What Homebuyers Should Know About Appraisals
March 15, 2021
What Is a Home Appraisal?
Home appraisals are professional, unbiased estimations of a house’s value. They are conducted by licensed appraisers who conduct a thorough inspection of the property to assess its true value, which may or may not be on par with the asking price the seller has set.
Lenders require a home appraisal be conducted before closing to make sure they are not loaning more money than what the house is worth. This is to protect themselves from taking a loss in the case of a foreclosure. If the borrower cannot make payments and defaults on the mortgage, the lender can sell the property to recoup the money they are owed. The appraisal helps lenders ensure that they do not lend more than what they can make back in this scenario.
It is important to remember that an appraisal is NOT the same as a home inspection. The appraisal is required by lenders to protect them for over-lending, whereas an inspection is for the buyer’s benefit. A thorough home inspection gives the homebuyer a thorough assessment of the condition of the house, which includes findings about the heating and cooling systems, plumbing, electrical work, water, and sewage, as well as some fire and safety issues.
How Is a Home Appraisal Done?
For a thorough appraisal report, professional appraisers consider all factors that could possibly affect the market value of a house. The number of bedrooms and bathrooms, updated appliances, type of flooring, etc. can all affect the appraisal. Even the exterior of the house, such as the lot size, landscaping, and upgrades are taken into consideration. Appraisers also include the pricing of recently sold comparable houses in the area in the appraisal of the home.
Why Should Borrowers Care?
If the house you put in an offer on is appraised for more than the asking price, congratulations! You got a great deal! But there is a chance that the house is valued at less than what the seller is asking for. In that case, things get a little more complicated. Even if you have been approved for a mortgage, it is not guaranteed that your lender will loan you the listing price. That decision is based on the appraisal report, not the asking price that the seller sets.
For example, you may be approved for a $200,000 loan, which is the seller's asking price. But the home you are interested in buying is appraised for $160,000, only. Based on the appraisal, your lender can choose to deny you the entire amount you are approved for.
In cases where the home appraisal comes back lower than the asking price, the buyer has three options. They can choose to make up the difference in price themselves with out-of-pocket funds, negotiate a lower price with the seller, or back out of the deal (if there is an appraisal contingency in place).
Regardless of what the property is appraised for, whether you are a repeat or first-time homebuyer, whether you are purchasing or refinancing, a basic understanding of how a home appraisal works will go a long way in helping you navigate the mortgage process smoothly.
Note: In March of 2020, HUD issued a Mortgagee Letter announcing temporary changes to the appraisal requirements for FHA loans that included the ability to have an exterior-only appraisal or a desktop appraisal.
------------------------------
RELATED VIDEOS:
What You Need to Know About the Appraisal Fee
The Appraisal is an Important Requirement
Build Your Dream Home With a One-Time Close Loan
FHA Loan Articles
August 19, 2026Homebuyers who have enough cash for a down payment still need to consider their full financial picture before choosing between a conventional mortgage and an FHA loan. Having cash on hand changes the math for both options, but savings alone won't make a conventional loan the automatic winner. Credit scores, current debt, and the type of property you want to buy all determine which loan will cost less over time.
August 11, 2026Homeowners with FHA adjustable-rate loans need to track their loans more closely. That is because FHA ARM loans start with introductory interest rates that eventually expire and are subject to change afterwards based on market rates. When interest rates rise, monthly housing payments climb on ARM loans, pushing many homeowners to consider refinancing into a fixed-rate mortgage.
August 10, 2026If you want to buy a home with an FHA mortgage, you must set up an escrow account to cover property taxes, homeowner insurance, and upfront closing expenses. While the FHA loan program has rules for funding these accounts, buyers often do not realize those rules can include approved and unallowed sources for escrow funds. What do you need to know before you set up and fund your escrow account for an FHA mortgage?
August 3, 2026Buying a home in a high-cost area requires understanding how FHA loan limits shape your financing options. Does the house for sale have a price above the local FHA loan limit? You may need to explore your jumbo loan options. There are conventional jumbo loans and FHA versions. Which is right for you? Much depends on your financial needs, plans, and goals for the loan.
July 30, 2026There is a common misconception about FHA loans that only a first-time home buyer can use the program. This is not true; repeat buyers can qualify for an FHA loan, but why does this misconception exist? Partially because state and local programs have first-time buyer requirements for down payment and/or closing cost assistance programs. So while you do not need to be a first-time buyer to get an FHA loan, you may need to meet that definition to qualify for down payment help.
