Eight Important Questions to Ask About Home Appraisal

A home appraisal is simply a third party's estimate of a home's fair market value. This appraisal is not done by a real estate agent, lender or anyone else who has any interest in the home or a transaction involving the property. Most home appraisers are independent contractors who work with homeowners and lenders.

Most people get appraisals as part of the home-buying process, as lenders usually require a valid appraisal to confirm the home is worth at least as much as the requested mortgage amount. An appraisal can also be required as part of a mortgage refinance. If you already own your home, you may benefit from a professional appraisal to lower your property taxes, give you an edge when selling your home or to settle an estate if you are the executor on someone's estate. The following are the 8 most important questions you should ask about having a home appraisal done.

1. Is an appraisal necessary?

When you take out a mortgage, the lender wants assurances that the home, which is the underlying collateral on the loan, is worth at least as much as the loan. This allows the lender to potentially get their money back by selling the home if you default and the home goes into foreclosure. An appraisal may be required in many cases, especially to take out a new home loan when buying a home or if you are refinancing your mortgage. If you are trying to establish that your home has at least 20% equity to remove private mortgage insurance (PMI) from your loan, an appraisal will also be required unless you have achieved this equity through mortgage payments.

2. What does an appraiser do to determine a home's value?

An appraiser's job is determining an estimate of a home's value by analyzing the home's location, features, and recent sales of similar homes in the area. In most cases, an appraisal will include a walk-through of the home to check its condition and note amenities that may add value. The layout of the home may be photographed or sketched and included with the appraisal report. Any safety or health code violations will also be noted on the report.

3. What is included in an appraisal report?

A professional home appraisal report will always include a credible estimate of the home's value. It will also include the intended use of the report, such as supporting a mortgage, the client, the type of value reported, and the effective date of the appraiser's opinion on the home's value. The report will clearly list relevant characteristics of the property such as location and physical characteristics. All known defects will also be listed such as easements, special assessments, and encumbrances.

4. How much does a home appraisal cost?

The cost of an appraisal will depend on the home's value and size, the region, the effort necessary to complete the appraisal report, and the type of report needed. On average, an appraisal will cost $350 to $600, although updating an existing report or a drive-by appraisal can be much lower. In most cases, the home buyer pays for the appraisal as part of their closing costs. Sellers can order and pay for an appraisal to support the asking price and reduce the buyer's costs, however.

5. What happens if my home appraises for lower than the loan amount?

A lender will not let you take out a mortgage for more than the home's appraised value. As a buyer, this can mean you will need to negotiate a reduction in the sales price with the seller or pay the difference yourself out of pocket. You can also pay for a second appraisal to challenge the lender's appraisal report, although this may not be successful. Many contracts have an appraisal contingency that also allows buyers to back out of a contract if the home does not appraise. If the home appraises for more than the sales price, it will not affect the loan in any way.

6. Can an appraisal lower my property taxes?

If you do not want an appraisal to affect your taxes, it won't. This is because a home appraisal won't be provided to your county. Still, you can use a current appraisal to reduce your property taxes as long as the appraised value is lower than your county's assessed value of the home. You can contact your local assessor's office to discuss your home assessment over the phone and appeal your assessment formally by paying a small filing fee. Many assessment appeals are successful, especially when backed with an appraisal.

7. Who chooses the appraiser?

If you are buying a house or refinancing a loan, it's important to consider who will do the appraisal. The lender will typically choose the home appraiser, but you have the right to see the results of the appraisal. A lender cannot up-charge for these services provided by a third party. According to new mortgage rules, lenders must order an appraisal directly through an appraiser, who is likely an independent contractor, or through an appraisal management company.

8. How do I prepare for an appraisal?

The home appraisal will come after the home inspection. Because the appraiser will likely walk through the home to check its condition and take photos, make sure the appraiser has easy access to the water heater, furnace, and the exterior of the home. Any bushes or items that would make it hard to take measurements of the outside of the home should be moved or trimmed down. You can speed up the appraisal by making sure the appraiser has copies of a survey of the home and property, a deed that shows the legal description, a recent tax bill for the home, and a list of personal property that will be included in the sale, if possible.

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