Understanding Home Appraisals

When purchasing a home, you will likely encounter the term “home appraisal.” Your real estate agent or lender will require one when you find a property you wish to purchase. But is it necessary? In short, yes. Home appraisals are very important if you want to purchase a home and know that you are paying the correct price for it. An appraisal is not a home inspection.

Why Do I Need a Home Appraisal?

A home appraisal is used to obtain an accurate description of the property in question and form an independent judgment of the home’s value. When an appraisal is used to obtain an opinion of value of a property for loan purposes, federal regulations require that the lender or real estate agent must place an appraisal order. The lender will use the appraisal to determine if the value of the home is enough to support a decision to provide home financing to the borrower.

How Does a Home Appraisal Work?

Once the appraisal is ordered for a particular property, the appraiser will research market data and public records. The appraiser will then research the following to use for comparison purposes:

• Local home sales
• Local home leases
• Current listings for similar properties
• Land sales
• Residential construction costs

The home appraisal should include:

• A clear and accurate description of the property
• Sales that are the most recent and most comparable
• Comments that explain important issues in the appraisal
• An opinion of value supported by the analysis of the comparable sales

There is not a standard, across-the-board appraisal report form. However, Fannie Mae and Freddie Mac have developed residential appraisal report forms that are typically used to communicate the appraisal properties used as collateral. Regardless of the type of appraisal report used, all appraisal reports must contain adequate information to enable the intended users to understand the report properly.

Are There Limits to What Home Appraisers Can Do?

Yes, there are several things that home appraisers cannot do by law:

• The appraiser by law cannot work for or directly with a mortgage lender.
• The appraiser must be licensed in the state where he or she performs the appraisal.
• The appraiser cannot take into account home cleanliness and style, but rooms with cosmetic issues may be noted.

If for some reason you review your appraisal and believe the appraiser did not consider important information about the property, discuss the matter with your mortgage lender. Make sure to submit your concerns in writing and request that the appraiser address the concerns.

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The above information is for educational purposes only. All information, loan programs and interest rates are subject to change without notice. All loans subject to underwriter approval. Terms and conditions apply. Always consult an accountant or tax advisor for full eligibility requirements on tax deduction.