Home Appraisals: What to Know, How Much It Costs, and How It Works

Home appraisals involve an assessment of a home by a professional appraiser. The goal of a home appraisal is to determine the fair market value of a property. This can affect the amount you can borrow when you obtain a mortgage loan. Appraisals are part of the process both when you purchase a home and if you are refinancing your mortgage.

What is a home appraisal?

A home appraisal determines the objective fair market value of the property. Appraisals assess a home's square footage, location, features, and condition.

Appraisals can happen when an individual wants to purchase a home or refinance their mortgage. The appraisal value may show a home is worth more or less than listed by the seller. Or it could show it is worth more or less than you paid for it.

Note that appraisers are licensed, certified, and trained to assess the value of a property. They often, but not always, use a Uniform Residential Appraisal Report. This helps them evaluate the home and accurately determine its worth.

How much does a home appraisal cost?

A home appraisal for a single-family home typically costs between $300 and $450. However, the cost can vary. Factors affecting the price include your location and the complexity of estimating the property value.

How do home appraisals work?

Typically, an appraisal will be ordered by a lender. The lender selects an appraiser, who visits the home to assess its value.

Owners can also request appraisals. They may do this to appeal their home's property tax valuation. Or they may want an appraisal to help determine how much their property might go for on the market.

The key features that appraisers consider when determining the property's value include:

The neighborhood composition
Supply and demand for properties in the local area
Zoning rules and compliance
The type of property (single-family home, number of stories, etc.)
The property's condition, including needed repairs
The size of the property
Key features, including the type of heating system, the foundation, the roof surface, the floors, the composition of the walls, the number of cars the garage holds, the driveway surface, and the home's finishes.

Appraisers identify comparable properties that recently sold and that are similar in size and location. They then make adjustments to account for differences between the property they're appraising and the recently sold property.

For example, they may add $10,000 to a home's value for an extra bedroom. Or deduct $5,000 if it has one less fireplace. After making adjustments to the comparable properties, the appraisal will be able to estimate the appraised home's value.

What is the home appraisal process?

The home appraisal process works as follows:

A lender or owner orders an appraisal. This happens when a borrower applies for a home loan to purchase or refinance a home or if a homeowner orders an appraisal for other purposes.
An appraiser visits a home to assess its condition and identify its features.
The appraiser obtains information about the property and neighborhood. This comes from public records and a site visit.
Appraisers identify comparable properties. These are similar homes in the area that recently sold.
Appraisers make adjustments to the price of the comparable properties. These are based on the appraised home's features. This could involve adding or subtracting amounts based on whether the appraised home has more or less desirable features, is larger or smaller, or is in a better or worse location.
Appraisers determine the fair market value of a property. This is based on how it stacks up to comparables. If three comparable properties are priced around $200,000 but the property being appraised is larger and has an extra bedroom, the appraiser may determine the property's value is $250,000 after making adjustments.
Lenders use the appraisal to determine the loan-to-value ratio. This helps them determine whether to approve the buyer for a loan. Lenders generally always require an appraisal, including lenders for first-time home buyers.

Our beginner's guide to home loans provides more details about why a home's valuation is important.

What do appraisers look for?

Appraisers only consider things that affect the fair market value of a home. They don't care about the furniture or how tidy the home is. They are concerned with:

The size or square footage
The number of bedrooms and bathrooms
The home's location
The home's condition
Other permanent features, such as a pool or fireplace
The level of finishes

How to prepare for a home appraisal

In most cases, there is little you can do to prepare for a home appraisal as a buyer. However, sellers or people who are refinancing may have a few steps they can take to maximize their home's appraisal value.

Preparing for a home appraisal as a buyer

As a home buyer, you don't have much control over an appraisal. Your role will simply be to pay the appraiser. Your lender will decide who should appraise the property you're considering buying.

Your goal as a buyer is for the home to appraise high enough so that you qualify for your home loan.Mortgage lenders and refinance lenders use the appraisal to determine your loan-to-value ratio.

If the property appraises too low, this could affect your loan-to-value ratio.

An example

If you're borrowing $200,000 to buy a $250,000 home, the loan-to-value ratio would be 80% (because $200,000 is 80% of $250,000). But if the home appraises for only $200,000, your loan-to-value ratio would be 100% ($200,000 -- your loan amount-- is 100% of $200,000, which is the home's value).

If you end up borrowing more than 80% of the appraised value, you'd likely have to pay for mortgage insurance. So if the home appraises too close to the amount you need to borrow, you might ask the seller to drop the price. Or you could put down more money, so you borrow less.

Use a mortgage calculator to understand how mortgage insurance premiums affect total costs.

Preparing for a home appraisal as a seller or refinancer

If you're selling or refinancing your mortgage, make sure your home is in good condition before an appraisal.

Cleaning up and decluttering can make it easier for an appraiser but won't ultimately impact your property's value. However, making necessary repairs can affect your home's value, as your appraiser does take the condition of the home into account.

FAQs

A home appraisal is an assessment of a property's fair market value performed by a licensed professional. Appraisers find comparable properties which have recently sold. They make adjustments to the price based on how the home's features differ. They use this information to estimate what a home is worth on the open market.
A home appraisal typically costs between $300 and $450.
Lenders or owners order an appraisal from a licensed appraiser. The appraiser visits the home and obtains information about the property and the neighborhood.
The appraiser identifies similar properties in the local area, and makes adjustments based on how they differ from the home being appraised. If the home being appraised is larger or has more attractive features, the estimated price is raised. If the property has less attractive features, is smaller, or is in worse condition, the value is lowered.
After making adjustments to the price of comparable properties based on the varying features of the home being assessed, the appraiser can estimate the property's fair market value.