When buying a new home, getting an appraisal is often an important step in the purchase process. Your lender will most likely require an appraisal before allowing you to continue with the closing, whether you use a conventional loan or a government loan.
Whether required or not, an appraisal can save you from overpaying for a new home.
The appraisal is typically done after an offer has been accepted, but before closing the deal. Usually, an appraisal and an inspection can both be done around this stage in the purchase process.
They are not the same, however, so keep reading to learn about appraising a home to better understand what information will be garnered during that specific process.
What is a Home Appraisal?
A home appraisal is essentially a cost evaluation of a home. This step is usually done before you close on a deal and can highlight a discrepancy in pricing in relation to comparable homes in the area. A home appraisal can save a buyer from overpaying on a home, which is a protection both a buyer and a lender usually want to have!
Lenders generally require an appraisal once an offer is accepted and the home is under contract. The main reason a lender requires an appraisal is to make sure that, if you fail to make your mortgage payments, it can get enough money back after foreclosing on your home.
How Does an Appraisal Work?
A home appraisal generally involves an appraiser visiting the home in person to visually check the state of the property. Damages and repairs are factored into the appraisal.
Other factors include square footage, floor plan, amenities and more. Both the exterior and interior should be evaluated.
After evaluating the individual home, the appraiser will then take into account any comparable home sales in your immediate area, called “comparables” or “comps”.
These comps are equivalent homes sold within the last 90 days, or up to six months in a slower market. The area of interest might be within one square mile if your home is in a more developed area.
What is the Purpose of an Appraisal?
The idea of an appraisal is to gauge the current market trends to properly identify the Fair Market Value (FMV) of the home. These comps can greatly impact the appraisal, so having a local appraiser who is familiar with the area can be vital. An appraiser might even visit comps in person.
The appraiser then factors everything into a report, which is sent to the lender when complete. You can request a copy for yourself, but that is typically not done automatically, so be sure to ask.
The Difference Between Inspections and Appraisals
An appraisal and an inspection are two different aspects of the home purchase process. Generally speaking, home appraisals evaluate the cost while home inspections evaluate the structure itself.
A home inspector checks the mechanical and subsystems of a home to ensure that everything is in good working order and that there are no structural issues with the home.
A home appraiser evaluates the current housing market locally to compare the cost of the home you want to buy with other comps to ensure accurate pricing.
Appraisers take into account any upgrades and renovations, plus any damages or repairs needed in a house in terms of cost, but will operate under the assumption that there are no structural issues with the home itself.
Appraisal visits tend to take a few hours in total and you can generally expect your lender to receive the final report within seven business days. High demand markets can take longer, so ask for an estimate when you arrange the appraisal.