You've found your dream home. The asking price is $300,000 -- an amount you've already been pre-approved for by your bank. But is the home really worth that amount? That's the question at the heart of the home appraisal. The worth, or value of the property, will determine how much a lender is willing to give you to buy that particular piece of real estate.

This all-important step in getting the financing you need is the home appraisal *(optional - more details below)* -- an oftentimes-confusing part of the mortgage process in which both buyer and seller must depend on the expert opinion of a stranger. A real estate appraisal is simply that -- the expert opinion of a certified, licensed professional who determines the value of a piece of property. If your $300,000 dream home is really worth only $200,000, then the home is overpriced.  

A home appraisal also protects the bank from getting stuck with property that's worth less than they've invested.  And it protects you from paying too much for a house simply because it was love at first sight.  The home appraisal is a no-nonsense factor in a decision that is often emotional for the buyer.

So now, if the property is overpriced, it provides you with the option to reconsider your offer (negotiate on price) or walk-away (if it is a condition of the offer).  Some clients may decide to allow the lender to finance the property based on the Appraised value and pay the difference (if not substantial) depending on their perceived value and if they think it's worth making the additional investment.

When are Home Appraisal Required? Home Appraisal Methods

When you apply for a mortgage, your lender typically requires the property to be appraised by one of their approved appraisers.  This practice helps create more consistent appraisals and gives you assurance that the appraiser is properly licensed and certified.  Even though the home appraisal is the lender's requirement, it's the borrower's responsibility.  You usually pay for it as part of the mortgage costs at the time of closing. The cost is typically around $300 but can be more depending on the price of the property.  Here are examples on when an appraisal is a likely required:

• High-Ratio vs. Conventional Mortgage: If the mortgage is high-ratio, the insurer or lender will usually request for an appraisal if the purchase price is not within reason after reviewing sales comparables through their emili system. 
• Private purchase vs. MLS Listed property: In most cases, the lender or insurere will require an appraisal on a private purchase. 
• Owner-occupied vs. Rental Purchase:  Lenders will always request an appraisal on rental property purchases.  
• Purchases vs. Refinances:   Some lenders offer an internal property valuation system (like the insurers emili system) that may waive the need for an appraisal but it's the lender and/or the insurer that determines if the value being provided is within reason. 

What Appraisals are acceptable?

Most Lenders require AACI, CRA, DAR or DAC designations for the appraiser and the appraisal often needs to be ordered through a third-party source like Nationwide Appraisal Services (NAS), Brokerworx or Solidifi.  Some offer a list of approved appraisers.  

How do you choose the Appraiser?

If you are working early enough with your Mortgage Professional, we can order the appraisal on your behalf with the criteria that is required for the lender depending on the mortgage terms you select or that best suits your needs. This saves you the headache of ordering an appraisal from a source that may not be approved by the lender thus requiring two appraisals (double the cost).  Some lenders may make an exception depending on the appraiser but not in all cases, which can be avoided. 

Home Appraisal Methods

There are two primary appraisal methods for residential property.

In the sales comparison approach, the appraiser compares the property with three or four similar homes that have sold in the area, often called comparables, or comps.  The analysis considers specific components, such as lot size, square footage of finished and unfinished space, style and age of house, as well as other features such as garages, granite, hardwood flooring and fireplaces.

The cost approach is used more for new property and is based on reproduction costs. The appraiser estimates the cost to replace the structure on the property if it were destroyed. The appraiser then looks at land value and depreciation to determine the property's worth.

The appraiser gathers information for the appraisal report from a number of sources, but the process often begins with a physical inspection of the property inside and out. Additionally, the appraiser may look at county courthouse records and recent reports from the local real estate multiple listing service.

The appraisal report generally includes:

• an explanation of how the appraiser determined the value of the property
• the size and condition of the house and other permanent fixtures, along with a description of any improvements that have been made and the materials used
• statements regarding serious structural problems, such as wet basements and cracked foundations
• notes about the surrounding area, such as new or established development, rural acreage, and so on
• an evaluation of recent market trends of the area that may affect the value
• a comparative market analysis that supports the appraisal
• maps, photographs and sketches

A common misunderstanding is that the appraisal amount is only for the house itself. In fact, the figure appraises the total value of the home and any other permanent structures, along with the land that the house is built on. This appraisal figure also determines the loan amount you can get to buy the property.