What Are Appraisals?

Why do lenders require an appraisal to get a mortgage loan?

Because — if a bank lends you, say, $300,000 to buy a nice craftsman, they want to make sure that home is actually worth $300,000 — and not two bottle caps, some loose change, and a free ticket to a water park.

Appraisals are thorough, but they’re also fairly straightforward.

As Easy as One, Two, Three

1. The Inspection

First, there’s an actual appraisal inspection of the property.

Important: Don’t confuse this with the “home inspection,” which comes later on and is totally different.

In general, the appraisal inspector is looking to confirm some basic info about the home:

• Is the home located where it’s supposed to be?
• Is it actually habitable?
• How much land area comes with this property?
• Does the square footage match what’s been reported?
• Any obvious damage inside or out that could ding the property value?
• Same number of bedrooms as what’s been reported?
• Is the basement finished or updated? (Counts for appraisal, not square footage.)
• Does the HVAC system seem to be in working order?
• Are upgrades reported by the seller accurately described?
• Any permanent, built-in appliances or other features that could affect value?

The inspector will also assess the front and back of the home, check that each reported “bedroom” has its required window and required closet, and consider other features or upgrades that might or might not play a role in in their assessment.

With their questions answered, the appraiser is off to crunch some numbers on comparables.

2. The Comparables

At this point, it’s on to the next step — pulling data on similar homes in your neighborhood and looking at what such homes are selling for locally. These homes are called comparables or comps.

Not just any comp homes will do, though. Appraisers are looking for homes that ideally have the same number of bedrooms and very similar square footage. Lenders often get pretty specific about their requirements for an appraiser’s comps, as well. These can be things like:

• Comps that are within a close proximity of the home, sometimes as little as a mile radius is required.
• Comps that are fresh sales, almost never more than a year old, with a preference for sales within six months.
• A minimum number of closed comps, sometimes three or more completed sales are required for comparison.
• A minimum number of active listings, sometimes two or more.

Sometimes there may not be enough sales in a particular neighborhood to meet a lender’s requirements. In that case, the appraiser will have to dig deeper to find suitable comps and supply the lender with a detailed explanation.

After the appraiser settles on some suitable comps, it’s time to write up their findings and put a price on the home in question.

3. The Report

For the last task of the appraisal, the appraiser provides the lender with a final appraisal report. This report will combine all the info gathered during the inspection plus all the data on comparable homes to come up with the home’s “market value.”

The market value is the appraiser’s professional opinion about the true value of the property in its current condition. It’s impartial, fact based, and meant to help the lender weigh the risk of approving the borrower’s loan.

Appraisals Help Lenders Make Loans

That makes appraisals a really important part of the mortgage lending process. Unfortunately, not every loan to every borrower works out. By verifying the home is worth the same or more than the amount of the mortgage loan, the lender ensures that, should things go bad, they’ll be able to sell the home for enough money to recoup their losses. That makes approving the loan a good deal for the lender and for you, the borrower.

Lending can be a risky business — making sure a home is worth what sellers and agents say it is makes lending safer. In the long run, that means more people can become homeowners