You have found the home of your dreams and are now working to make it your own. So many terms are being thrown around that you may not understand. This article is to give you a basic understanding of the appraisal process.  

An appraisal is, very simply, an "opinion of value", whether it is a diamond, an automobile or a home. A professional appraiser will visit the home and inspect it. They consider the size, condition, quality and function of the home to help determine the home’s value. The appraiser will generally compare the home with the sale prices of similar homes in the area and add in the inspection information they gathered to determine a value of the home that is being appraised. Comparisons can be made to square footage, appearance, amenities and overall condition.
An individual home's value can be adjusted up or down in relation to what properties are actually selling for in the neighborhood. For example, a home with 4 bedrooms will generally carry a higher value than a home with only 3 bedrooms if all other things are equal. A home that needs exterior painting will carry a lower value than a similar home that has been recently painted. The appraiser will then submit a detailed report to your lender and you, if you specify that in their contract. A whole-house inspection is concerned only with the condition of the home. In an appraisal, condition is only part of a larger picture--including size, neighborhood and general location. Although an appraisal will address the condition of the home (for example, if it needs a new heating system or roof) it should NOT be relied upon as a final determination of the quality of the property. A whole-house inspection is a buyer's best protection against potential defects in the home they want to buy.  

If there have been several similar homes in the area that have sold recently, the appraiser's job is easy. It is more complicated if the home is located in a rural area or a diverse neighborhood. The appraised value will usually be very close to the sale price. If the appraisal comes in lower, the Agent may be able to provide the appraisers with additional information on recent sales which will result in increased value or it will allow the buyer to renegotiate the sales price so they aren’t overpaying for the property. One thing to note is that while the buyer or seller may view the property as a home or an investment, lenders view it in a completely different way. To a lender, property means security in the event a borrower fails to repay a mortgage. Therefore, lenders must know real estate values in order to limit their risks. A professional appraisal protects both the lender (so they don't lend more than a property is worth) as well as they buyer (so they don't PAY too much). If a buyer gets into the heat of the moment and offers too much for the property, the appraisal will often show this and prevent it from happening.  

In most loan situations, the buyer pays for the appraisal, generally at the time of the original mortgage application. The appraisal fee usually runs somewhere between $250 and $500. This fee is non-refundable, so you should be very sure this is the home for you before you get this far in the process. If the appraisal is lower than the amount the lender is willing to finance, then the loan cannot proceed unless either the seller lowers the price or the buyer increases the amount of their cash down payment. This means the re-opening of negotiations for the home purchase. Although an appraisal is not written in stone (miscalculations may have been made, for example) and there may be some "wiggle-room" in the appraisal numbers, if the appraisal comes in considerably below what you have offered to pay, your first inclination should be that you are paying too much. Although you may have to pay for the appraisal service, the investment is a wise one. It can prevent you from paying far more than the property is worth.