What Is a Home Appraisal and Who Pays for It?

Get to know the basics on what a home appraisal is, when it takes place and how it factors into your ability to buy a home.

U.S. News & World Report

What Is a Home Appraisal?

Home appraiser assessing a house

Lenders often have a list or network of approved local appraisers they will accept valuations from.(Getty Images)

For homebuyers financing their purchase with a mortgage, a home appraisal is often a required step of the process in order to get an approved loan and close on the deal.

A home appraisal can be a valuable step outside of a pending real estate deal as well, either for a homeowner looking to determine the right asking price to put it on the market, or when looking to estimate the monetary value of a deceased loved one's estate.

The best way to use an appraisal to your advantage is to understand what it is and how it's used by others in the homebuying or selling process. Here's what you need to know:

A home appraisal is an estimate of the market value of a residential property at a specific point in time, completed by a professional.

Once a home is under contract between the buyer and seller, a lender will typically require an appraisal during the underwriting process to determine whether the agreed-upon sale price of the home reflects the market value of the property.

"The appraisal is really used for the lender to determine the value of the collateral," says Brian Smith, regional manager, mortgage adviser and executive coach for Union Home Mortgage in Sandusky, Ohio. A lender won't want to approve a mortgage for $350,000 if the home is only worth $300,000, for example.

While there are many situations when an individual can hire a home appraiser for a private appraisal, unrelated to a loan application, lenders often have a list or network of approved local appraisers they will accept valuations from, depending on the location of the property in question.

"What you want when you get a home appraisal is you want a very unbiased opinion," says Rodman Schley, a licensed appraiser in Denver and national president of the Appraisal Institute, an international association for professional appraisers. Schley explains that lenders will often have an employee to liaise between the appraiser and loan underwriter to avoid any possible influence on the valuation.

A home appraisal can involve a few factors, including sales comparisons of similar properties in the area, how condition or improvements can add to or detract from value as it compares to those other properties and the potential income for a piece of real estate, if it's intended to be used as a rental or other type of income-producing property.

An appraiser will take the details of the home, including "the age of the house, size of the entire property, number of bedrooms, number of bathrooms, how big the yard is," Smith says. "They're looking for homes that are recently sold that are closest in proximity to that house."

Schley notes an appraiser is typically looking for three to four deals to compare. The closer in location and more recent the comparable sales are, the better. But when a property is unique for the area or few homes have sold recently, "you might have to expand your location parameters to find a similar home throughout a wider area," Schley says.

When possible, an appraiser will also visit the property to examine the home's condition and see any features that would affect the appraised value.

In the coronavirus pandemic, many government agencies including the Federal Housing Agency, Department of Veterans Affairs, Fannie Mae and Freddie Mac, eased their requirements for appraisers to enter properties, in an effort to avoid unnecessary contact between individuals. However, when possible, "the preference is always to go in and see the improvements," Schley says.

If you're not getting a conventional mortgage and are instead opting for something like a VA or FHA loan, for example, the appraisal has additional steps the government agencies require.

The VA, for example, has minimum property requirements, including working electricity, functional heat and air, an adequate roof and no lead paint or evidence of mold, termites or dry rot, among others. While a VA appraisal may involve more in-depth information about the condition of the property than an appraisal for a conventional loan, "it's not as granular as a home inspection," says Chris Birk, vice president of mortgage insight and director of education for lender Veterans United and author of "The Book on VA Loans."

The average single-family home appraisal costs $340, according to HomeAdvisor. Costs can vary depending on the individual appraisal company, location of the property, size and condition of the home and required details either by you or the lender. National lender Quicken Loans notes that appraisals frequently cost somewhere in the range of $200-$600.

Traditionally, the buyer pays for a home appraisal because it is required by a lender. When a private appraisal is ordered by a homeowner or executor of an estate, the individual who orders the appraisal will pay for it.

While an appraisal fee may be included in a list of closing costs, or one-time fees due at closing, it's likely the appraisal fee will be due ahead of closing. "(The lender) might include the appraisal fee upfront, because that is a cost incurred prior to closing," Schley says.

If your real estate deal falls through after an appraisal has taken place, consider it a sunk cost. "The appraiser completed a service, he got paid for it – unfortunately the money is spent," Smith says.

The valuation that comes from an appraisal can contribute to a real estate deal falling through. If an appraiser reports the valuation as lower than the agreed-upon sale price, the lender will likely be unwilling to approve a mortgage above the appraised price. To salvage the deal, the buyer can come up with the cash to make the difference, or ask the seller to agree to the lower price – if the seller won't budge on the price and the buyer doesn't have enough cash, the deal falls apart.

In the case of a VA appraisal where the minimum property requirements reveal issues like an HVAC system that needs repair or a crawl space that needs venting, the VA requires the issue be dealt with in order for the loan to be approved. Often, that means the seller is responsible for covering the repairs, "but the veteran themselves can look at paying for repairs if that's what it takes to keep the deal going," Birk says.

When your lender requires an appraisal, the appraiser will be contacted by the lender directly, and in the case of specialty appraisal like that for the VA, the government agency handles initiating the appraisal. But if you're looking to get a private appraisal done for another reason, you'll want to find one local to you.

A simple online search for home appraisers in your area may help you find local companies. The Appraisal Institute also has a search feature to help you find licensed appraisers local to you that are a part of the organization. Regardless of where you're searching, Schley recommends looking for an appraiser with an SRA designation, which means he or she is trained in appraising residential properties.

Wealth of Knowledge Podcast

Wealth of Knowledge is a weekly podcast featuring tips and expert insight on all things money: personal finance, careers, investing, real estate and more.

Wealth of Knowledge logo