You may find it challenging to add “buying a home” to your to-do list — there’s a lot to think about, from juggling purchase prices to picking the right neighborhood for you. 

We’ll help you streamline the process. 

To start, here’s a quick question: When you’re buying a home, can you guess one of the most important steps in the mortgage process? 

If you guessed an appraisal by a mortgage lender, you’re right. A lender will carefully analyze the results of a home appraisal before you can ultimately purchase a home.  

In this piece, we’ll answer the question, “What is an appraisal?” We’ll also take a look at types of appraisals, why you need an appraisal, appraisal costs, the appraisal process and more.

What is an Appraisal?

Mortgage lenders require a home appraisal — an unbiased assessment by a professional appraisal of the fair market value of the home you’re purchasing. Professional appraisers use various techniques and ultimately produce an appraisal report, a written report based on the appraiser’s findings on a property. It underlines what the bank should loan to purchase the property and the reasons for that determination. The report reveals the amount the property should sell for.

A lender uses an appraisal to determine whether the home you are buying is really worth the amount they’ll lend you to pay for it. An appraisal also protects you so you don’t overpay for a home. 

It’s important to understand that an appraisal is much different than the standard home inspection performed at the beginning of the purchase contract process. 

A home inspection involves a comprehensive examination of a home and its structures. An inspector walks through the home and looks at the foundation, roof, attic, electrical system, plumbing and other items. The inspector can walk you through any issues in the home. As the buyer, you can attend the inspection, but you cannot attend an appraisal. It’s important to note that inspections are optional, while appraisals are not.

Types of Appraisals

Appraisals are done by licensed home appraisers, who determine the current value of a property for a potential buyer. Appraisers can complete several types of appraisals. Below, we’ll walk through a full appraisal, exterior-only appraisal, rental analysis, desktop appraisal and broker price opinion. 

Full Appraisal

The most common type of appraisal, a full appraisal, occurs when a licensed appraiser does a full physical evaluation of a home to determine property value. This thorough examination may include taking photos and measurements (to evaluate square footage of the interior). They evaluate the structure of the home, including general property characteristics, home upgrades and quality of the structures in the home. 

The appraiser will also do a comprehensive walkthrough to inspect the exterior condition of the home. They will take note of the lot characteristics, including easements and encroachments (which both involve using someone else’s land), zoning, special hazards, whether the home sits in a FEMA flood zone and improvements in lights, streets and other conditions that could affect the home’s value. An appraiser also looks at the comps, or the selling prices of similar homes in the neighborhood to determine the fair market value. 

Exterior-Only Appraisal

Sometimes a bank or mortgage company orders an exterior-only appraisal. In an exterior-only appraisal, also called a drive-by appraisal, the appraiser determines the property’s value using an assessment based on the exterior of the property. Exterior-only appraisals also rely on recent Multiple Listing Service (MLS) listings, ​​which is a database established by cooperating real estate brokers to provide data about properties for sale. 

Because they won’t enter the home, the appraiser will rely more heavily on recent home sales in the area. They will also go through public records, in addition to the MLS research to help them determine the home’s market value. 

Rental Analysis

Rental property analysis involves the process of analyzing an investment property to determine its rental potential and profitability as an income property. An analysis determines the adjusted price per square foot of comps and then multiplying by the square feet of properties for sale.

Broker Price Opinion (BPO)

A real estate broker or other qualified individual or firm evaluates the value of a property in a broker price opinion (BPO). Typically, they only occur in the case of foreclosures or short sales. A BPO certified individual will take into consideration the characteristics of a property, research the property, investigate the neighborhood, take pictures and retrieve comparable properties in an MLS. 

Appraisals and Insurance

Insurance companies use appraisals to calculate what it costs to replace property or estimate the amount of damage after a covered loss. Insurance companies also use appraisals to settle claim valuation disputes and total up the amount of coverage for personal belongings. 

Why Do You Need an Appraisal?

An appraisal provides an accurate measure of a property’s value. When you buy or sell a home, an appraisal is necessary because you want to make sure the appraised value of a home is less than the home loan amount. The property also serves as collateral in case the borrower defaults, so mortgage lenders need to make sure the appraised value fits the amount being borrowed. 

Ultimately, an appraisal helps a lender gauge the risk of lending to a prospective buyer. Homeowners often get an appraisal on their own for various reasons. However, an appraisal for mortgage qualification purposes fulfills a different purpose than generally getting your home appraised. Homeowners or buyers can get an independent appraisal but cannot use them to determine a potential loan. Lenders must use certain independent appraisals contracted through third parties. 

Let’s go over a few benefits of home appraisals in different situations below. 

Benefits of a Home Appraisal

What are the benefits of a home appraisal? 

  • Before selling your house: If you’re considering putting your house on the market, you can have a pre-listing appraisal to understand the market value of your home. This can help determine a realistic asking price and can increase your likelihood of a fast sale.
  • Refinancing your home: When refinancing your home, you replace your old mortgage with a new mortgage under new terms. An appraisal can help you change your loan type or take out a cash-out refinance. Some refinances don’t require an appraisal, such as refinancing your home’s interest rate to a longer or shorter loan term. You can attend the appraisal when you’re getting a refinance, but you can’t attend the appraisal when you’re the seller of your home.
  • Applying for loans: Applying for other loans (such as a business loan) could require that you use your home as a source of collateral. Getting an appraisal determines the value of your collateral. 

How is a Property’s Value Estimated?

First of all, appraisers must follow standardized guidelines and practices outlined by the investors (such as Fannie Mae, Freddie Mac, U.S. Department of Housing and Urban Development). 

