Home LoansMortgage

Everything You Need to Know About Home Appraisals for Mortgages

A home appraisal is a subjective opinion of a property’s value — but it’s a very important and well-informed opinion. For homebuyers and mortgage lenders, the appraisal is a critical part of the mortgage approval process that ensures both sides are getting the right loan.

That’s why home appraisers are so highly trained. Certified residential appraisers have specialized training and certifications that require over 150 hours of education and 200 hours of apprenticeship under the supervision of an experienced appraiser. This training gives them the detailed knowledge they need to analyze the data about each home they appraise, and provide you with accurate information on a home’s characteristics.

This guide to home appraisals will walk you through what appraisals are, how they’re done and why they’re important. We will cover:

Why you need an appraisal for a mortgage

Most of the steps in getting approved for a mortgage involve collecting information about your income, credit and assets. But a home appraisal can make or break a deal.

A home appraisal establishes that a home is worth as much as the mortgage the lender is issuing to pay for it. If the appraisal comes in at or above the contracted sale price that buyer and seller have agreed upon, generally all is well.

But an appraised value that is less than the sale price can potentially result in the cancellation of the purchase. Sometimes an appraiser may believe repairs are needed, and make the report subject to completion of those repairs.

These circumstances can be stressful, but the details included in an appraisal provide consumers with an objective, unbiased opinion of the value. It’s better to know if there are repair issues before you close when you can still negotiate for them to be fixed than to wait until after you move in and try to sue the seller to fix them.

The type and cost of the appraisal needed for your loan will depend on the type of mortgage that you are applying. The fees will vary from lender to lender with the exception of loans made for current or retired military borrowers through the Veterans Affairs department (VA loans) — the cost for VA appraisals is set by the VA based on the area you live in, and ranges from $450 to $800 for a single-family residence.

How the appraiser calculates a home’s value

The standard comparison approach for residential real estate transactions is known as the sales comparison approach. With this method, appraisers look for similar properties that have been sold or are currently listed for sale nearby. The appraiser then makes adjustments based on the features of the comparable properties to come to a final opinion of value.

Once the appraiser has collected data on the the specifics of a home, the characteristics are compared against other recent sales. In most cases, at least three comparable properties are required for analysis, but more may be needed if the property is unique, or if there are not many recent sales nearby.

Here’s how it works.

Step 1: Choosing comparable homes

There are a number of factors an appraiser is required to consider when determining which properties are the best match for the property being appraised.

Market match appeal

At a minimum, the appraiser will review the site, room count, gross living area, the style of construction (like ranch, two-story or colonial), living area and the overall condition of the home. The comparables don’t have to to be an identical match, but the appraiser needs to justify the differences, and why the comparable was chosen over other available sales.

How close the sales are to the property

It’s very rare that there are enough sales in an immediate neighborhood to choose from.  Most likely, the appraiser will have to travel to nearby neighborhoods. He or she will have to justify the reason for the distance of the comparables, and explain why there aren’t more comparables in the immediate area.

Step 2: Collecting the data

The next step in a home appraisal is collecting data on the property in question and the surrounding area. Here’s a brief overview of what is involved.

Market data

The appraiser starts by looking at the housing market near the property. You may have heard the saying that the most important factor in buying real is state is location, location, location. That’s also true of real estate appraising.

The following criteria play a role, and appraisals will generally collect data on all of them:

  • The neighborhood you are buying in
  • Amenities nearby
  • How much other houses are selling for
  • The state of the economy in the region and city
  • Proximity to airports
  • Nearby busy streets
  • Quality of public schools and public water

Property data

The appraiser also verifies characteristics of the home you are buying — square footage, room and bathroom count, and any improvements made to the house. Upgrades are considered room by room, as well as any room additions or major structural changes.

This information is important because you want to make sure that the square footage is accurate, there are no issues with home additions and the representations the seller made in the contract are supported by the appraiser’s inspection.

Step 3: Calculating the value

Using the data from similar properties, a home appraiser will then calculate the value your home. Your property will be higher or lower in value depending on how the following factors compare to similar homes that have sold.

Site: The square footage and/or acreage of land that is connected to a home can influence the value. In some areas, additional land value can add value, in others it can detract.  Again, it all depends on what other houses are selling for with similar features.

View: You may have picked your home because of the unobstructed mountain views, or because of a partial ocean view. The appraiser will look at other sales to determine how much it adds to the value.

Condition: The condition of the house will either add or detract from the adjustments an appraiser makes.

Room count and gross living area: The total number of rooms, broken out into how many bedrooms and baths can also have an effect on the final value estimate. The total square footage is also taken into consideration, with increases in value for more square footage.

Special features: A garage versus a carport, pool or no pool, fireplace or no fireplace — upgrades and special bells and whistles in a house can contribute to the final opinion of value.

The appraiser reconciles the information collected, and then issues the opinion of value. If the value is unacceptable, a value dispute can be requested, which involves providing additional comparables, or proof that there is a material error, like incorrect square footage.

The appraiser is under no obligation to change the value in the dispute.   Consumers have the right to request another appraisal if they feel that the value is not correct, but they will likely to have to pay another inspection fee.

Appraisals for special properties

If you are buying a property other than a single-family residence that will be your primary or second home, there are different types of appraisals that will be required, and the fees are more expensive.


