When you buy a home, getting the home appraised is a critical step in the process. A home appraisal is a professional, unbiased estimate of the property’s market value conducted by a licensed real estate appraiser.
An appraisal occurs to protect both you and your lender — you get assurance that you’re paying a fair price for the home, and your lender validates that the property’s value supports the loan amount being requested, thus reducing their financial risk.
This guide explains how appraisals work and what appraisers evaluate when determining a property’s value so you feel comfortable with the process when it comes time for your appraisal.
Considering buying a home, refinancing* your mortgage or tapping your equity for cash? Newrez has loan products to help you reach your financial and homeownership goals. Reach out to one of our loan experts today to explore your options.
What a Home Appraisal Means in Real Estate and Mortgage Lending
A home appraisal is an independent evaluation of a property’s fair market value. The appraiser analyzes the physical characteristics of the property as well as comparable home sales in the area to determine what the property would likely sell for on the open market.
Mortgage lenders like Newrez rely on appraisals to verify that the property is worth as least as much as the loan amount they’re offering you. If the appraiser values the home lower than expected, the lender may adjust the loan terms, request a larger down payment or decline the loan entirely.
Newrez often requires appraisals for:
- Home purchases
- Mortgage refinances
In some instances, Newrez may require an appraisal for:
- Newrez Home Equity Loans
- A Newrez Home Equity Line of Credit (HELOC)
In mortgage lending, the appraisal helps ensure that the loan-to-value ratio is in line with underwriting guidelines. Certain loans, though, only require a drive-by appraisal instead of a full interior and exterior appraisal.
Appraisals might also be requested for other purposes such as:
- Property tax appeals
- Estate settlements or divorce proceedings
Why Lenders Require a Home Appraisal
Lenders use appraisals as a safeguard against lending a borrower more money than the property is worth. Because the property itself serves as collateral for the mortgage, confirming the property’s value protects the lender in case you default on your loan.
For the lender, the appraisal verifies two key factors:
- The property has sufficient market value for the loan amount
- The condition of the home meets lending standards
Without an appraisal, the lender would face greater risk when financing a home loan, which is why nearly all mortgage programs require one.
How the Home Appraisal Process Works
The home appraisal process follows a series of steps in order to get to an objective valuation of the property.
Step 1: Lender Orders the Appraisal
Once you apply for a loan to finance a home or refinance a property that you own, the lender will often order an appraisal through an independent appraiser or appraisal management company. Federal regulations mandate that appraisers are independent from lenders to make sure valuations are unbiased.
Step 2: Appraiser Conducts a Property Inspection
The appraiser schedules a visit to the property to conduct a physical inspection. During this inspection, the appraiser evaluates:
- The home’s square footage and layout
- The number of bedrooms and bathrooms
- The property’s condition and structural integrity from roof to foundation
- The home’s systems such as HVAC and plumbing
- Any upgrades or renovations
- Exterior features such as garages, decks and landscaping
- Lot size and land characteristics
The appraisal may be quick or may take several hours, depending on the size and complexity of the property.
Step 3: Comparable Sales Analysis
After inspecting the property, the appraiser will research recently sold homes in the same neighborhood that are similar in size, condition and features. These comparable properties are commonly referred to as “comps.”
The appraiser makes adjustments based on the differences between these “comps” and the property being appraised. For example, the appraiser will adjust if a comp has a two-car garage and the subject property does not, or if one has an updated kitchen and the other does not.
Step 4: Market Evaluation
The appraiser will analyze local real estate market trends such as:
- Recent sale prices
- Area housing supply and demand
- Economic conditions impacting prices
Then the appraiser reaches a conclusion about whether local property values are rising, stable or declining.
Step 5: Final Appraisal Report
After completing their analysis, the appraiser produces a detailed report that includes:
- The home’s estimated market value
- A description of the property
- Photographs and property measurements
- Comparable sales data
- Any adjustments made during valuation
The lender will review this report before continuing the loan approval process.
