Appraisal

Appraisal summary:

• An appraisal is a professional opinion of the fair market value of a piece of real estate. Lenders rely on appraisals to make sure they don’t loan more money than the property is worth. 

• Appraisals can be done in person or by software.

• If an appraisal comes in low, your lender might adjust the amount they are willing to loan you.

Appraisal definition and meaning

An appraisal is a professional assessment of an asset's fair market value (FMV). Fair market value represents the price that a buyer is willing to pay for a piece of property, given the current market conditions. 

Appraisals serve an important function in mortgage lending, as lenders use them to determine what a home is worth. If you're buying a home or borrowing against your home, the appraisal value influences how much you can borrow, as well as your interest rate and down payment.

Appraisal basics

Appraisals help lenders, homebuyers, and homeowners assess the value of a home. Home value is an important consideration if you:

• Want to buy a home and plan to apply for a mortgage

• Own a home and want to refinance your current mortgage

• Plan to borrow against your home equity with a home equity loan or line of credit (HELOC)

Lenders typically require appraisals to ensure that the home's value and the amount you want to borrow are aligned. The appraisal, along with other factors, determines the maximum amount the lender is willing to offer. If the home's appraised value is below what’s needed for your desired loan amount, you may be denied. 

How home appraisals work

When you apply for a mortgage, home equity loan, or HELOC, the lender will schedule an appraisal through a licensed professional. Many home equity and HELOC lenders use AVM software. AVM stands for automated valuation model, and it’s a sophisticated way of using technology to value homes.

If there’s a fee for the appraisal, you'll need to pay it before the appraisal takes place. A typical in-person appraisal fee is around $500, though your cost may be higher or lower. Many home equity lenders offer AVMs for no additional charge.

At an in-person appraisal, the appraiser visits the home to inspect it. They may need to enter the home. An AVM is handled remotely.

Once an appraisal is finished, the appraiser prepares a formal report with their assessment of the property's condition and its value. You and your lender will get a copy of this report for review.

What happens if the appraisal value is too low?

If you’re trying to borrow against your home equity and your appraisal value comes in low, that could put your loan in jeopardy. When that happens, you have some options. You could:

• Borrow less.

• Appeal the appraisal or request a second appraisal to determine value. 

(If you’re buying a home, you could also increase your down payment or negotiate the purchase price with the seller so that it matches the appraisal value.)

As you weigh your options, you have to consider what's most realistic. 

In the worst-case scenario, the loan falls through. If that happens, there may be other ways to reach your financial goals. You could explore whether a personal loan could meet your needs. Or you could postpone your project until you build more home equity and can qualify for the loan you want.