When Is a Home Appraisal Done and Why Is It Needed?

A home appraisal is an objective assessment conducted by a licensed appraiser to determine a property’s estimated fair market value. This valuation serves a fundamental purpose in the real estate market, providing an independent opinion of worth based on an in-depth analysis. The appraiser considers various factors, including the property’s characteristics, prevailing market trends, and recent sales of comparable properties. This process ensures that the property’s value is accurately reflected, which is important for all parties involved in a real estate transaction.

Appraisals for Home Purchases

When purchasing a home with a mortgage, an appraisal is a standard and often mandatory step. It is typically conducted after a purchase agreement has been accepted, but before the final loan approval and closing. The mortgage lender usually orders the appraisal once the buyer’s loan application package has been submitted and begins the underwriting review. This timing, often occurring approximately two to three weeks after formally applying for the mortgage, allows the lender to properly assess the application before incurring the appraisal cost.

Lenders require an appraisal during a home purchase to protect their financial investment. The property serves as collateral for the loan, and the appraisal ensures that the amount being lent does not exceed the home’s market value. This mitigates the risk for the lender in case the borrower defaults, as they need assurance that they could recover their investment if the property were to be sold through foreclosure. The appraisal confirms the property’s value sufficiently supports the loan amount, aligning the financing with the asset’s worth.

The process typically involves an on-site visit, followed by research and report generation, which can take several business days to a few weeks. The full appraisal report is usually provided to the lender within 6 to 20 days. These reports are generally valid for 120 days for existing homes. The cost of the appraisal, typically ranging from $300 to $450, is generally borne by the buyer as part of the closing costs. If the appraisal value comes in lower than the agreed-upon purchase price, it can create an “appraisal gap,” potentially jeopardizing the transaction. The buyer may need to negotiate a new price, pay the difference out-of-pocket, or, in some instances, withdraw from the purchase.

Appraisals for Refinancing

When homeowners refinance an existing mortgage, an appraisal is frequently required to reassess the property’s current market value. Similar to a home purchase, lenders mandate this to ensure the property adequately secure the new loan. This appraisal typically occurs after the refinance application is submitted and is part of the underwriting process, preceding final loan approval.

Lenders require an appraisal during refinancing for risk management. The appraisal helps determine the updated loan-to-value (LTV) ratio, which assesses the homeowner’s equity in the property. This valuation informs the lender about the maximum loan amount they are willing to extend and can influence the interest rate offered. The appraisal confirms that the property’s value remains sufficient collateral for the new mortgage.

While most refinance transactions require an appraisal, certain exceptions exist. Some government-backed programs, such as specific FHA Streamline or VA Interest Rate Reduction Refinance Loans, may not always require a new appraisal. An appraisal might be waived if the borrower has substantial equity or meets specific low-risk criteria. However, for cash-out refinances, where a homeowner borrows against their equity, an appraisal is almost invariably required to determine the accessible funds. A lower-than-expected appraisal can lead to a reduced loan amount, private mortgage insurance (PMI), or even a denial of the refinance application. Conversely, a higher appraisal could result in more favorable loan terms or the potential elimination of PMI.

Appraisals for Other Purposes

Home appraisals serve various other important functions, each with its own specific timing and purpose. In estate planning and probate, an appraisal is often necessary to establish the fair market value of a property for inheritance purposes or for calculating estate taxes. This valuation is typically initiated during the administration of an estate, after an individual’s passing, to ensure accurate financial reporting and equitable distribution among heirs.

Homeowners may seek an appraisal when appealing their property tax assessment if they believe their home has been over-assessed. An independent appraisal provides objective evidence of the property’s market value, which can be presented to local tax authorities to challenge the current assessment. This process usually begins after the annual property tax assessment notice has been received.

In divorce settlements, appraisals are used to determine the equitable division of marital assets, especially real estate. An appraisal provides an unbiased valuation of the property’s worth, aiding negotiations between spouses or serving as evidence in court proceedings. Depending on the situation, a “retrospective appraisal” might be conducted to determine the property’s value at a specific past date, such as the date of marriage.

Some sellers obtain a “pre-listing appraisal” before putting their home on the market. This occurs prior to listing or accepting an offer and can help set a realistic asking price, especially for unique properties or in areas with limited comparable sales. A seller’s appraisal can offer peace of mind and provide an objective starting point for pricing discussions.