Key Factors That Influence a Home’s Appraised Value
Appraisers evaluate many factors when determining a property’s value. While each appraisal is unique, several common variables are likely to impact a property’s final valuation.
Property Size and Layout
The square footage of the home, as well as the number of rooms and overall layout, usually affect the property’s value. Appraisers typically look for homes with similar living space when selecting and evaluating comps.
Home Condition and Maintenance
The physical condition of the property can have a major impact on valuation. Appraisers review the structural integrity and visible maintenance of:
- Roofing systems
- HVAC equipment
- Plumbing and electrical systems
- Foundation condition
- Windows and insulation
If you keep your property well-maintained, it may receive a high valuation than if it hadn’t been kept up.
Renovations and Upgrades
Home improvements can increase a property's value if they enhance functionality or modernize the home. High-value upgrades commonly include:
- Kitchen renovations, like new countertops, new cabinetry and modern appliances
- Bathroom remodels such as upgraded fixtures and tiling
- Finished basements
- Energy-efficient improvements
- Roof replacement or major system upgrades
However, not all renovations provide equal returns, and some luxury upgrades may not fully translate into higher appraisal values. If the work is only cosmetic or is poorly done it may not add to the home’s value.
Comparable Home Sales
Recent sales of similar homes are a critically important benchmark used by appraisers. These comparable properties must generally meet several criteria:
- Located within the same neighborhood or nearby area
- Sold within the last three to six months
- Similar size, condition and design
If recent comps have lower sale prices than your property’s purchase price, the appraisal may come in below expectations.
What Happens if a Home Appraisal Comes in Low
When the appraised value of the home is less than the agreed purchase price, it can create challenges for buyers and sellers because lenders won’t finance more than the property is worth, as assessed by the appraisal.
If this occurs, several actions could be taken to resolve the situation:
- The buyer renegotiates the purchase price with the seller
- The buyer increases the down payment to cover the difference
- The seller disputes the appraisal with additional comparable sales
- The buyer requests a second appraisal
How Long a Home Appraisal Takes
The typical home appraisal timeline ranges from several days to one week depending on market conditions and scheduling availability. During busy housing markets, appraisal turnaround times may extend longer due to increased demand for licensed appraisers.
Who Pays for the Home Appraisal
In most mortgage transactions, the borrower pays for the appraisal as part of the loan’s closing costs. The fee is typically paid upfront when the lender orders the appraisal.
Appraisals typically cost several hundred dollars, and the cost may be higher or lower depending on factors such as the complexity of the property, the loan type and the state where the property is located.
Some refinance programs or promotional lending offers may include appraisal fee waivers under specific circumstances.
Appraisal vs Home Inspection: Understanding the Difference
Home appraisals and home inspections serve different purposes in the real estate transaction. Home appraisals are designed to determine a home’s market value, while a home inspection conducted by a certified home inspector serves to identify structural or safety issues inside or outside the home.
Tips to Prepare for a Home Appraisal
If you already own the home being appraised, you can take steps to improve the home’s presentation to an appraiser. Bear in mind, though, comparable home sales and the local market are likely to have a major impact on the valuation.
- Improve Overall Presentation: Clean and declutter the home to highlight the home’s usable space and features.
- Document Home Improvements: Provide the appraiser with a list of recent upgrades, renovations or major repairs.
- Ensure Easy Property Access: Appraisers have to evaluate all the main areas of the home including basements, attics and garages. Ensuring access allows the appraiser to complete a thorough assessment.
- Address Minor Maintenance Issues: Fixing small problems such as leaking faucets, broken fixtures or damaged trim might improve the property’s overall condition rating.
Final Thoughts
Appraisals are an important part of the mortgage process, and they give homeowners, buyers and lenders critical information about the property. For buyers and homeowners, understanding how appraisals work could help ensure smoother real estate transactions and might reduce surprises.
Preparing for your next big step? Whether you’re buying a new home, seeking a refinance or unlocking cash from your home’s equity, Newrez loan experts can help you access great solutions.
Disclaimer
*By refinancing an existing loan, the total finance charges may be higher over the life of the loan.
