Understanding The Home Appraisal Process | Pennymac (2024)

Home appraisals are a vital component of mortgage lending. See how the appraisal process works and learn how it protects you as a homebuyer.

Financing your new home is a process with numerous steps. The home appraisal is a step that can be particularly confusing to many buyers. Is the value of your home what you and the seller just agreed on? Is it the tax assessment value or what the house last sold for? How is the appraisal different from the inspection I just completed? Here are the answers that you need to get you through one of the final—and most important—steps of the home buying process.

What Is a Home Appraisal?

A home appraisal is an unbiased report on the worth of a house in the fair market, performed by a trained and licensed individual. Appraisals are needed to ensure the homebuyer, the home seller and the mortgage lender receive the accurate and true value of the real estate in question.

In most residential property transactions you are able to choose your real estate agent and your lender, but you cannot choose your appraiser. Instead the appraiser must be chosen by your lender to provide a level of independence from the buyer and seller.

In order to ensure that appraisals are impartial the Appraisal Independence Requirements, or AIR, prohibits a lender’s loan production staff from having direct contact with—or influence upon—any appraisers.

To reduce the risk of violating AIR many lenders now hire appraisers via appraisal management companies. These companies work with many residential appraisers in order to cover a more diverse housing market and to reduce the risk of improper influence.

How Does a Qualified Appraisal Help Me?

An accurate appraisal has the power to protect home sellers, homebuyers and mortgage lenders. Therefore, it is important to make sure that a qualified, independent appraiser evaluates your potential home.

Appraisers and appraisal management companies are licensed by individual states and they are regulated at both the state and federal level. For example, the Dodd-Frank Wall Street Reform and Consumer Protection Act ensures that real estate appraisers make their decisions based on their own knowledge and judgement, without pressure from lenders or other individuals.

Home Appraisal vs Home Inspection: What’s the Difference?

Although the home appraisal may seem similar to the home inspection, the goals of these two processes are very different.

  • The appraiser determines the value of the house.
  • The inspector determines any repairs needed, and their potential cost.
Typical Duties Home Inspector Appraiser
Checks the condition of all major systems and structures in and around the home, such as HVAC and roofing.
May provide repair cost estimates for any damage or latent issues that may influence the home purchase price negotiations.
Checks the prices of recent comparable home sales in the area.
Gives the buyer and lender a report detailing their findings and the repair recommendations.
Gives the buyer, seller, and lender a report detailing how they calculated the value of the home.

What Does a Home Appraisal Cost? Who Pays for It?

While your lender will typically arrange for an appraisal, the buyer is ultimately responsible for the cost. Generally appraisal fees range between $450 and $750, depending on the size and location of your property.

Don’t let this cost stop you from making offers: The home appraisal will only occur after your offer has been accepted by the seller and you have begun to work with a lender to finance your new home. You do not need to complete appraisals on every house you choose to bid on.

What Factors Determine a Home’s Value?

There are several steps taken by an appraiser to determine a property’s value, which include visiting the property in-person and reviewing recently-completed sales of comparable homes. The data gathered by the appraiser during this process is combined and presented to you in a final report of value.

Viewing the Property

The in-person part of an appraisal often takes over an hour, depending on your home size. The appraiser will measure the property's square footage, check the number of bedrooms and bathrooms in your home and compare the findings with housing data provided by local county records to ensure accuracy.

The appraiser also will check the status of the major systems and structure of the house. During a viewing, appraisals usually answer questions such as,

  • Is there water, termite or mold damage?
  • Is the furnace in good shape?
  • Does the plumbing leak?
  • Will any major systems or structures need replacement, such as the roof?

Appraisers will account for many home improvements and upgrades as well. This is perhaps the most confusing area for new buyers and sellers, due to the fact that remodeling and other home upgrades may not have universal value.

For example, a new roof will be desirable to nearly any buyer, but the costs and upkeep of a swimming pool may not be. It’s advisable to put in some research before you begin a home remodeling project to ensure your investment is worthwhile.

Comparables: Evaluation of Similar Home Sales

The next step is for the appraiser to look at comparables, also often referred to as "comps." Comparables are similar homes that have recently sold in the general area or even that specific neighborhood or subdivision. Appraisers look for houses that share similar characteristics with the subject property, such as size, age and architectural style. Comps typically only include homes listed and sold within the past three to six months.

The Final Report of Value

The last step in the home appraisal process is preparing a final report of value. This report will provide you and your lender with a complete property analysis. It will also outline how the appraiser calculated your home's worth. Typically, the final report of value will cover the following items:

  • Size and condition of the house
  • Comments about serious structural problems, like cracked foundations, wet basements, windows that need replacement and roofing that needs repair
  • Permanent fixtures, such as lights, ceiling fans and plumbing, including faucets
  • Details about any home renovations such as updated kitchens, bathrooms or new flooring
  • Comments about the surrounding area, including positive and negative local features
  • Maps, photographs and sketches of the property, both inside and out
  • A detailed current market analysis, including recent sales of comparable homes

How Can You Improve Your Home Appraisal Process?

As a buyer, you can make sure that the home appraisal process protects you by taking a careful look at the Final Report of Value.

If there is a significant difference between the agreed selling price and the appraised value of the home, your bank may choose not to fund the mortgage and the deal could fall through. Buyers can typically solve this problem by bringing additional “cash to close,” which is essentially increasing your down payment by the difference between the sales price and the appraisal value, or negotiating the sales price.

