- Renegotiate the Sale Price – The seller can agree to lower the price to match the appraisal.
- Make Up the Difference – The buyer can pay the gap between the loan amount and purchase price in cash.
- Dispute the Appraisal – The buyer can request a review if they believe the appraiser made errors.
- Walk Away – If the purchase agreement has an appraisal contingency, the buyer can cancel the deal. (this is one of the reasons we discussed in 7 Reasons Real Estate Deals Fall Out of Escrow)
Final Thoughts: Why Appraisals Matter
A home appraisal is a critical part of the buying, selling, and refinancing process. It ensures:
- Buyers don’t overpay for a home
- Lenders don’t lend more than a home is worth
- Sellers price their homes correctly
- Homeowners can refinance with accurate valuations
If you’re buying or refinancing, understanding the appraisal process and it’s implications can help you avoid surprises and make informed decisions.
OKAERI 