Whether you are buying a new home or refinancing your mortgage, a home appraisal is an important component of the transaction. An appraisal usually costs about $200-$600, depending on certain factors such as the size and location of the property. If you are a homebuyer, you will pay for the appraisal.
To help you understand where this expense goes, we will go through what an appraisal is, how it works, and why it is important for the home loan process.
A home appraisal is an objective determination of a property's fair market value. It is done by a third-party appraiser who ensures that the price of the home reflects its location, condition, curb appeal, and more. When we say third-party appraiser, it means that they are not connected to the lender, buyer, or seller.
You also need to understand that a home appraisal is different from a home inspection. A home inspection checks whether a property is in good condition, but it doesn't tell you how much it is worth.
Although a home inspection is recommended, it is not mandatory. But it can inform the seller what they need to fix before closing the deal with a buyer. An inspection would involve checking the condition of the roof, HVAC, plumbing, basement, and garage.
On the other hand, a home appraisal is required by the lender. Not only does it involve checking the condition of a home, but it also includes the size of the lot, the number of bedrooms or bathrooms, quality of the landscaping, upgrades, and other features. Appraisers would also review recent nearby home sale prices.
Your lender orders an appraisal after an offer has been made to the seller. The borrower pays the appraisal fee, which is also included in the closing costs.
During the actual inspection, a licensed appraiser will go to the property for a site visit. The appraiser would then determine the value of a home based on a variety of factors, including:
Once the appraiser finishes their examination, they will make a final estimation of the property's value. Then, they will submit their report directly to the mortgage lender. You can expect the whole appraisal process to take between two days and two weeks.
A home appraisal is important because it benefits the buyer and protects the lender.
As a buyer, an appraisal would ensure that you do not pay more than what a property is actually worth. If the appraised amount is lower than the seller's price, then you can use it to negotiate for a better price. On the other hand, if the appraised amount is higher than the seller's price, then you can be sure that you'll get more when it's time to sell the property.
For the mortgage lenders, an appraisal would ensure that they don't have to lend more than the home's fair market value. It protects them from losses if ever you default on the loan. If the appraised amount is lower than the sale price, and the borrower defaults on the loan, the lender would not be able to sell the property for enough funds to cover the loan.
A home appraisal is a complex process because each home is unique. The outcome will greatly affect your decision to continue with the purchase or look for another property. It also affects the amount the lender will be willing to loan you. So whether you are buying a new home or refinancing your mortgage, familiarizing yourself with the appraisal process can help you prepare for what comes next.