Let's start with the basics. What is an appraisal? An appraisal is a professional, unbiased opinion of a home's value. Whether you’re using a mortgage to finance your new home purchase, refinancing your existing mortgage, or selling your home to anyone other than an all-cash buyer, a home appraisal is a key component of the transaction. Appraisals are almost always used in purchase transactions and commonly used in refinance transactions. In a purchase transaction, an appraisal is used to determine whether the home's contract price is appropriate given factors like the home's condition, location, and features. In a refinance transaction, an appraisal assures the lender that it isn't handing the borrower more money than the home is worth.
Lenders want to make sure that homeowners are not over-borrowing for a property because the home serves as collateral for the mortgage. If the borrower should default on the mortgage and go into foreclosure, the lender will sell the home to recoup the money it lent. The appraisal helps the bank protect itself against lending more than it might be able to recover in this worst-case scenario.
If you’re an owner, buyer, or seller, you should understand how the appraisal process works and how an appraiser determines a home’s value.
According to the Appraisal Institute, an association of professional real estate appraisers, a qualified appraiser should be licensed or certified—as required in all 50 states—and be familiar with the local area. Per federal regulations, the appraiser must be impartial and have no direct or indirect interest in the transaction.
A property's appraisal value is influenced by current market trends and recent sales of similar properties. The home's square footage, number of bedrooms/baths, amenities, and floor plan functionality are also key factors in assessing a home's value. The appraiser must do a complete visual inspection of the interior and exterior and note any conditions that adversely affect the property's value, such as needed repairs.
Typically, appraisers use the Uniform Residential Appraisal Report from Fannie Mae for single-family homes. In this report, the appraiser is asked to describe the interior and exterior of the property, the neighborhood, and nearby comparable sales. The appraiser then provides an analysis and conclusions about the property's value based on these factors and their observations.
The report must include
- A sketch of the exterior of the building and photos of the home's front, back and street views.
- A street map showing the appraised property and the comparable sales used
- Front exterior photographs of the comparable properties used
- How the square footage was calculated
- Additional important information such as public land records, public tax records or market sales data that the appraiser used to determine the property's market value.