Home appraisals are essential components of real estate transactions.
Whether you’re buying, selling, or refinancing your home, an appraisal will be part of the process. However, despite the fact that they are a standard step in real estate deals, most people don’t fully understand home appraisals or how an appraiser determines a home’s value.
If you are among those that need an explanation of what an appraisal is, then keep reading – this article is for you.
Home Appraisals – What Are They?
A home appraisal is an unbiased determination of a house’s value. Not just anyone may determine the appraisal estimate amount. Only a licensed, trained, and experienced individual may make the assessment. Most of the time the buyer and seller don’t select the appraiser. Instead, the lender will hire someone who is an objective third-party, separate from the other parties involved in the transaction.
In a real estate purchase or sale, an appraisal is needed to decide if the home for sale is worth the asking price based on thehome’s special features, specific location, and condition. If you are refinancing, the lender orders an appraisal to determine the appropriate loan amount to allow you.
Now you know what a home appraisal is and what purpose it serves. Let’s look at how the value of your home will be determined.
Also Read: How to Find The Best Mortgage Lender in MN
The Difference Between A Home Appraisal and Home Inspection
Some people may confuse an appraisal with an inspection. While similar, some primary differences can help distinguish the two. Even though the two processes are similar, the goals of each are very different. An appraisal determines the value of the home, while the inspection uncovers damages to the property and estimates repair costs. Some aspects are present in both processes, while others are unique to one or the other. For example, both appraisals and inspections check the condition of all primary structures and systems within the home. Only inspections provide costs estimates for any repairs the home needs and only appraisals check the price of recently sold comparable properties.
Both processes are essential parts of real estate transactions and contain some of the same aspects, but they have very different purposes and goals. Now you know what a home appraisal is and what purpose it serves. Let’s look at how the value of your home will be determined.
What Determines An Appraisal Value?
Home appraisals are more for lenders than they are for home buyers and sellers – although there are benefits for them, too. For this reason, the lender usually chooses the appraiser.Qualified appraisers are licensed and certified and have general knowledge of the local area. The appraiser cannot have anypersonal interest whatsoeverin the affairs of the transaction and must remain unbiased.
Standard factors that provide the final result of the appraisal value arerecent sales of comparable nearby properties and current market values.The home’s amenities, such as the number of bathrooms and bedrooms, functionality, square footage, and floor plan, also play a part in determining the market price. The appraiser will visually inspect the house inside and out, making notes of any conditions that might negatively impact the value of the property, such as water damage or cracks in the foundation.
Usually, when appraising a single-family home, the appraiser will use Fannie Mae’s Uniform Residential Appraisal Report. This report requires them to describe the inside and outside conditions of the property, comparable sales, and neighborhood. They will then analyze and make conclusions about how much the property is worth based on their observations.
Aside from the appraiser’s opinion, the report includes other elements such as:
- A street map that indicates the location of the property
- The comparable sales that they used
- Sketch of the exterior building
- How they calculated the square footage
- Photos of the home from the street view, the front of the house, and back of the house
- Photos of the comparable properties used
- Market sales data
- Public land and tax records
An appraiser will use all of these elements to assess the fair market value of a property. While the lender orders the appraisal, the borrower typically picks up the tab for it.
We know that home appraisals benefit lenders, but how can they affect you as a buyer or seller?
How Appraisals Affect the Mortgage Process
Qualified appraisals performed by certified professionals have the potential to protect not only mortgage lenders but homebuyers and sellers as well. Both federal and state governments regularly monitor individual states’ licensed appraisal management companies and appraisers, providing standards that protect all parties involved in a home buying transaction.
For homebuyers, an appraisal ensures that they aren’t paying more for the home than what it’s worth. In addition to that, it can also be an excellent negotiating tool when discussing the price of the house. Adversely, an appraisal that determines the value to be lower than the asking price can stall the transaction until all parties are satisfied.
As for sellers, the benefits of appraisals aren’t as numerous. An appraisal that is lower than your asking price can cause a reduction in your profit. You can dispute the appraiser’s findings, but federal guidelines can make it difficult to challenge.
If you’re refinancing your home, a low appraisal may halt the process. The appraisal value has to be equal to or above the amount you requested to borrow before the refinance process can commence. However, for those who currently have an FHA mortgage, an appraisal isn’t required through the FHA streamline program.
As you proceed through buying, selling, or refinancing your home, an appraisal might seem like just another step to complete. It is essential to the process, however, and plays a crucial role determining the final selling price and loan amount for a house. Understanding what a home appraisal is and how appraisers calculate it helps you know what to expect and prepares you for any outcome. Appraisals protect buyers, sellers, and lenders alike, so it is helpful to understand them.
If you are looking to take out a loan local to the Minneapolis or St. Paul, Minnesota area, give Twin City Lending the opportunity to match you with one that fits your wants and needs.