What is the Purpose of an Appraisal?

What is the Purpose of an Appraisal?

A home serves as collateral for the mortgage loan, so the lender needs to make sure that the home is worth the price being paid.  An appraisal provides a means for the lender to determine the value and condition of the property, and analyze the fair market value based on comparable properties in the area.  In some cases, the condition of the property is even more important, such as in the case of low equity loans like an FHA or VA loan.  The lender wants to make sure the property is not only worth the loan amount but also that it is in good overall condition.  This ensures that in the event of excessive repair costs or personal financial situations that arise unexpectedly, the homeowner will be able to pay the mortgage.

An appraiser must be licensed and certified in the state in which he or she is practicing, and have completed thousands of hours of instruction and supervised appraisals in order to qualify for a license.  The appraiser will look at the market where the property is located and will conduct a search for comparable properties that have sold in the previous six to twelve months.  The appraiser evaluates both the inside and outside of the property to determine the home's current condition and prospective market value.  The appraiser will not only be looking for positive aspects of the property, but also for needed repairs that might detract from the property's value.  Before an appraisal, it's a good idea to deep clean the home and completes any needed repairs in order to present the property at its best.  It also helps the appraiser to see every part of the home, as the appraiser is required to take photos of every room, the electrical system, the heating system, etc.  So the appraiser needs easy access to the entire inside and outside of the property.

If you are unhappy with the appraisal results, you can appeal the appraiser's evaluation. However, it is best to have a solid basis for the challenge, not just a feeling that your home is worth a different amount.  You'll need additional, accurate information to provide to the bank or appraiser, such as:

- The appraiser used outdated or inappropriate comparable properties to determine the market value

- Upgrades that were not taken into consideration could potentially improve the appraisal report and home valuation

- Incorrect square footage and other basic information on the appraisal report, such as wrong room count

Whether you are buying, selling, or refinancing, it's important to understand the appraisal process and how it may impact your transaction - and your bank account!