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Getting an appraisal on a home is like getting a price check at the grocery counter. Except a house costs a lot more than a jar of pickles.
That’s why most lenders will require an appraisal during the homebuying process. But even when it’s not required, it’s likely worth the price tag to have an appraisal take place.
Before you start the home buying, selling, or refinancing process, it’s essential to understand how the appraisal works and how much it will cost.
What Is a Home Appraisal?
An appraisal is an evaluation of a home’s value given its condition and the current housing market. In most cases, mortgage lenders require an appraisal as a way of ensuring the home is actually worth the money they’re lending to someone.
“The appraisal is a way for them to justify the loan that they’re going to give you,” said Ryan Fitzgerald, realtor and the owner of North Carolina’s Raleigh Realty. “The bank is making an investment in lending you the money, and they need to protect their investment with that appraisal.”
But it’s not just the bank that an appraisal helps protect, according to Carrie Powers, loan originator and the senior branch manager at Silverton Mortgage in Atlanta.
“If you are, for example, purchasing a house for $200k, then you want to make sure that your purchase is worth it,” says Powers. “That’s what the appraisal does. It confirms that you’re buying it for a reasonable value.”
In other words, an appraisal can help assure the buyer isn’t overpaying for a home.
When an appraiser determines the value of a home, these are the most common factors:
- Square footage
- Exterior and interior condition
- Home improvements
- Recent comparable home sales
When determining the value of a home, an appraiser compares it to recent homes sold in the area. Comparable sales should be from the same neighborhood and have similar characteristics such as size, room count, style, and condition, according to Fannie Mae. It’s ultimately the appraisers who choose which comparable sales to consider.
As a seller, if you think your home value has increased, it may be worth it to pay for an appraisal before you list your home. This way, you can get a better idea of how much your house may sell for.
How Much Does a Home Appraisal Cost?
The average cost of a home appraisal is $340, with most borrowers paying between $312 and $407, HomeAdvisor reports. But the range can be much larger. Appraisals on single-family homes can range anywhere from $300 to $700, says Charles Gallagher, real estate attorney and the managing partner of Florida-based law firm Gallagher & Associates.
The cost of an appraisal depends on several factors, including the location, size, and condition of the home. Appraisal prices generally increase with the size of the home. They tend to be more expensive in urban areas, but you might also pay a premium if your home is in a difficult-to-access location.
Who Pays for the Home Appraisal?
In most cases, the bank requires an appraisal as a part of the mortgage process. As a result, the buyer is responsible for that cost, as they are for other closing costs.
The buyer will “be bearing that expense as a line item on the closing,” Gallagher said. “More than likely, the bank is the one that picks that appraiser, not you.”
Even if you can’t choose your own appraiser, you can check their credentials through this government registry.
While the buyer is typically required to pay for an appraisal as a part of the mortgage process, it can sometimes be in the best interest of the seller to pay for an appraisal before they put their house on the market.
“It’s almost worth the seller buying an appraisal ahead of time to make sure they’re not shooting themselves in the foot,” says Fitzgerald. For example, Fitzgerald has seen an appraisal return higher than what a home has sold for. When this happens, the seller could have paid for an appraisal before listing their home and potentially make more from the sale, says Fitzgerald.
What if Your Home Appraises for Less Than the Purchase Price?
Homebuyers may run into a problem if the appraised value of the home turns out to be lower than the accepted offer price. Lenders use the appraised value to determine your loan-to-value ratio (LTV), and they’re unlikely to finance more than that.
If this happens, there are four options:
- The appraisal could be challenged, and the appraiser may agree to reconsider the home’s value based on additional comparable sales.
- The buyer and seller can renegotiate to lower the sale price of the home.
- The buyer can come up with the difference between the appraisal value and purchase price.
- If the buyer has an appraisal contingency, they can walk away from the deal.
“The buyers and sellers have to negotiate at that point,” says Fitzgerald. “More often than not, the buyers are going to have to come up with more money because there are 30 other people wanting the house.”
Coming up with the difference is not always feasible for a first-time buyer, says Gallagher.
If the appraiser won’t reconsider the home’s value and the parties can’t reach a new agreement, the last resort would be to walk away from the contract. Most contracts have an appraisal contingency which gives buyers the right to back out if the home doesn’t appraise as expected.
“You can kill the contract, and the parties can discharge that obligation. They would be allowed to get their earnest money back and be on their way,” says Gallagher.
Do You Need an Appraisal for a Refinance?
When you refinance a mortgage, you take out a brand new home loan to replace your existing one. In many ways, the process of refinancing a mortgage looks quite similar to the initial mortgage. Depending on the situation, that may or may not include a home appraisal.
In many cases, homeowners might be eligible for an appraisal waiver. These waivers, granted by Fannie Mae and Freddie Mac, allow certain mortgages, including refinance loans, to skip an appraisal. To qualify for an appraisal waiver, the property usually has to be a single-family home that meets certain LTV requirements. You can talk to your lender to find out if you might be eligible.
It’s not just conventional mortgage borrowers that can avoid the appraisal. Government-backed loan products also come with a process to refinance without an appraisal.
“There are some government-insured loans called streamline refinance where you’re just dropping your interest rate,” says Powers. “In those cases, you don’t always necessarily need an appraisal.”
There are some situations where an appraisal is more likely to be required. Some borrowers do a cash-out refinance when they borrow against some of the equity they’ve built in the home. Because lenders will only let borrowers take out so much equity, these refinance loans usually require an appraisal.
Some might want an appraisal if their home’s value has increased significantly. An appraisal might help a homeowner reduce their interest rate since the increased home value would likely mean a lower LTV.
Another situation where borrowers might want an appraisal is if they’re currently paying for private mortgage insurance (PMI) and have surpassed 20% equity in their home.
“Let’s say you currently have mortgage insurance, and when you bought the house last year, you put the minimum down,” Powers said. Since you now have 20% equity, you may want to refinance to drop the PMI. But, if rates haven’t gotten any lower, it doesn’t make sense to refinance. You can ask your lender to drop the mortgage insurance based solely off the appraisal and the 20% equity, says Powers.