What Does Appraisal Mean On A House?
A home appraisal is a professional, unbiased estimate of a property's fair market value conducted by a licensed appraiser. It is typically required when buying, selling, or refinancing a home because lenders use this assessment to ensure the borrower isn't taking out a loan for more than the property is worth.
Purpose of a Home Appraisal
Home appraisals serve several important functions:
- Protects lenders: Ensures the property's value is sufficient to cover the loan amount, minimizing financial risk if the borrower defaults.
- Guides buyers: Confirms the purchase price is reasonable and represents a sound investment.
- Helps sellers: Assists in setting an appropriate listing price for a property.
- Influences loan terms: Lenders use the appraisal to determine interest rates, required down payments, and loan amounts.
What Appraisers Evaluate
During an appraisal, the licensed appraiser will conduct a thorough inspection and analysis:
- Visual inspection: Walk through the interior and exterior of the property to assess its condition, size, and building materials.
- Note amenities: Document features like finished basements, swimming pools, or other upgrades.
- Research comparable sales: Analyze recent sales of similar properties in the area ("comps") to understand current market trends.
- Review neighborhood data: Consider public records and neighborhood statistics.
The appraiser then compiles these findings into a report that includes the estimated home value and explains how it was determined.
What Happens If the Appraisal Is Low?
If a home appraises for less than the agreed purchase price, several options exist:
- Renegotiating the purchase price to reflect the appraised value,
- Having the buyer make a larger down payment,
- Or disputing the appraisal if errors are suspected.
This situation can affect the transaction because lenders typically only finance a percentage of the appraised value, not the sale price.