In addition, note that local lenders do not have “special” access to appraisers and cannot predict or influence the outcome of the appraisal or appraised value of the home. All appraisers must follow national/federal requirements. Most lenders use an appraisal management company (AMC), which works with lenders and appraisers to order, track and deliver the request to all appraisers in the area. 

The following characteristics of a home can help determine property value:

  • Condition: An appraiser will check your home’s condition in all areas. For example, the appraiser will check the bedrooms, bathrooms, attic and basement to assess a home’s condition. 
  • Age of the property: The appraiser will also take the age of the property into consideration. It’s typically based on current condition rather than actual age. A home well taken care of could have an effective age — a “younger” age than it actually is due to excellent maintenance and updates. 
  • Size: The square footage of the home and lot size should affect the appraiser’s assessment. The appraiser will compare the home to similar-sized homes in the area. 
  • Features and amenities: Neighborhood amenities such as parks, restaurants, biking paths and other features may increase the appraisal value as well.
  • Location and neighborhood: Location, desirability of the neighborhood and market value of surrounding properties can affect value and marketability of the property.
  • Recent improvements: If you’ve made recent improvements to your home and these improvements compare to other homes or are better (such as adding an extra garage stall to a two-car garage), this can help your appraisal. 

What Hurts a Home Appraisal?

A few factors can hurt a home appraisal. Some factors you can control, and others, you can’t. Let’s walk through both.

Factors You Can Control

You can control maintenance, finishing and repairs during an appraisal. 

  • Maintenance: Keeping up on maintenance can help you with your appraisal. An unkempt property usually reduces a home’s value. For example, you could fix foundation problems, cracked walls or faulty air conditioning systems prior to the appraisal. 
  • Finishing: Consider putting final touches on your home before the appraisal. A few suggestions: Pay attention to curb appeal — wash the siding, clean the gutters, plant cheerful plants out front. Inside, you could fix chipped paint and mismatched light fixtures. You may not want to choose finishes that only people with specific tastes would like, such as bright orange walls. 
  • Repairs: As mentioned, you probably want to do as much as you possibly can ahead of time to fix things around the house. If you haven’t gotten around to any necessary repairs, you can share any bids or estimates for the work with the appraiser, who can work the exact costs into the calculations for a more accurate assessment.

Factors You Can’t Control

On the other hand, you can’t control certain factors, including market conditions and appraiser experience. 

  • Market conditions: Appraisers also take a look at market conditions and what home sales are doing in the area. They look at the sales price of homes in the area and analyze sales trends.
  • Appraiser experience: An appraiser might be brand new or working outside of their regular area of expertise. You don’t get to choose your appraiser as either the buyer and as the seller, however. 

How to Get a Home Appraised

Let’s take a look at some common home appraisal questions you may have. 

Who Can Perform the Appraisal on My House?

An appraisal must be conducted by a third-party appraiser who is licensed to do appraisals. Appraisers must have no connection to the lender, buyer or seller. The mortgage lender chooses the appraiser through the use of an appraisal management company (AMC), an independent company tasked with contracting independent appraisers to complete a home’s evaluation.

Appraiser Qualifications and Experience

All appraisers obtain licenses on the national level and become subject to standardized guidelines. In most states, once a person becomes state licensed or certified, any work or service must meet Appraisal Institute guidelines and regulations and oversight by the state regulatory agency.

How Long Does an Appraisal Take to Complete? 

A home appraisal typically takes a few days to a week to complete. The mortgage lender must order the appraisal and schedule it. After that, the amount of time it takes depends on the appraiser’s schedule, the complexity of the property and the time necessary to draft a finalized report submitted to the lender.

How Much Does it Cost to Get an Appraisal for a House?

Appraisals range anywhere from $450 to $700, but in some cases, such as during high-demand markets, prices have been known to exceed $2,000 based on a variety of factors. Some key factors include:

  • The type of home: The property type can affect the cost of an appraisal for a home. For example, a condo may cost less than a large farmhouse. In addition, a home that has a lot of unique characteristics can take more time to evaluate. 
  • The size of the home: The size of the home can affect the cost of an appraisal as well.  A smaller home may cost less because it takes an appraiser less time to evaluate, while a larger home may cost more. For example, a property with a small lot may cost more than one that contains 20 acres of land and a 4,000-square foot home.
  • The home’s location: Cost of living will also factor into the cost of an appraisal. For example, an appraisal will likely cost more in Los Angeles than Des Moines, Iowa. In addition, if the home is in a remote area, the appraiser may have a hard time finding similar comps — it may require more research.
  • The condition of the property: It may take more time to determine fair market value in the case of damage to a home or a property in poor condition. 
  • The amount of work and time required: Ultimately, the amount of time, effort and work that goes into the appraisal affects the amount the borrower will pay.
  • The availability of appraisers: Not all areas have an abundance of appraisers, and costs may be significantly increased above the normal average if an appraiser is unavailable to complete the appraisal or requires someone to travel longer distances.

Frequently Asked Questions About Appraisals

Why should I get my home appraised if it’s not for sale or refinancing, etc.?

You may want to consider getting a home appraisal for various reasons, including getting a home equity loan, applying for other loans or for tax assessments, for example.

How often should I have my home appraised?

It’s a personal choice. However, getting an appraisal can assist you anytime you want to learn more about your overall asset value.

Are home appraisals tax deductible?

You can deduct appraisal fees for business reasons. However, if you are buying or selling personal property, you cannot deduct the appraisal.

Are home appraisals public record?

No, appraisals are not public record. 

Can home appraisals be done virtually?

Yes, they can. A homeowner can show a home’s interior online while the appraiser does an exterior appraisal from the outside. Desktop appraisals can also occur, which means property valuation completed at the appraiser’s desk using tax records and information listed on the multiple listing service (MLS) only.