You’ve just made an offer on a house that checks off everything on your list: location, number of bedrooms, that je ne sais quoi. To your delight, the seller accepted your offer.
Now it’s all about preparing for your closing. If you’re taking out a mortgage, your lender will arrange something called a home appraisal. But who pays for the appraisal? Why is it considered a key part of the homebuying process? And what happens if your contract falls through?
To find out, we talked to experts like Barrett Spray, a real estate agent based in central Florida who has 27 years of experience helping clients navigate the homebuying process, chatted with two appraisers about the ins and outs of home appraisals, and tapped into HomeLight’s extensive homebuying resource database.
Let’s get you some answers. This guide will help you understand who pays for the home appraisal and why it’s important.
What is a home appraisal?
According to the National Association of Realtors®, only 22% of residential sales are cash sales, so it’s likely that you’re taking out a mortgage to finance your home purchase. That means that between the time your offer is accepted and the day you close on your home, you and your lender will be in frequent contact as they review your finances and prepare your loan.
One piece of information your lender will look at closely is the home appraisal. This is a professional assessment of a property’s value, based on a thorough review of the house and property by an independent appraiser.
The Appraisal Institute, a global professional association of real estate appraisers, calls an appraisal “the act or process of developing an opinion of value.”
Why is the appraisal so important to your lender? Simply put, they want to make sure your new home is worth the loan they’re providing. This due diligence protects the lender in case you default and they need to recover their costs. Importantly, it also protects you, by validating that you’re not overpaying.
“What it really is supposed to do is give [the buyer’s] bank a feeling that the asset that they’re purchasing is worth the amount that they’re purchasing it for,” says Spray. “That is what it’s supposed to do for the buyer as well.”
The difference between a home appraisal and a home inspection
In some ways, buying a house is like learning a new language. You’ll learn jargon you’ve never heard before, like earnest money, escrow, and title search.
Let’s brush up on the difference between two important terms: home appraisal and home inspection. Although they might sound similar, they are distinct steps that most buyers will encounter as they move through the homebuying process.
A home appraisal:
- Assesses the property’s value, specific to the unique characteristics and location of the home
- Gathers information to protect the home buyer and the lender’s investment by comparing the value to others in the market and what is being offered to purchase the home
- Gathers information to protect the buyer’s investment
- Seeks to identify issues that could reduce the home’s value or cause significant costs for the owner, such as a leaky roof, mold, electrical problems or structural integrity
- Assesses the property’s condition
Who pays for a home appraisal?
It’s the buyer’s responsibility to pay for the home appraisal. Typically the lender requires the payment upfront, but in some cases the fee may be included in your closing costs. In rare cases, the seller may cover the appraisal cost to sweeten your deal.
According to Spray, appraisals typically range from $400 to $600 for his central Florida clients. Nationally, the average home appraisal is about $340.
The exact cost will vary based on the home’s location, square footage, and condition. If your desired home has characteristics that require the appraiser to be on site for longer than usual, the cost may go up.
If your contract falls through (and more on that later), you shouldn’t expect a refund on your appraisal, unfortunately.
Who conducts a home appraisal?
Your home appraisal is conducted by a person called an appraiser. This is a third-party certified or licensed contractor, hired by your lender (often through an appraisal management company). Appraisers must meet congressionally authorized standards and qualifications, plus any qualifications set by the state in which they are based.
Appraisers are well-versed in the real estate field and understand the different factors that must be weighed to evaluate a property, such as neighborhood growth, housing trends and market conditions.
In conducting your appraisal, the appraiser will typically walk through the house to look at your home-to-be’s structural condition, the size of the property, the layout, recent upgrades, amenities, and any necessary repairs.
Lisa Meinczinger, an appraiser in Greenfield, Indiana, says she spends about 15 to 20 minutes walking through a well-cared-for house taking pictures and measurements. But that’s just the tip of the iceberg when it comes to each of her appraisals.
“When I get back to the office is when the work begins,” she says.
An instructor for the Appraisal Institute, Meinczinger has worked as an appraiser since 1998. Last year, she was particularly busy, conducting 310 appraisals.
To finalize her appraisals, she looks at market conditions, checks tax records, and compares recent home sales of similar properties. She’ll also check her measurements against those provided in the listing, making sure there aren’t any discrepancies.
“[Real estate agents] will say this is a 6,000-square-foot home, but 3,000 of it is in the basement,” says Meinczinger. And since below-ground basements cannot be added to the calculation of a home’s living space, she has to make that correction on the appraisal.
The appraiser will fill out a standard home appraisement form, often Fannie Mae’s or Freddie Mac’s Uniform Residential Appraisal Report, to share with the lender. Your lender should provide you with a copy of the appraisal within about seven business days (possibly longer if your market is particularly busy).
Be your best advocate
While the lender is responsible for arranging the appraisal, the buyer can insist on a highly qualified appraiser. In fact, that’s advice straight from Daniel Crehin, owner of Crossland Appraisal Service, which provides commercial and residential appraisal services on the West Coast.
“Get a good, reputable appraiser,” he says. His recommendation is that once your lender has scheduled your appraisal, make sure your appraiser is a member of the Appraisal Institute.
Another way to inspect an appraiser’s credentials is to see if they have any professional designations. Crehin, for example, has an MAI (Member Appraisal Institute) designation, while Meinczinger’s credentials include the SRA (Senior Residential Appraiser) and AI-RSS (Appraisal Institute, Residential Review Specialist) designations. These indicate additional education and experience.
Understanding your appraisal
You’ve just received a copy of the appraisal from your lender. One step nearer to closing day and moving into your new home! Let’s talk about the different scenarios that accompany your appraisal outcome.
Did the appraisal come in higher than the offer the seller accepted? That’s good news for the buyer, says Spray.
“It means congratulations to the buyer because you bought a house that has built-in equity in it, according to the appraiser,” he says.
What if the appraisal comes in lower than the amount you told the seller — and your lender — that you would pay? This isn’t uncommon.
In fact, according to the February 2021 Realtors® Confidence Index Survey from the National Association of Realtors®, 23% of the problems encountered for delayed home sale contracts were related to appraisal issues. For terminated contracts, appraisal issues accounted for 11% — a higher percentage than any other issue.
You’re certainly not alone if this happens to you, but this can be a stressful situation for a buyer.
There are a few different paths forward.
You can ask the seller to match the appraisal price, which they may be willing to do. Alternatively, if you have more money you can throw toward a down payment, you can make up the difference between the appraisal and the offer price.
You can also agree to split the difference with the seller. For example, if the appraisal is $10,000 off from the offer price, the seller can accept an offer that’s $5,000 lower while you add $5,000 to your down payment.
You can also push back. Let’s say you think the appraiser got it wrong. You (or the seller, for that matter) can dispute the appraisal — though that may mean it’s you who pays for a second appraisal. You can also find another lender and get a new appraisal, which you’ll need to pay for.
If your contract included an appraisal contingency, you may choose to walk away and try your luck with a different house.
Factor the appraisal into your home ownership journey
When you’re buying a home, costs can quickly add up. There’s the down payment, of course, and the home inspection. Maybe you’ve also opted to conduct a survey? And we haven’t even talked about moving costs or the startup charges that can accompany getting your utilities up and running.
The home appraisal is one more expense you’ll need to prepare for to achieve your goal of homeownership. Ultimately, the appraisal is a worthwhile investment; you want to make sure that you’re getting your money’s worth and paying the fair market value of the property.
An experienced real estate agent can walk you through the process. Get in touch today and connect with a top HomeLight agent.
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