Condo projects require a more detailed analysis of the common areas that you share with the other owners. Besides evaluating the features of the condominium itself, the appraiser considers the location of the unit within the project, what amenities are offered and the amount and purpose of the monthly association fees.

Multi-unit properties

Buying a multi-family home can be a great way to start homeownership and have rental income to offset your payment at the same time. However, it requires a more detailed appraisal analysis of the property because the it serves as both a residence and a source of rental income.

Investment properties

One of the unique features of buying rental property is being able to use the rental income to qualify even if there is no active lease on the property. The rental income analysis Form 1007 estimates the market rent for a property being purchased and allows the rent to be counted as income to offset the new mortgage payment.

Manufactured homes

Manufactured homes are pre-built housing structures fabricated on a permanent frame and then attached to a foundation. Appraisers have to verify that the property meets Housing and Urban Development (HUD) standards as evidenced by a HUD Data Plate and HUD Certification label, and that the property is safely attached to the foundation.


A co-op is a unique type of property. Rather than actually owning the property, you are granted occupancy rights by the co-op project to live in particular apartments or units as a shareholder. The ownership and features can be very complex, and appraising a co-op requires a more extensive analysis of the way it is structured.

Why appraisals are so important for each mortgage type

An appraisal can be the determining element in how much cash you access from your home’s equity for debt consolidation, or how much your house will be worth after you complete proposed renovations.

Cash-out refinance

If you are considering taking equity out of your home with a cash-out refinance, the appraised value will determine the maximum you are able to borrow. That can be very important if you’re trying to accomplish some specific financial goal like paying off high-interest rate credit cards or making a large improvement or addition to your home.

Buying a fix-up property or property with deferred maintenance

An appraisal will provide you with an “as is” or “subject to” valuation to determine what the house is worth. If the property value is “as is,” then no repairs are required, but the value reflects the current condition.  With a “subject to” valuation, you are given a list of items that could be done, along with an estimated cost for what it would take to achieve that value.

Buying a property with a renovation loan

Renovation loans are unique because they allow you to borrow money based on the after-improved value of the property. These types of appraisals are required for Fannie Mae Homestyle® Renovation loans and FHA 203k loans, and can be an invaluable resource to ensure your project doesn’t run over budget or that you’re not spending more than the neighborhood values will allow you to recoup.

Buying a property using sweat equity

Freddie Mac’s HomePossible® program allows sweat equity as a valid source of down payment.  The program works like a renovation loan, except instead of having a contractor do the work, you do the work using your handyman skills. The appraisal will estimate the value of of your labor, and if the numbers work out, your sweat equity takes the place of cash for a down payment.

Buying investment property or multi-unit property (market rental income)

One of the best ways to determine how much cash flow you’ll have on a rental property is to have a third-party appraiser do a market value analysis. The extra cost is worth it to have some extra information about where market rents are headed in the neighborhood your rental property is located.

Special cases where you do not need an appraisal

Fannie Mae has begun to allow consumers to choose a property inspection waiver instead of a full appraisal. An automated underwriting system will determine whether the property is eligible for the waiver, and if it is, no appraisal will be required to complete the loan.

In most cases, you’ll need to have at least 20% equity, although some refinances may allow for a PIW with only 10% equity in your home. The waiver may also be offered on cash-out refinance, second home purchases and even investment property mortgages.

Freddie Mac has a similar appraisal waiver option called an “automatic collateral evaluation.”  There are more restrictions than the Fannie Mae PIW — only primary or second home occupancy are eligible, and the purposes of the transaction has to be purchase or no-cash out refinance with at least 20% equity.

The Appraisal Institute has expressed concerns about the new appraisal waiver programs in letters written to both the Senate Banking Committee and House Financial Services Committee. “As Congress weighs how to roll out the conserved enterprises, it must ensure that taxpayers are not exposed to irresponsible decision-making and unnecessary risk taking,” said Appraisal Institute CEO Jim Amorin, MAI, SRI, AI-GIS.

Appraisals are independent

It’s important to note that although an appraisal is an opinion of value, that opinion is derived from a thorough analysis of facts related to the property and the market for similar properties in a given neighborhood.

The Home Valuation Code of Conduct was a byproduct of the housing crisis, and it established new guidelines for preventing parties in a real estate transaction from exerting influence over appraisers to “hit a certain value.”  It has since been replaced by the Appraisal Independence Requirements that most lenders follow when it comes to how appraisal work is assigned.

That’s the primary reason you can’t just pick up the phone and call any appraiser listed online if you’re getting a mortgage. The appraisal must be ordered by the lender, on a random rotation basis.

Some lenders will have their own panel of appraisers, while others employ regional or national appraisal management companies (AMCs). The educational, training and apprenticeship requirements are very stringent for appraisers, and they do have liability for the representations they make about values.

Keep in mind as a homeowner, you can’t give the appraiser suggestions for what the value should be. You can provide all the facts and details about upgrades and improvements, and make sure they have specs and permits for any additions you might have done.

But if you cross the line to trying to influence the value, you could be perilously close to contributing to appraisal fraud, and it’s not worth the trouble with the FBI and other federal regulatory agencies. The facts are all the appraiser needs to know — and in most cases, and appraisal is a good indicator of the market value of the home you are buying or refinancing.


Compare Mortgage Loan Offers