These days, a home appraisal is pretty standard for any home that will be bought with a mortgage loan.
Because when a lender provides a $300,000 loan to buy a home, they want to make sure that home is actually worth $300,000.
Appraisals are thorough, but they’re also fairly straightforward.
First, there’s an actual appraisal inspection of the property. Don’t confuse this with the “home inspection,” which comes later on and is totally different. In general, the appraisal inspector is looking to confirm some basic info about the home:
The inspector will also assess the front and back of the home, check that each reported “bedroom” has its required window and required closet, and consider other features or upgrades that might or might not play a role in in their assessment.
With their questions answered, the appraiser is off to crunch some numbers on comparables.
The next step is to pull data on similar homes in the neighborhood and look at what such homes are selling for locally. These homes are called comparables or comps.
Not just any comp homes will do, though. Appraisers are looking for homes that ideally have the same number of bedrooms and very similar square footage. Lenders often get pretty specific about their requirements for an appraiser’s comps, as well. These can be things like:
Sometimes there may not be enough sales in a particular neighborhood to meet a lender’s requirements. In that case, the appraiser will have to dig deeper to find suitable comps and supply the lender with a detailed explanation.
After the appraiser settles on some suitable comps, it’s time to write up their findings and put a price on the home in question.
For the last task of the appraisal, the appraiser provides the lender with a final appraisal report. This report will combine all the info gathered during the inspection plus all the data on comparable homes to come up with the home’s “market value.”
The market value is the appraiser’s professional opinion about the true value of the property in its current condition. It is impartial, fact based, and meant to help the lender weigh the risk of approving the borrower’s loan.
That makes appraisals a really important part of the mortgage lending process. Unfortunately, not every loan to every borrower works out. By verifying the home is worth the same or more than the amount of the mortgage loan, the lender ensures that, should things go bad, they’ll be able to sell the home for enough money to recoup their losses. That makes approving the loan a good deal for the lender and for you, the borrower.