When Is an Appraisal Done in the Loan Process?

A property appraisal is a professional, unbiased assessment of a home’s market value in the loan application process. It helps establish a fair price for the property, protecting both the lender and the borrower. The appraisal provides an objective perspective on the property’s value, independent of the sales price.

Purpose of an Appraisal in Loan Applications

Lenders require a property appraisal for risk mitigation. The home serves as collateral for the mortgage loan, and the lender needs assurance that the property’s value supports the loan amount. Should a borrower default, the lender may need to sell the property to recover their investment, and the appraisal ensures sufficient value to cover potential losses.

An appraisal also offers protection to the borrower. It provides an independent valuation, preventing a buyer from overpaying for a property. This helps borrowers make informed financial decisions. The appraisal confirms the property’s market value aligns with the loan amount.

Navigating the Appraisal Within the Loan Process

The appraisal occurs after the loan application has been submitted and the buyer’s offer accepted. It takes place once a purchase contract is executed. This step is initiated after the borrower indicates intent to proceed with a chosen lender.

Lenders order the appraisal once initial loan pre-approval is granted and property selection is complete. This timing allows the lender to review preliminary application details before incurring the appraisal cost. While the buyer typically pays for the appraisal, the lender is responsible for ordering it, often through an appraisal management company.

The appraisal process begins two to three weeks after formally applying for the mortgage. It is a prerequisite for final underwriting approval. For new construction, the appraisal is not ordered until the property is substantially complete. The process, from order to report delivery, can take a few days to a few weeks.

What Happens During an Appraisal

Once the lender orders the appraisal, a licensed appraiser is assigned. The appraiser schedules a visit to the property, coordinating with the homeowner or real estate agent. During this on-site visit, the appraiser conducts an inspection of the home’s interior and exterior.

The inspection involves evaluating the property’s condition, size, layout, and any notable features or improvements. The appraiser takes measurements, draws floor plans, and photographs various aspects of the home. They assess the quality of construction, number of rooms, and functionality of major systems. This assessment helps identify issues affecting value.

Following the on-site inspection, the appraiser conducts research to determine the property’s fair market value. This research includes analyzing recent sales of comparable properties in the local area. They consider factors like age, size, condition, and location of these homes. Collected data and market trends are compiled into an appraisal report, which is submitted to the lender.

Appraisal Results and Loan Implications

Once the appraisal report is completed, it is sent to the lender. The outcome impacts loan approval. The most favorable result is when the appraised value meets or exceeds the purchase price, allowing the loan to proceed.

If the appraisal value comes in lower than the agreed-upon purchase price, it creates an “appraisal gap.” The lender will only approve a loan amount based on the appraised value. The buyer may need to cover the difference in cash, renegotiate the purchase price, or withdraw from the deal if an appraisal contingency is in place.

A low appraisal impacts the loan-to-value (LTV) ratio, which lenders use to assess risk and determine loan terms. A higher LTV can lead to less favorable loan terms, or loan denial. The appraisal report is a necessary document for final loan approval.