The appraisal, or estimate of the value of the home being purchased, is an integral component of virtually all mortgage processes. Some sort of appraisal is required in most types of mortgages-without it, buyers often cannot obtain a loan. In the vast majority of mortgage situations, the buyer pays for the home appraisal at the time the original loan application is filed. Appraisal fees typically range from $300 to $500.
Once financed, the appraisal is performed by a professional appraiser who inspects the home’s size, condition, quality, and function. The appraiser produces a comprehensive report based on the visit and typically considers the sale prices of similar homes in the area to establish a value of the home being appraised. Comparisons of the square footage, physical appearance, amenities, and overall conditions can be made. The home’s value can be adjusted up or down based on the prices similar properties are selling for in the neighborhood and the comparisons made by the appraiser.
Both the lender and the buyer benefit from the appraisal. The lender learns how much money is too much to lend given the property’s worth; the buyer discovers how much is too much to pay for the home.
Though the buyer pays for the appraisal, the appraiser is almost always [selected by the lender, and buyers are rarely ever present when the appraisal is performed. In fact, the buyer is typically unaware that an appraisal has even been done until after it is completed and provided to the lender.
An appraisal that is lower than the maximum amount the lender is interested in financing will block the issuance of the loan unless either the seller lowers the price of the home or the buyer increases the cash downpayment, i.e., re-opens negotiations for the home purchase. While appraisals are not error-proof and the numbers may be susceptible to negotiation, an appraisal that is substantially below what a buyer has offered to pay for a home is an indication that the buyer may be paying too much.
In summary, while an appraisal is just another cost that must be borne by the buyer, it may be well worth the investment. The $300 to $500 a full appraisal costs may prevent a buyer from paying thousands of dollars more than what a home is really worth. In any event, a buyer is unlikely to get a home loan without one.