When purchasing a home, an appraisal is a key step in ensuring the property’s value aligns with the purchase price. Residential property appraisals are conducted by licensed or certified residential appraisers to help lenders assess risk. While some appraisals require an in-person visit, others—such as desktop appraisals—can be completed remotely. Additionally, hybrid appraisals involve a third party collecting on-site information while the appraiser completes the evaluation separately.
Here are five key things to understand about appraisals:
1. Appraisals help guide mortgage terms.
The appraised value of a home plays a crucial role in determining your loan terms. It influences the loan-to-value ratio—the percentage of the home’s price that you’ll be borrowing—while the remaining balance becomes your down payment. The size of your down payment can significantly impact borrowing conditions. For instance, with a conventional conforming loan, putting down less than 20% typically means you’ll need to pay a monthly private mortgage insurance (PMI) premium.
2. Appraised value is not a fixed number.
While appraisers follow strict professional standards, property valuation is not an exact science. Several factors—including changes in a home's condition, market fluctuations, or even the appraiser performing the evaluation—can influence the final appraised value.
3. Appraised value and sales price are not always the same.
It’s important to understand that an appraised value does not always match the sales price. For example, a motivated seller who needs to sell quickly may set the price below the appraised value, while a seller in no rush might list the home at a higher price, hoping a buyer with additional cash will bridge the gap.
4. Appraisers rely on past data.
Appraisals often take a retrospective approach, as they rely on recent sales data from comparable properties—often referred to as “comps”—to determine a reasonable valuation. Because of this, an appraisal may not always reflect the most current market conditions, especially in rapidly shifting markets.
5. Appraisals serve multiple purposes beyond home purchases.
Although appraisals are commonly associated with home purchases, they also have other important applications. They are used to determine property values for insurance purposes, assess replacement costs, and establish assessed values for property taxes.
