A home appraisal is a critical component of any transaction, whether you’re buying a property with a mortgage, refinancing your existing loan, or selling your house to someone other than an all-cash buyer.
If you’re a buyer, owner, or seller, you’ll want to understand how an appraisal works and how an appraiser decides what a property is worth. So let’s dive into everything you need to know about home appraisals.
Your Guide To Home Appraisals
When it comes to purchasing, selling, or refinancing a property, the prospect of having an appraisal done may not be on your mind. But perhaps it should be: An appraisal determines how much a home is worth for everyone involved in the process, including the buyer, seller, and lender.
The aim is to prevent the buyer and the lender from paying too much. Although a home appraisal isn’t the most exciting aspect of purchasing or selling a house, it is essential. Learn more about how property appraisals work below.
What Is a Home Appraisal?
An appraisal is an expert estimation of a property’s worth. Appraisals are often employed in buy-and-sell transactions and occasionally used in refinance situations. They are unbiased and aim to accurately assess a property value so that everyone involved in the transaction has the truth.
An appraisal is used to verify whether the property’s contract price is fair given its condition, location, and features in a purchase-and-sale transaction. In addition, an appraisal protects the lender in a refinance situation by ensuring that they are not providing the borrower more money than the home is worth.
Lenders want to ensure that homeowners are not over-borrowing for a house as collateral for their mortgage. If the borrower defaults on their mortgage and enters foreclosure, the lender will sell the property to recover the money it gave.
The appraisal protects the bank against lending more than it might be able to recover in the worst-case scenario.
The Appraisal Process and How Values Are Determined
Because an appraisal typically protects the lender’s interests, the lender will generally request one. A good expert evaluation costs several hundred dollars and is paid for mainly by the borrower.
According to the Appraisal Institute, a professional real estate appraiser should be licensed or certified—as required in all 50 states—and be familiar with the local market. In addition, the appraiser must be impartial and have no direct or indirect interest in the deal under federal rules.
Comparable sales and market trends determine the appraisal value. In addition, the home’s features, such as the number of bedrooms and bathrooms, floor plan functionality, and square footage, are critical criteria when determining the property’s worth.
The interior and exterior of the home must be thoroughly examined, and any factors that damage the property’s value, such as necessary repairs, must be noted.
Appraisers use the Uniform Residential Appraisal Report from Fannie Mae for single-family houses. The report requires the appraiser to document the property’s interior and exterior and its neighborhood and comparable sales. The appraiser then analyzes and concludes the property’s worth based on their inspections.
The report must include:
- A map of your neighborhood showing the appraised property and comparable sales used
- Exterior photographs of each comparable property used
- An explanation of how the square footage was determined
- A sketch of the exterior
- Photographs of the front of the house, the back of the house, and the street
- Any other pertinent information, including market sales data, public tax records, public land records, and anything else the appraiser used to determine the property’s fair market value.
How Can You Improve Your Home Appraisal?
It’s critical to obtain a precise house appraisal. However, for sellers or homeowners who wish to refinance their mortgage, it’s still ideal for achieving as high an appraised value as possible. The most significant influence on the value of a home is sales data in the immediate market area. If all the houses surrounding the home you’re interested in are increasing in sales price, then your property will also likely continue to increase in value with no changes.
Though home appraisals aren’t really within your control, there are a few things you can do that might ensure your property is appraised at a higher value.
It’s essential to have good curb appeal. Mow the lawn, weed the garden, and trim the hedges. Confirm that the home is in excellent condition. The appraiser should be able to detect your house’s potential. Your style may not matter much, but curb appeal and maintenance may influence its assessed value.
For sellers specifically, the most significant way you can impact the market value of your home is to make improvements. For example, fresh paint and new flooring can go a long way to provide the greatest return on investment.
Make a list of recent house enhancements. Make a note of any improvements or unique features you’ve added to your property and leave it for your appraiser. You should include things like if you installed new roofing or siding or replaced your heating system, as well as when the work was completed.
Focus on the crucial upgrades. Though pools and large yards can make a difference, updated kitchens and bathrooms definitely carry more weight when it comes to a home’s value. However, we should include a warning. Don’t get too attached to the repairs you’ve made. Even if you’ve spent thousands remodeling, it doesn’t automatically mean your house will increase its worth.
What Sellers Need to Know About Home Appraisals
As a seller, an incorrect appraisal might force you to decrease the price of your home to sell it. However, waiting for an all-cash buyer who doesn’t need an appraisal as a condition of closing the transaction will unlikely result in a greater sales price. No one wants to overpay for property.
Unfortunately, if your neighborhood has recently suffered from distressed sales, the appraisal value of your property will be reduced. However, you may be able to persuade the appraiser that your home is worth more if it’s in much better shape than foreclosures and short sales in your neighborhood.
What Refinancing Homeowners Need to Know
If you’re refinancing a standard mortgage and a low appraisal will likely prevent the refinancing from happening. Your loan must appraise at or above the amount you wish to refinance for it to be approved.
If you possess an FHA mortgage, you can refinance without an appraisal through the FHA Streamline program—a fantastic alternative for underwater homeowners. Ask your real estate agent if this might be the right option for you.
The Bottom Line
The home appraisal is simply another box to check off a closing checklist when everything goes well. However, when the appraisal value is lower than anticipated, the transaction might be delayed or even called off.
Whether you’re purchasing your first house or refinancing, a basic understanding of how the appraisal procedure works can only work in your favor. This is especially true if you’re buying your first property. Contact your local real estate agent if you need help with this process. The team at 41 Realty Group would love to help you with buying, selling, inspections, home appraisals, and more! When you need experience on your side, give us a call today.