Why You Shouldn't Always Trust Home Appraisals -- but They Matter Anyway

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  • Home appraisals are professional valuations of a home.
  • Lenders often require appraisals before they are willing to approve a mortgage loan.
  • Appraisals may not be as accurate as you would expect.

Appraising a home isn't an exact science, but lenders require appraisals anyway.

When you apply for a mortgage, chances are good that your lender is going to require a home appraisal. An appraisal is an analysis of the valuation of the home performed by a professional.

Appraisers will evaluate how much your home is worth based on a comparison of your property to others in the area that sold recently. Lenders want to see this analysis because they want to confirm the home is worth enough to serve as collateral that guarantees the mortgage loan so they don't lose money if you fail to pay off your mortgage.

Since lenders require appraisals, you may assume they are very accurate. But, the reality is, this may not be the case.

Why you may not want to trust an appraisal's estimate of value

One big reason why you shouldn't necessarily count on home appraisals to provide an accurate valuation of a home is because they are very subjective. An appraiser can choose which properties to consider comparable to yours, and there may be many within a geographic area that range widely in price.

My husband and I experienced this firsthand when we built a home and had to get it appraised in order to close on a permanent mortgage in order to repay our construction loan. We worked with a lender who ordered an appraisal that came in much lower than we had anticipated. Based on that appraisal, we would not have been able to borrow as much as we needed. Our builder advised us to switch to a different mortgage company, and that mortgage company ordered an appraisal of its own with a different appraiser. Although there was less than three weeks between the different appraisals, the value placed on the home by the second appraiser was over $100,000 more than the initial valuation.

We also had a second experience with how inexact appraisals can be when we tried to refinance years later. Our initial appraisal came in lower than we had hoped again, and we wouldn't have been able to refinance for enough to pay off the home and also take cash out that we wanted to use to consolidate other debt. We appealed, and this time the same appraiser raised the valuation of our house by over $75,000 after I suggested some different comparable properties that he could use as part of the appeal process.

These two incidents demonstrated to us clearly that an appraisal is definitely not an exact science, and that the valuation really is little more than an educated guess.

Why this estimate can matter a lot

Although home appraisals don't necessarily tell you exactly what the likely market value of a home should be, they are very important because mortgage lenders rely on them when deciding whether to give you a mortgage loan or allow you to refinance.

If an appraisal comes in too low, as ours originally did, you may find yourself in a situation where a lender won't allow you to borrow all you need, so you may have to bring cash to the table. When and if this happens, you can try the approaches we did like working with a different lender or appealing the initial appraisal.

But no matter what, there will be additional hoops to jump through -- and extra money to spend -- if an appraisal doesn't turn out as planned. That's why an appraisal matters, even if you can't be sure the valuation assigned to your home is the right one.

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