Mortgage Appraisals

What is a Mortgage Appraisal?

First, an appraisal IS NOT a home inspection.  The apparisal is ordered by the lender.  A home inspection is ordered by you the buyer (or in some cases the seller).  The appraiser is an expert who provides the value of the property to the lender.  The home inspector provides an inspection report of any material defects to the buyer.

The appraiser is hired by the lender to protect their investment.  The lender doesn't want to lend you $200,000 on a home that is worth only $125,000.  The appraisal will visit the property and normally measure the structure.  The appraiser then uses one of two methods to value the home. 

Home Valuation Methods

The first is the sales comparison approach and this is the most widely used method.  In this method the appraiser reviews similar homes that have sold in the area and uses these to prepare a price.

The second method is called cost and it is typically used for unique properties.  The property is not compared to other properties, but is valued on the cost to replace the structure if destroyed. (This method is similar to what home owner's insurance uses when insuring your property.  What is the cost to rebuild.)

You the Consumer

As a consumer, you are entitled to a copy of the appraisal.  Many times it will be given to you at closing or you can request it from your lender.  When you see your appraisal, you need to know that the appraiser received a copy of the Agreement to Purchase when they received the order to appraise the property and many times your appraisal will be very close to the purchase agreement amount.  So if you negotiated down the price of the property, don't be too alarmed when you see the appraisal only slightly higher than the purchase price.

If the appraisal comes in below the agreed upon purchase price, you have the option to renegotiate the contract price.  The seller may hire an appraiser for a second opinion or you the buyer might hire a second appraisal if you feel the first is in error.  The lender will not complete the transaction though until they are satisfied with the appraisals and the differences have been resolved.