You’ve found the house you love, put in a good offer and it was accepted. If you’ve applied for a mortgage, the next step is to undergo a comprehensive appraisal of its worth.
And be warned: An unfavorable home appraisal can squash a real estate deal. Here, realtor.com offers insight into how the home appraisal process works.
Appraisals estimate a home’s value with fresh eyes
You and the sellers might have agreed on a price, but that doesn’t mean it’s a done deal. You’ll need a home appraisal to obtain a mortgage because the home serves as collateral for your lender. If for some reason you are unable to make your mortgage payments, the lender will have to foreclose on your home and sell the property to recoup its costs.
So, your mortgage lender will have to know the value of your home before handing over any funds. While the home appraisal process is somewhat similar to getting comps—as you did to determine a fair price—the appraiser delves in deeper to determine the home’s exact value. An appraiser will investigate the condition, square footage, location, and any additions or renovations. From there, the home will be appraised to determine its value.
The appraiser also might evaluate the current real estate market in the neighborhood to help determine the value of the property. The lender or financing organization usually will hire the appraiser. Because it’s in the best interest of the lender to get a good home appraisal, the lender will have a list of reputable pros to appraise the home.
Whoever takes out the mortgage pays for the home appraisal, unless the contract specifies otherwise. Then the buyer pays the fee in the closing costs. If a seller is motivated, he may pay for the home appraisal himself to back his asking price, which benefits the buyer by reducing closing costs.
You’ll get a copy of the home appraisal, too
An appraiser sets out to determine if the home is actually worth what you’re planning to pay. You might be surprised by how little time that takes, with the appraiser likely entering and exiting the home in 30 minutes. An appraiser doesn’t have the same job as a home inspector, who examines every little detail.
While they’ll pay particular attention to problems with the foundation and roof, the home appraisal process includes noting the quality and condition of the appliances, plumbing, flooring, and electrical system. With data in hand, they make their final assessment and give their report to the lender. The mortgage company is then required by law to give a copy of the appraisal to you.
Appraisers work for your lender—not you
As the buyer, you’ll be paying for the home appraisal. In most cases, the fee is wrapped into your closing costs and will cost around $300 to $400. However, just because you pay doesn’t mean you’re the client. The client is the lender rather than the buyer, which ensures that appraisers remain ethical. In fact, it’s a crime to coerce or put any pressure on an appraiser to hit a certain value. Appraisers must remain independent.
Appraisers protect buyers from a bad deal
The home appraisal process is meant to protect you (and the lender) from a bad purchase. For example, it’s usually fine if the appraisal comes in higher than your asking price. Of course, the sellers could decide they want more money and would rather put their home back on the market, but in most cases, the deal will go through as expected.
If your appraisal comes in lower than what you offered, this is where things get tricky: Your lender won’t offer more money than the appraised price. So, if you and the sellers agree on $125,000 but the appraisal comes in at $105,000, it creates a $20,000 shortfall.
A curveball appraisal isn’t necessarily the end
If your appraisal comes in low and your contract with the seller was contingent on an appraisal, you could walk away and have your earnest money returned. If you prefer to buy the home anyway (or waived your appraisal contingency), there are some other paths you can pursue:
- Come up with the cash to cover the difference between the appraisal and offer price.
- Ask the seller to cover the difference.
- Challenge the appraisal, and pay for a second opinion.
Keep in mind, though, that your new report could come out identical. Also know that if you do choose to walk away, that’s actually good news because the appraisal kept you from paying too much for your home.