The Home Appraisal Process Explained

By Brandon Cornett
© 2011 All rights reserved

Welcome to another video lesson from the Home Buying Institute. In this video, Brandon will explain what happens during the home appraisal process, and how it relates to you as a buyer. You can also find a full transcript below, if you prefer to read the lesson.

Transcript: In this video, we are going to talk about the home appraisal process. This is a relevant topic to anyone who is buying or selling or home, because the home appraisal ties into the mortgage loan (if the buyer is using a mortgage).

Let's start by talking about when a home appraisal generally takes place. Let's say that John and Jane have been shopping for a home, and they finally find one that meets their requirements. So they put in an offer to buy the home. They make a purchase offer. Just to keep things simple, we will assume the seller accepts the offer with no negotiation process whatsoever. That's because John and Jane are smart buyers, and they made a reasonable offer based on comparable sales data.

Offer First, Home Appraisal Second

After the purchase offer has been accepted, the home appraisal will take place. So they've made an offer to buy the house, and the seller has accepted it. Next, a licensed home appraiser will come out to look at the property. This appraiser is sent by the mortgage lender. He doesn't necessarily work as part of the lender's company, but he is hired by the lender to appraise the property. Why? Because the lender has a major investment in the house.

Remember, when you buy a house using a mortgage loan, you're not putting up very much money (compared to the lender's contribution). Even if you put down 20%, which is a large down payment, the lender is still making an 80% investment. So they have a lot of money invested in the property. They want to make sure the house is worth what you've agreed to pay. And that's what the home appraiser does. He wants to make sure the home's value is at least as much as what you're going to pay for it.

What the Appraiser Does

How does the appraiser determine the current market value of the home? He will look at tax records to see the sale history of the home, if applicable. He will look at the tax assessor's current assessment of the property, or what they think it's worth for tax purposes. He's going to look at comparable sales or comps, which are similar homes that have sold in the same area over the last few months. All of this will help him determine what the house might be worth in the current market.

Now there are some things that might be unique about this house, and the home appraiser will consider these as well. These are upgrades that might add value to the home. Maybe the homeowners put in a swimming pool or a new kitchen.

He'll also consider any unique features, such as a waterfront view -- anything that might make the house worth more than the comps. So he's looking at the comps, he's looking at the tax records, and he's examining the property itself.

He may also take pictures of the home during the appraisal process, so he can measure the quality and condition of the property. He will compare these to pictures of the comps. He will probably drive through the neighborhood to look at the other houses that have sold recently, so he can better compare them to the home being appraised.

Based on all of this research, the appraiser will come up with an appraisal amount for the home.

Possible Outcomes

Let's say that in this scenario he determines the home is worth $400,000. Now if this amount is equal to, or greater, than the amount John and Jane have agreed to pay for it, they shouldn't have any trouble getting the mortgage loan. The appraisal has "met" the purchase price.

But if John and Jane agreed to pay $450,000 for the house, then they have a problem. They have offered more than the home appraiser thinks the house is worth. So their lender probably won't give them a loan for $450,000, or for whatever amount minus their down payment. That's because the home appraiser has told the lender it's not worth that much.

In this scenario, the seller can lower the asking price, or the buyer can pay more money out of pocket. But it's generally not a good idea to pay more for a home than it's worth. If the seller doesn't agree to lower the price, the buyers can simply walk away from the deal. It happens.

This is how the home appraisal process works. These are the different types of scenarios that can result from an appraisal. The buyer makes an offer on the house. The seller accepts the offer. The lender will eventually send an appraiser to look at the house, because the lender is making a large investment in the property. They want to make sure the home is worth what the buyer has agreed to pay.

If the home "meets" appraisal (which means the appraiser says it's worth at least what the buyer is offering), then the mortgage loan will probably go through. If the home appraises for less than the amount offered, the buyer and seller will have some decisions to make. In many cases, the seller will lower the asking price to reflect the appraisal. But not always. If the seller refuses to do this, the buyers will have to decide whether they want to pay the difference or simply walk away.

If you would like to learn more about the home appraisal process, or anything else about buying a house, you can use the search tool at the top of this page.