An appraisal is a professional estimate of a home’s current market value. It is prepared by a licensed appraiser and helps a lender decide how much they are willing to lend on a property.
The appraisal compares the contract price to recent sales and the home’s condition. This helps reduce the risk of lending more than the property is worth.
What an appraisal is
An appraisal is an independent opinion of value for a specific property on a specific date.
The appraiser reviews the home and studies recent sales of similar properties to estimate what a typical buyer might pay in the current market.
Appraisals are usually required when a buyer is getting a mortgage.
The appraiser is hired by the lender as a neutral third party and does not represent the buyer or seller.
How value is estimated
To estimate value, the appraiser inspects the home and compares it to recently sold properties nearby.
They look at factors such as:
- Size
- Layout
- Age
- Condition
- Upgrades
- Lot features
- Location
Most appraisals use a sales comparison approach. The appraiser adjusts recent sales up or down based on differences between those homes and the property being evaluated.
The findings are written in a detailed report explaining the data and final value.
Where the appraisal fits in the loan process
The appraisal typically occurs after the offer is accepted and while the loan is being processed.
The lender orders the appraisal, and the buyer usually pays the fee as part of upfront costs.
The report helps the lender determine the maximum loan amount for that property.
Many purchase contracts include an appraisal contingency, which connects the buyer’s obligations to the appraised value.
When the value is at, above, or below the contract price
If the appraised value is equal to or higher than the purchase price, the loan process usually continues as planned.
If the value is lower than the contract price, the lender generally bases the loan on the lower amount. This can create a difference between the approved loan amount and the agreed price.
When this happens, the buyer and seller may renegotiate the price or adjust terms, depending on the contract.
Simple summary
An appraisal is an independent estimate of a home’s market value ordered by the lender. The lender uses this value to determine how much they are willing to loan, which can affect the final terms of the purchase if the value differs from the contract price.
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