A home appraisal determines the value of a home. Appraisals are common in real estate transactions, and they’re often required by lenders as part of the mortgage approval process.
Here are some scenarios where you may need a home appraisal:
- Getting mortgage approval
- Determining a listing price when selling your house
- Assessing whether a house is a good investment opportunity
- Refinancing a mortgage
- Applying for a home equity loan or HELOC
- Going through a divorce
- Estate planning
- Challenging a property tax assessment
In this article, we’ll look in more detail at what a home appraisal is, when and why you need one, and who to talk to for advice about whether to get an appraisal.
What is an appraisal?
An appraisal is a report from a licensed appraiser that states the fair market value of a property. Appraisal reports include information such as a description of the property, what comparable properties nearby are selling for, and the state of the local real estate market.
Appraisals are often required by lenders as part of the mortgage approval process, so it’s usually the buyer who requests an appraisal. However, sellers can also order an appraisal to help them price their property and negotiate with buyers.
Should I get an appraisal before buying a house?
You usually need a home appraisal when you buy a house, especially if you require funding.
By law, any real estate transaction worth more than $400,000 and requiring a loan needs to have an appraisal.[1] Even if the home price is below that amount, your lender will often require an appraisal.
The appraisal is necessary for the lender since it reduces their risk in case you default on your mortgage payments. In the worst-case scenario, if you’re no longer able to pay your mortgage, your lender could foreclose on your home, sell it, and make back most or all of the money still owed to them.
If you don’t need a mortgage to buy a new home, then you can choose whether or not to get an appraisal. Getting an appraisal, even if technically not required, can reassure you that you’re making a good investment and paying a fair price for a property.
However, waiving the appraisal requirement can make your offer much more enticing to sellers. An offer without an appraisal contingency is more likely to close faster and less likely to fall through due to financing issues. But there are usually much less risky ways to make a good offer.
If you’re concerned about the need for an appraisal, you should talk to a real estate agent. They can provide insights about the current real estate market, advise you on whether waiving the appraisal contingency can give you a leg up, and help you navigate the process of getting the appraisal done.
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Should I get an appraisal before selling my house?
An appraisal isn't required and generally isn't necessary before you sell a house. A real estate agent can give you a free CMA report to help you price your home.
A pre-listing appraisal can give you an accurate idea of what your property is worth and how to price it. Getting the listing price right is one of the most important steps when you sell a house.
But having your own appraisal doesn’t negate the need for a buyer to get a separate appraisal in order to obtain financing. While the buyer’s appraisal should be similar to yours, there's a chance it won't be. If the buyer’s appraisal comes in lower than your own, it could affect their financing approval and potentially require you to renegotiate the sale price.
A professional appraisal costs around $400–600. But you can get accurate pricing guidance from a realtor for free, so there’s no harm in consulting an agent first.
A real estate agent will provide an estimate of your home’s market value, called a comparative market analysis (CMA). A realtor with local expertise should be able to provide a suggested listing price that is close to the appraised value.
If you’d like the extra certainty that an appraisal provides, you can ask your realtor to recommend a licensed appraiser.
Do I need an appraisal to refinance?
You typically need to get an appraisal in order to refinance.
Because your refinanced mortgage is based on your home’s current fair market value, your lender will usually only provide financing up to your home’s current appraised value.
However, if you’re only refinancing in order to reduce your interest rate or loan term, your lender may not require a new appraisal. Ultimately, the decision of whether or not to require an appraisal is up to the lender.
Also, if you have a Federal Housing Administration (FHA), Veterans Affairs (VA), or U.S. Department of Agriculture (USDA) loan, you may not need an appraisal in order to refinance your loan.[2]
These government-backed loans are sometimes eligible for streamlined refinancing, which may be completed without an appraisal in some situations. Streamlined refinancing is typically only available to loan applicants who can reduce their interest rates or monthly payments by refinancing.
Do you need an appraisal for a home equity loan or HELOC?
Yes, you usually need an appraisal for a home equity loan or line of credit (HELOC).
These types of loans use your house as collateral so that if you default on the loan, the lender can still make back their money.
However, some home equity loans and HELOCs are available without an appraisal. For non-appraisal loans, lenders rely on tax data or automatic valuation models (AVMs) to determine the value of a home.
While you’ll save on appraisal fees with a non-appraisal loan, your interest rate may be higher since the lender is potentially taking on more risk.
Other situations where you may need an appraisal
Divorce
During a divorce, you and your ex-spouse need to decide what to do with the house. The most common options are to sell it and split the proceeds or for one spouse to stay in the home and buy out the other. In both cases, an appraisal can be a good idea.
Getting an appraisal before selling helps reduce potential disagreements between you and your former spouse about how to price the property. And if one spouse is buying out the other, an appraisal is extremely important for making sure the amount agreed upon is fair.
Estate planning
Appraisals are an important part of estate planning. For example, when setting up an estate trust, it may be necessary to determine the value of the property. Similarly, if you’ve inherited property, you’ll likely need an appraisal to determine what the value of the property is.
During an inheritance, knowing the property’s appraised value is essential for matters like paying estate tax, dividing the proceeds of the inheritance fairly, and determining the listing price of the property.
Home insurance
Some home insurance companies require appraisals or accept them in lieu of a home inspection. However, you’ll likely need to pay for the appraisal out of pocket, whereas home inspections are usually covered by the insurance company.
A home appraisal may also be needed if you disagree with your insurer about a recent insurance claim. Many home insurance policies include an appraisal clause.[3] This clause states that instead of filing a lawsuit if you have a disagreement about a claim, an appraiser can be brought in to help settle the dispute.
Property tax assessment
If you’re challenging a recent property tax assessment, an appraisal will go a long way in helping your case. While appraisals are not the same as tax assessments, they can be used as evidence that an assessment is too high.
The process for appealing a tax assessment varies by state. Also, keep in mind that appraisals for tax assessment purposes are sometimes more expensive than an appraisal for a home purchase. You’ll need to decide if this extra cost is potentially worthwhile.
No matter the circumstances, a real estate agent can help you decide whether or not an appraisal is a good idea. You should reach out to a realtor who has experience with your situation and also knows the local market.
FAQ
What does appraisal mean?
An appraisal is a report that determines the fair market value of a property. An appraisal essentially gives an estimate of what a home can reasonably expect to sell for on the open market based on current market trends, how much nearby comparable homes are selling for, and the property’s condition.
How do you get a home appraisal?
If you’re buying a house and need a mortgage, your lender will already know how to get a home appraisal on your behalf. If you’re selling a house, you’ll need to hire a licensed appraiser yourself. You can find a real estate agent who can recommend a local appraiser.
How much is a home appraisal?
A home appraisal usually costs around $400–600, depending on the property’s size, location, and condition. If the appraisal is required by the lender, this fee may be included in the closing costs. Otherwise, you will have to pay for it upfront.
What happens if the appraisal comes in low?
In case of a low appraisal, the lender will likely only provide a loan up to the appraised value. The buyer can make up the difference with cash, try to negotiate a lower sale price, or walk away from the deal so long as the agreement includes an appraisal contingency.
How often should you get your home appraised?
An appraisal is typically valid for 90 days to 6 months, depending on your local market. You should consider getting your house appraised if you’re needing mortgage approval, setting a listing price, thinking about refinancing, taking out a home insurance policy, challenging a property tax assessment, or going through a divorce.
