What Happens During the Home Appraisal Process: A Buyer’s Guide

If you’re using a mortgage loan to buy a home, you’ll probably have to go through a home appraisal process. Nearly all mortgage lenders require an appraisal to estimate the market value of the property being purchased, prior to approving the loan.

But what happens during this process? How long does it take? And what are the possible outcomes you should prepare for?

Let’s start with the short version. After that, we’ll take a deeper dive.

During a home appraisal, a licensed appraiser will visit the property to evaluate its condition, size, location, and features. The appraiser compares the home to similar properties that have recently sold in the same area, in order to determine its fair market value. Mortgage lenders use this information to ensure that the home’s value supports the loan amount.

What Happens During a Home Appraisal

A home appraisal is a professional evaluation of a property’s value. The final appraisal provides a fair market value estimate for the home.

The “fair market value” is the price at which a property would likely sell in an open market under normal conditions.

Mortgage lenders use appraisals to make smart lending decisions. Remember, in a typical mortgage scenario, the lender will invest a lot more money than the actual home buyer. So the lender will perform due diligence prior to approving the loan, including a home appraisal.

How the appraisal process works in a typical home purchase:

1. The home buyer makes an offer to buy a house.
2. The seller accepts it, and the two parties sign a purchase agreement.
3. The buyer sends a copy of the purchase agreement to their lender.
4. The lender orders a home appraisal. They’re required for most mortgages.
5. The appraiser will evaluate the “subject property” inside and out.
6. He/she will compare the property to similar homes that have sold recently.
7. The appraiser estimates the market value and creates an appraisal report.
8. The appraisal report is sent back to the mortgage lender for review.
9. The next steps depend on whether or not the home “meets appraisal.”

Note: The home appraisal process can vary due to several factors, including the type of home loan being used. But it usually follows the steps and sequence outlined above.

What the Appraiser Looks for During a Visit

The home appraiser will make note of the agreed-upon purchase price. This is the price the buyer has agreed to pay for the property, as written in the purchase agreement.

The appraiser will then review recent comparable sales in the area (or “comps”), to find out how much they sold for. This information helps the appraiser determine what the subject property might be worth.

The appraiser will usually visit the property being purchased to conduct a thorough on-site evaluation. He or she will examine the home inside and out. If the subject property has certain value-adding features that the comparable homes do not have, the appraiser might adjust the market value upward.

During a visit, the appraiser will likely do some or all of these tasks:

• Measure the exterior dimensions of the property.
• Inspect the condition of the roof and exterior walls.
• Note the property’s location and neighborhood characteristics.
• Evaluate the condition of the interior (floors, walls, ceilings, etc.)
• Measure and assess the size of each room.
• Take photographs of the property, both inside and outside.
• Assess any recent renovations or upgrades to the home.
• Note any visible damage or areas in need of repair.
• Evaluate the overall layout and flow of the home.
• Assess the size and condition of the lot, including landscaping.
• Evaluate neighborhood factors like schools, amenities, and crime rates.
• Compare the property to similar homes in the area (comps).

The goal: The appraiser wants to know what the house is worth in the current, local real estate market. He or she will look at any aspect of the property that helps in this assessment.

Reporting Back to the Mortgage Lender

Next comes the appraisal report. This is a boilerplate document with fill-in-the-blank areas for property condition, lot size, comparable sales, and other factors evaluated during the appraisal process.

The report will also include the estimated fair market value of the home. This is basically the appraiser’s best guess as to what the home is worth in the current market, in light of recent sales activity.

The mortgage lender will review the appraisal report and compare it to the amount the buyer has offered to pay for the home (and contained within the purchase agreement).

What happens next will depend on how these numbers line up:

• If the appraised value matches or exceeds the sale price, the transaction can proceed as planned. The buyer will likely secure financing based on the agreed-upon price, and no further negotiations will be needed.
• If the appraised value is lower than the sale price, the buyer and seller must negotiate further. The seller could lower the sale price. The buyer could increase their down payment to cover the difference. Or the buyer could walk away from the deal entirely.

Important: If the buyer backs out of the deal due to a low appraisal, and without a contingency clause in place, they could lose their earnest money deposit. So let’s cover that next…

Using a Contingency to Protect Your Deposit

When you make an offer to buy a house, you have the option to add certain contingencies to your purchase agreement / contract. These contingencies can give you an exit strategy in certain scenarios, including a low appraisal situation.

More importantly, they can allow you to recover your earnest money deposit.

Definition: Real estate contingencies are like escape hatches built into your offer. These legal clauses state that your offer to buy the house is contingent on certain things happening (or not happening) before the sale becomes final.

There are several different types of contingencies, and they all cover different scenarios. A home appraisal contingency allows the buyer to back out of the deal and keep their earnest money if the property does not appraise at the agreed-upon purchase price.

Here’s the worst-case scenario from a buyer’s perspective:

• The home appraises for less than the purchase price.
• The seller refuses to lower the sale price to match the appraisal.
• The buyer cannot come up with more cash to cover the difference.
• The buyer chose not to include an appraisal contingency in the contract.

In this scenario, the home buyer might have no choice but to back out of the deal, while forfeiting their earnest money deposit in the process.

On the other hand, if the buyer included a standard appraisal contingency within the contract, they would be able to exit the transaction and recover their deposit.

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Disclaimer: This article provides a simplified overview of how the home appraisal works. This process can vary from one transaction to the next due to a number of factors. So your situation might differ from the examples provided above. Your mortgage lender can answer any questions you have about the appraisal process, and a real estate agent can advise you on the use of contract contingencies.