Between fixed-rate mortgages, Fannie Mae and the FHA, homebuying jargon can be a tough code to crack. One term that will certainly come in handy for buyers, sellers and hopeful refinancers alike is the home appraisal. Regardless of your role, you’ll want to take some time to understand just what this critical step in the homeownership process is and why it matters.
What is a home appraisal?
A home appraisal is “an unbiased professional opinion of a home’s value” (Investopedia, 2021). Appraisals are common in home sales and refinances, and are used to communicate the home’s value to the buyer or lender. Appraisals take into account the condition of the home, its location, features and more.
The home appraisal process
The appraisal process will vary depending on your loan type but, in most cases, begins with an appraisal visit (Forbes, 2020). During the visit, an appraiser will inspect the status of the interior and exterior of the home, review any potential safety hazards, note the number of rooms and any upgrades or renovations. The appraiser will also typically take photos or videos of the home and, depending on the loan type, test utilities and appliances.
After the visit, the appraiser will then research comparable homes with similar characteristics that have recently sold in nearby markets. Appraisers will utilize government records and the Multiple Listing Service (MLS) (National Association of REALTORSⓇ) to compare, contrast and help determine value. Another approach is to create an estimate based on the theoretical cost to build the home today plus the value of the land.
Why home appraisals matter
Understanding the significance of a home appraisal is particularly important for buyers (Investopedia, 2020). If the appraisal is equal to or higher than the listing price, you can likely proceed with your purchase. If the figure comes in lower, however, the purchase could get a bit more complicated. Lenders won’t typically lend borrowers more than their home of choice is worth, so you may need to either use the appraisal as a bargaining chip to negotiate a lower price, get a second opinion from another appraiser or walk away from this particular home.
Sellers should also be aware of an appraisal’s potential impact. Because borrowers can’t take out more than the home is worth, if you receive a materially low appraisal that was competently done, you may need to consider lowering the price of your property accordingly. Unfortunately, certain aspects that are out of your control, including foreclosures or short sales in the immediate area, could affect your home appraisal. If you feel that your home’s value was unfairly influenced by these or similar factors, you may be able to appeal your case to the appraiser if your property is in better condition or, similarly, get a second opinion.
Those refinancing may also need to familiarize themselves with the home appraisal process, depending on loan type. For example, in the case of conventional mortgages, a low appraisal can prevent refinancing. The appraisal amount must be at or above the amount you’d like to borrow for in order to be approved. Refinancing an FHA mortgage, on the other hand, may not require an appraisal through the FHA Streamline program (U.S. Department of Housing and Urban Development). Research your particular loan type to determine whether or not a home appraisal is required when refinancing and talk to a mortgage loan professional who can help you.
Whatever your role in the homeownership process, it’s important to understand the power of a home appraisal. Take some time to get to know appraisal requirements based on loan type, explore property values nearby and, if you’re a current owner, make any necessary upgrades to present your home in its best light. Afterall, this figure can make or break a sale or refinance.
Published on April 12, 2021
