What Is a Home Appraisal and Why Does It Matter?

If you’re buying or selling a home, you need to know how much it’s worth so you can make an informed decision. A home appraisal determines a home’s value using various methods and data to give a fair and accurate assessment. Lenders require an appraisal before approving a new mortgage or a loan for refinancing, so it’s important to have an objective, accurate assessment to confirm the home’s value. Learn more about home appraisals and why they’re such a critical part of the home-buying process.

What Is a Home Appraisal?

A home appraisal is a determination of how much a home is worth at a particular point in time. Appraisals take into consideration the specifics of a property, the condition of the home, any unique features, the value of comparable homes in the area, and more to arrive at a home’s value. There are several types of appraisals, a market value appraisal being the most commonly used type for residential real estate transactions.

A local house appraiser is a licensed and certified professional who will provide an impartial assessment of a home’s value using a home appraisal checklist and market data. Appraisals are an important part of buying and selling a home to ensure the house is being sold at the correct price.

When Do You Need a Home Appraisal?

Mortgage companies typically require an appraisal before underwriting a loan to confirm that they don’t lend more than the property is worth since the home acts as collateral for the loan. Most often, the buyer pays for the appraisal, or it’ll be built into the closing costs. You’ll also need a home appraisal before refinancing—the mortgage company wants to ensure their loan is in line with what the house is currently worth.

Appraisals are sometimes necessary even before you have a home to appraise. When you’re building a home, you’ll need a land appraisal before purchasing the land you’re building on. Insurance companies may also require an appraisal, particularly after you’ve done value-adding updates.

How Is a Home Appraisal Conducted?

Appraisers determine house value using a combination of methods and data sources, including inspection results, comparisons to sales prices for similar properties, neighborhood information, and current market trends. Appraisals required by the U.S. Department of Housing and Urban Development (HUD) for Federal Housing Administration (FHA) loans also require additional reporting on the home’s safety and security according to the FHA appraisal guidelines.

Once the appraisal has been conducted, the appraiser will compile a report to submit to the lender and other involved parties that details the home’s value. Appraisals are generally conducted in a few hours or less in your home, but the report may take up to several weeks to compile.

What’s the Difference Between an Appraisal and an Inspection?

While an appraisal uses information that can be obtained in an inspection, the two are very different. The focus of an appraisal versus an inspection is different—an appraisal determines the home’s value, while an inspection details specific observations about the home’s condition. Inspections aren’t always required to obtain a mortgage, but with very few exceptions, appraisals are. A home inspector won’t make a determination about your home’s value, but they will pinpoint any safety concerns, code violations, or areas in need of repair.

A home appraisal costs an average of $350 and a home inspection costs about the same. It may seem redundant at first, but if you’re looking to buy a home, having both an inspection and an appraisal will ensure you have a full picture of the property you’re considering.