Essential information for buyers, sellers, and refinancers. Whether you're purchasing a home with a mortgage, refinancing your existing mortgage, or selling your house to anyone other than a cash buyer, a home appraisal is a vital component of the transaction. Whether you're a buyer, homeowner, or seller, you'll want to understand how the appraisal process works and how an appraiser determines the value of a home.

KEY POINTERS: An appraisal is an impartial professional opinion on the value of a home and is always used whenever a mortgage is involved in the buying, refinancing, or selling of that property. A qualified appraiser creates a report based on a visual inspection, using recent sales of similar properties, current market trends, and home aspects (e.g., amenities, floor plan, square footage) to determine the property's value. The applicant usually bears the cost of the appraisal, which can be several thousand pesos. When the value from the appraisal is lower than expected, the transaction may be delayed or even cancelled.

What is a home appraisal? An appraisal is an impartial professional opinion on the value of a home. Appraisals are almost always used in purchase and sale transactions and are commonly used in refinancing transactions. In a purchase-sale operation, an appraisal is used to determine if the contract price of the home is appropriate given the home's conditions, location, and features. In a refinancing operation, an appraisal assures the lender they aren't lending the borrower more money than the home is worth. Lenders want to ensure homeowners aren't borrowing too much for a property because the home serves as collateral for the mortgage. If the borrower doesn't pay the mortgage and goes into foreclosure, the lender will sell the house to recover the loaned money. The appraisal helps the bank protect against lending more than they could recover in a worst-case scenario.

The appraisal process and how values are determined: Since the appraisal primarily protects the lender's interests, the lender typically orders the appraisal. An appraisal costs several thousand pesos, and the borrower usually pays this fee. According to the college of appraisers, an association of professional real estate appraisers, a qualified appraiser must be licensed or certified and be familiar with the local area. Federal regulations dictate that the appraiser must be impartial and have no direct or indirect interest in the transaction. The value derived from a property appraisal is influenced by recent sales of similar properties and current market trends. Home amenities, the number of bedrooms and bathrooms, the floor plan's functionality, and the square footage are also key factors in evaluating a home's value. The appraiser should perform a complete visual inspection of the interior and exterior and note any condition that adversely affects the property's value, like necessary repairs. Typically, appraisers use the Uniform Residential Appraisal Report for single-family homes. The report asks the appraiser to describe the property's interior and exterior, the neighborhood, and nearby comparable sales. The appraiser then provides an analysis and conclusions about the property's value based on their observations.

The report should include:

A street map showing the appraised property and the comparable sales used. An exterior building sketch. An explanation of how the square footage was calculated. Front, back, and street scene photos. Exterior front photos of each comparable property used. Other relevant information, like market sales data, public land records, and public tax records, that the appraiser needs to determine the property. Important: When refinancing a mortgage, if the appraisal value places your home's equity below 20%, you'll be stuck paying private mortgage insurance (PMI).

What Home Buyers Need to Know:

When you are buying a home and are under contract, the appraisal will be one of the first steps in the closing process. If the appraisal comes in at or above the contract price, the transaction proceeds as planned. However, if the appraisal is lower than the contract price, it can delay or derail the transaction. It's likely that neither you nor the seller want the transaction to fall through. As a buyer, you have the advantage that a low appraisal can serve as a negotiation tool to persuade the seller to reduce the price. The bank won't lend you or any other potential buyer more than the house's value. While appraisals help buyers avoid overpaying for homes, a seller might feel a low appraisal is inaccurate and be reluctant to lower the price. If a poor appraisal stands between you and purchasing or selling your home, seek a second opinion through another appraisal by a different individual. Appraisers can make mistakes or have imperfect information. Better yet, present a factual case for a higher value to the original appraisal. They might agree with you and adjust the appraisal.

What Home Sellers Need to Know: As a seller, a low appraisal, if accurate, means you might need to lower your home's price to sell it. Waiting for a cash buyer who doesn't require an appraisal as a condition to complete the transaction is unlikely to fetch you a higher selling price. Nobody wants to overpay for a home. Unfortunately, if your surrounding area has seen recent distressed sales, this could bring down your home's appraisal value. If you believe your home's value is diminished by nearby foreclosure and short-sale prices, you might convince the appraiser that your home is worth more if it's in better condition than those properties. Getting an appraisal is also a mandatory step when gifting a home to a family member as an equity gift.

What Refinancing Homeowners Need to Know: If you're refinancing a conventional mortgage, a low appraisal might stop you from doing so. The home must appraise at or above the amount you wish to refinance for your loan to be approved. However, if your current mortgage is an SHCP mortgage.

In Summary: When everything goes smoothly, the home appraisal is just another box to check on a closing checklist. When the appraisal value is lower than expected, the transaction can be delayed or even cancelled. Regardless of where you stand in your home buying, selling, or refinancing experience, a basic understanding of how the appraisal process works can only work in your favor, especially if you're purchasing your first home.