Home appraisals: the process, and cost

If you finance a home purchase with a mortgage, your lender will want to make sure you're paying a fair price for the house. After all, the home serves as collateral for the mortgage, so it's your lender's real estate investment, too. If you default on the loan and go into foreclosure, your lender will sell the home to recover the money it lent to you.

Cue the home appraisal: a process that determines a property's value based on its age, location, square footage, and upgrades, as well as recent sales in the area. An appraisal helps the bank avoid "over investing" (lending more than the home is worth) — or lending more than what it could reasonably recoup if it resells the property later on. The appraisal also confirms you're getting a good (or at least reasonable) deal on the home.  

Appraisals vs. home inspections

Home appraisals and home inspections are essential steps in the home-buying process, but they serve different functions. While an appraisal tells you how much the house is worth, an inspection shows if it's in good condition. 

Appraisers should be licensed or certified, impartial (with no direct or indirect interest in the property), and familiar with the local area. The appraiser visits the property and quickly assesses its quality and general condition, noting things like:

• The lot and home size (square footage)

• Age and design of the home

• Interior and exterior materials

• Floor plan

• Number of bedrooms and bathrooms 

• Flooring

• Appliances

• Finish details (such as hardwood floors and granite countertops)

• Upgrades and improvements

• Landscaping

• Proximity to community amenities and conveniences

• Any obvious health or safety hazards 

The appraiser then researches comparable listings — or "comps" — to see what similar properties in the area have sold for recently. Ideal comps:

• Have sold within the last three to six months (or more recently in a hot real estate market).

• Are located within a quarter- to half-mile of the subject home.

• Have similar characteristics to the subject home, such as construction date, lot size, square footage, number of bedrooms and bathrooms, and condition. 

The appraiser makes a final valuation of the property in an appraisal report, which includes photos of the home and descriptions of the comps. Both the lender and the borrower receive a copy of the report, and the lender uses the information to ensure the loan size is appropriate.

While the lender generally orders an appraisal, the buyer hires a home inspector to confirm the property they want to buy is safe, sound, and habitable. A home inspection takes a much deeper dive than an appraisal into the home's condition. A licensed home inspector visits the property and spends several hours examining and testing the home's systems and components, including the: 

• Heating and cooling systems

• Plumbing and electrical systems

• Roof and rain gutters

• Attic and visible insulation

• Walls, ceilings, and floors

• Windows and doors

• Foundation, crawlspace, and basement

• Structural components 

The inspector also looks for radon, termites, asbestos, lead piping or paint, mold, water damage, and other safety issues. 

After completing the inspection, the home inspector provides a written report highlighting their findings and recommendations. If everything looks okay, the buyer can proceed with the sale, knowing the home is in good condition. Otherwise, the buyer can request repairs, a reduced purchase price, or a credit at closing to fix any problem themselves. If the seller isn't willing to negotiate, the buyer may decide to back out of the transaction.  

Appraisal and home inspection contingencies

If you need a mortgage to buy a home, you might want to include appraisal and inspection contingencies in your sales contract. An appraisal contingency lets you walk away from the purchase (and recover your earnest money deposit) if the appraisal comes in too low to justify the sales price or secure the financing you need. Similarly, an inspection contingency lets you back out if the inspection finds significant defects and the seller refuses to fix the problems or lower the price. 

The home appraisal process

A home appraisal is one box on the closing checklist. Appraisals are usually required if you buy or refinance a mortgage. However, some government refinance programs — including FHA streamline and USDA streamline loans in most circumstances — don’t require them. 

Read more: Home appraisal tips for sellers.

When is the appraisal done?

The home appraisal process begins after you sign a contract and hand over your earnest money deposit. The lender orders the appraisal during escrow, arranging an appointment with an third-party appraiser. All of this usually happens within a week of entering the contract. After the appraisal is completed, the mortgage underwriter reviews the loan file, assesses the loan's risk, and approves or denies the loan application.  

When is the report available? 

While the in-person part of the appraisal takes just an hour or so, the appraiser also spends time researching comparable properties that have recently sold nearby. The appraiser typically sends the completed report to the lender in about seven to 10 business days. By law, buyers have the right to receive a free copy of their home appraisal promptly after the report is completed — no later than three days before the loan closes. If you haven't received a copy, ask your lender for it. 

Home sellers aren't entitled to copies of appraisal reports that lenders order on behalf of buyers. That means sellers don't usually see a copy unless the buyer wants to share it — perhaps to show the home appraised below the agreed-upon sales price. Of course, sellers are entitled to order and pay for their own appraisals — before listing, after accepting an offer, or anytime they're curious about their home's value. However, a lender won't use an appraisal unless it comes from its network of approved, neutral appraisers.

Read more: How long does a home appraisal take?

Home appraisal costs

While the lender requires an appraisal, the buyer generally picks up the tab (or the homeowner, in the case of a mortgage refinance). The cost of the appraisal depends on several factors, including:

• Location. Home appraisals are generally more expensive in large cities and areas with a higher-than-average cost of living.

• Property size and complexity. Appraisals typically cost more for large, complex, or unusual properties that take longer to evaluate. For example, a luxury beachfront home in a secluded neighborhood will take more time (and cost more) to appraise than a small home in a tract subdivision.  

• The number of comparable properties. Rural or secluded homes have few neighbors, so appraisers charge more for the extra time it takes to find and justify suitable comps.  

The cost of single-family home appraisals ranges between $300 and $1,200, with a national average of $400, according to Fixr.com.  

Wrapping up

A home appraisal is a professional opinion of a property's value based on its condition and comparing recently sold homes in the area. If you finance a home purchase with a mortgage, your lender will require an appraisal to confirm the sale price makes sense. 

If the appraisal comes in low, you might need to negotiate with the seller for a lower price or rethink the purchase. However, when everything goes smoothly — and the home appraises at or above the contract price — you can tick the appraisal box on the closing checklist and move ahead with closing.