What is an Appraisal, and How Does it Work?

By Right Start Mortgage
December 27, 2022

If you’re thinking about buying, selling, or refinancing your home, chances are that an assessment is on the horizon. Read on if you’re entering new and unfamiliar territory with the appraisal process. We’ll tell you what an appraisal is, how it works, and how much it costs.

What is an Appraisal, and Why is It Important?

Appraisals are most commonly associated with real estate transactions. Say, for example, you want to buy a home and finance the purchase. You’ll need to have that home inspected by a licensed appraiser. Why? To build confidence with lenders who want to avoid loan losses by ensuring that the property price is fair.

If the home appraisal comes in under the purchase price, the odds are that the lender will decline your loan application. However, you still have a few options if you find yourself in a similar situation.

  1. Pay the difference: While the lender is likely to decline the lendee’s loan application if the appraised value of a home is less than the purchase price, buyers may be able to increase the down payment amount to make up the difference between the appraised and sale price.
  2. Return to the Negotiation Table: Don’t want to take on additional financial burdens? In slower, less competitive markets, you may have a chance to renegotiate the sale price with the seller.
  3. Use your appraisal contingency: In most cases, prospective buyers submit offers with an appraisal contingency, which allows you to back out of the sale without forfeiting earnest money. However, if the appraisal and sale price do not align and the seller will not renegotiate, now is the time to pull your contingency card.

I’m Selling. How Do I Get the Most Out of My Appraisal?

You’re selling a home and want to maximize profit. Now what?

  1. Do Your Due Diligence: While it is the licensed appraiser’s responsibility to “pull comps,” that is, assess homes in your community that are similar in square footage, condition, etc., nothing is stopping you from conducting your research. Start by browsing Zillow. More specifically, look for homes sold no more than six months prior.
  2. Finish Your To-Do List: No house is ever truly “done.” Take a look at your to-do list and get to work. Patch drywall holes, snake your slow-draining sink, touch up paint blemishes, and clean up the yard. In short, tackle that neglected to-do list and increase the odds of delighting buyers and appraisers alike.
  3. Record Improvements: Maybe you paid a contractor to tile your backsplash or called in a plumber to replace your water heater or swap out galvanized plumbing with PEX. Excellent. Pull all of your receipts and records. This paper trail proves you improved your home and may help you get more out of your appraisal.

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