Like a home inspection, the home appraisal process is a key part of the home buying experience and can also be part of refinancing.

Where a property inspection gives you a report on the home's condition, the appraisal tells you about its value. When a house is appraised, the evaluation is undertaken by an unbiased and licensed or certified professional, typically from a third-party service hired by the lender. This part of the process is mandated by law to prevent anyone involved in the transaction from swaying the appraiser's report.

Appraisals serve the buyers and lenders. Both benefit from getting a thorough assessment of the fair market value of the property in question. Buyers can avoid paying too much for a house, and the lender gets to minimize the size of the loan it grants for the loan, thereby lowering its risk.

Not only is the process beneficial, but it is also mandatory. Lenders typically won't approve a loan without an appraisal and tend to stick to the value assessed in the report. However, this won't necessarily match the asking price, which means the financing you receive will be lower than what you need. If the appraisal comes in low, you can pay out of pocket to cover what the financing won't pay for or negotiate with the seller to bring the price down.

How are homes appraised?

Appraisers take numerous factors into account when performing a valuation for the home you want. Here are some of the areas that are assessed:

  • Exterior and structure: The process begins outside. The foundation, siding and roofing will be inspected based on their quality and condition. Also, the appraiser will look for any issues such as cracks, leaks and other damage. Both the front and back yards will also be examined.
  • Interior: Once inside the property, the appraiser will determine the condition and quality of things such as floors, walls, plumbing, appliances, windows, lighting fixtures and the inside roof. These considerations will be tailored to items that will stay in the home after the seller moves because they are affixed to the structure.
  • Renovations and upgrades: If the seller put some money into the home before listing, those improvements will be factored into the appraisal. The homeowner will need to provide a written record of these upgrades when the appraiser is conducting his or her walkthrough.
  • Amenities: This category is where benefits such as central heating and air, fireplaces and intercom systems are evaluated. Keep in mind that these features don't necessarily convey value, and the appraiser's assessment may depend on the popularity of certain amenities in the community. A swimming pool, for instance, may not give any value in Alaska compared to Arizona.

Appraisals can take a few hours. On top of the walkthrough, the appraiser will consider the sale price of comparable properties in the area. All of the information, including photos and sketches, will be recorded on a report, which is typically Fannie Mae's Uniform Residential Appraisal Report for single-family homes.

Who pays for the appraisal?

Although the lender sets up the appraisal, you're responsible for the bill. You can choose to pay up front, but the expense is usually part of your closing costs. The approximate price will be included in your good faith estimate. The final figure will depend on numerous factors, including the size, location and value of the property.

Keep in mind that the appraisal can make or break the transaction. If it comes in lower than asking price, the seller may not be willing to negotiate, and you'll have to find another property.