What to Know About the Appraisal Process (Buyer)

Residential property appraisals are conducted by licensed residential or certified residential appraisers to helps the lender ensure the purchase price is in line with the property’s value. Today, an appraisals may or may not require an in-person visit. Appraisers also conduct “desktop appraisals” on homes that don’t require an on-site inspection, and hybrid appraisals, in which on-site information is gathered by a third party.

Here are five important things to know about appraisals:

Appraisals help guide mortgage terms.

Appraised value of a home is a crucial factor in the loan underwriting process, helping to determine the loan-to-value ratio—the percentage of the home’s price that you’ll be borrowing. The balance is your down payment. The amount put down can impact your borrowing terms. For example, with a conventional conforming loan, a down payment of less than 20% will trigger the need to pay a monthly private mortgage insurance premium.

Appraised value is not a concrete number.

Appraisers follow a strict standard for their work and provide a professional opinion of value—but valuing property isn’t an exact science. A change in a home’s condition, the appraiser doing the work, or market conditions can all alter the appraised value.

Appraised value doesn’t represent the whole picture of home prices.

The appraised value is different from the sales price. An owner who needs to sell quickly may set a price below the appraised value; a seller in no hurry may set the price high and wait for a buyer with the cash to make up the difference.

Appraisers use data from the recent past.

Appraisals are often considered somewhat backward looking, because they use sold data from comparable properties (often nicknamed “comps”) to help come up with a reasonable price.

There are uses for appraised value outside of the purchase process.

Besides being important to the purchase a a home that’s being financed, appraisals are also completed to determine insurance value, replacement value, and assessed value for property tax purposes.