A component of virtually every mortgage process is the appraisal - an estimate of the value of the home you are purchasing. In most types of mortgages, some sort of an appraisal is required - you simply cannot secure a loan without it.

What An Appraisal Entails

An appraisal is, simply, an "opinion of value" by a professional appraiser who visits the home and inspects the size, condition, quality and function of the home. The appraiser will generate a detailed report and will generally use comparisons to the sale prices of similar homes in the area to determine a value of the home that is being appraised - known as the "subject property. Comparisons can be made to square footage, appearance, amenities and overall condition.

An individual home's value can be adjusted up or down in relation to what properties are actually selling for in the neighborhood. For example, a home with 4 bedrooms will generally carry a higher value than a home - in the same area and in roughly the same condition - with only 3 bedrooms. A home that needs exterior painting will carry a lower value than a similar home that has been recently painted.

Why An Appraisal?

A professional appraisal protects both the lender--so they don't lend too more than a property is worth--as well as they buyer--so they don't PAY too much. If a buyer gets into the heat of the moment and offers a silly (too high) price on a home, the appraisal will often flush it out.

Who Does the Appraisal?

The appraisal will be done by a professional appraiser--in virtually all cases one selected by the lender. Unlike a whole-house inspection, where the buyer should accompany the inspector, buyers rarely are present when an appraisal is done. In most cases, the buyer does not even know the appraisal has been done until after it is completed and is in the lender's hands.

Who Pays? How Much?

In the vast majority of loan situations, the buyer pays for the appraisal, generally at the time of the original mortgage application. The appraisal fee usually runs somewhere between $300 and $500.

What if the Appraisal is Too Low?

If the appraisal is lower than the maximum amount the lender is willing to finance, then the loan cannot proceed unless either the seller lowers the price or the buyer increases the amount of their cash down payment, meaning a re-opening of negotiations for the home purchase. Although an appraisals not locked in stone (miscalculations may have been made, for example) and there may be some "wiggle-room" in the appraisal numbers, if the appraisal comes in considerably below what you have offered to pay, your first inclination should be that you are paying too much.

How Do an Appraisal and Inspection Differ?

A whole-house inspection is concerned only with the condition of the home. In an appraisal, condition is only part of a larger picture - including size, neighborhood and general location. Although an appraisal will address the condition of the home (for example, if it needs a new heating system or roof) it should NOT be relied upon as a final determination of the quality of the property. A whole-house inspection is a buyer's best protection against potential defects in the home they want to buy.

Summing Up

Although an appraisal is another cost that must be absorbed by the buyer, it can be money well spent. An investment of a few hundred dollars may prevent a buyer from paying more than what a property is worth. For this reason, we have some reservations with mortgage programs which have recently introduced options for either foregoing a traditional appraisal or obtaining only a "watered-down" (for example, driving by the home only) one--especially since the buyer usually has to pay a fee for this service. The $300 to $500 fee for a full appraisal could prevent paying thousands of dollars too much for a home.