As a home seller, you will also want to be ready for the appraisal process. Itemize any recent improvements that you have made to the home and complete any planned DIY projects before the appraisal. Don’t be afraid to highlight the upgrades and positive features of your home to the appraiser.

Protect Your Investment with an Appraisal

When you are working your way through the complex process of buying a new home, an appraisal can seem like just one more unnecessary hoop for you and the sellers to jump through. However, an accurate appraisal offers information that can help guide you safely through one of the biggest financial decisions in your life.

Understanding The Home Appraisal Process | Pennymac (2024)

FAQs

How soon after an appraisal is closing? ›

The length of time from an appraisal to closing can vary. While mortgage timelines can differ based on individual situations, some lenders estimate that this period typically takes about 30 to 45 days.

What happens if the appraisal is higher than the offer? ›

What happens if the appraisal comes in above the purchase price of the home? You're in a good situation if this happens. It simply means that you've agreed to pay the seller less than the home's market value. Your mortgage amount doesn't change because the selling price won't increase to meet the appraisal value.

What are the main steps in the appraisal process? ›

The steps in the appraisal process are:
  • State the purpose.
  • List the data needed and its sources
.
  • Gather, record and verify the data.
  • Gather, record and verify the specific data, such as site development.
  • Gather, and record and verify the data for each approach.
  • Analyze and interpret the data.

What negatively affects home appraisals? ›

One of the big things that can have a negative affect is the age and condition of the home's systems (HVAC, plumbing) and appliances. If the local market is declining, that'll also hurt your home's appraised value.

Can seller walk away after appraisal? ›

For example, standard contingencies allow a buyer to back out of the deal if the home receives an unexpectedly high home appraisal, an inspection reveals major issues, the house proves uninsurable or the buyer can't secure financing. If the seller's situation aligns with a contingency, they are free to walk away.

Do sellers usually lower prices after appraisal? ›

Do sellers usually lower price after appraisal? It depends. If the difference is small enough, a seller might lower the sale price to reflect the appraised value. They take less than they thought they were going to get, and you get the home for a price you're comfortable with.

Can a seller back out if an appraisal is low? ›

If your appraised value is lower than the agreed upon sales price, you'll have to make up the difference in cash, or cancel the deal.

Do appraisers try to match sales prices? ›

it is important to note that the appraiser's role is not to appraise the property to match a specific sales price or loan amount, but rather to provide an accurate valuation based on market conditions.

What is the last stage in the appraisal process? ›

The last step in this process is the review of appraisal, in which an employee is given report about the performance which mentions the improvement areas. Appraisal is done for various reasons such as for finding out the reasons for bad performance, or for motivating employees towards their work.

How do I prepare for my appraisal? ›

How to complete an appraisal form
  1. 1️⃣ Identify successes or accomplishments. Think about areas or projects where you had a hand in their success. ...
  2. 2️⃣ Jot down the goals you achieved. ...
  3. 3️⃣ Think about things that could have gone better. ...
  4. 4️⃣ List your areas of improvement. ...
  5. 5️⃣ Be clear about the skills you need to develop.
Jun 17, 2024

What happens if an appraisal comes in low? ›

Lenders always use the appraised value to calculate your LTV — not the purchase price. If the appraisal comes in lower than the purchase price, your lender will likely decrease the amount you can borrow. So you'll either have to pay more out of pocket or get the seller to lower their asking price.

What not to tell an appraiser? ›

In his post, he lists 10 things as a Realtor (or even homeowner), you should avoid saying to the appraiser:
  • I'll be happy as long as it appraises for at least the sales price.
  • Do your best to get the value as high as possible.
  • The market has been “on fire”. ...
  • Is it going to come in at “value”?
Mar 25, 2019

What increases appraisal value the most? ›

List of upgrades to increase appraisal
  • Fresh paint. ...
  • Install new garage door. ...
  • Spruce up front door and porch. ...
  • Kitchen and/or bathroom update. ...
  • Freshen up walls. ...
  • Make minor repairs. ...
  • Install shutters. ...
  • Check that everything works. Turn on every appliance and switch to make sure it all works properly.
Jul 10, 2024

Do appraisers care about cleanliness? ›

Does cleanliness affect a home appraisal? While appraisers aim to be unbiased, a messy home might signal neglect and hide potential issues. Though cleanliness may not directly affect the home's value, a messy or cluttered home could prompt some additional questions.

What comes after the appraisal is done? ›

More commonly, though, a home appraisal is being ordered by a lender as part of a residential real estate transaction. As such, the next step that will occur is the mortgage underwriting process.

How long after appraisal does underwriting take? ›

Summary: Average Timeline for Closing
MilestoneTime to Complete
Appraisal1-2 weeks for completion
Underwriting1 to 3 days for initial review
Conditional Approval1 to 2 weeks for additional underwriting review and clearing of conditions
Cleared to Close3 day mandated minimum for acknowledging Closing Disclosure
4 more rows
Jan 10, 2024

Does appraisal mean loan is approved? ›

A lender uses an appraisal not only to assess the value of the property, but also to determine such things as your interest rate, required down payment, and whether you will be approved for the loan.

How long after appraisal is mortgage commitment? ›

How long does it take to get a mortgage commitment letter? It can take 20 – 45 days to receive a mortgage commitment letter from the time the paperwork is submitted.

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