What is a home appraisal and how much does it really cost?

So you’re about to buy a house and you’ve heard about this thing called an appraisal. What’s it all about, and how much is this going to cost you?

A home appraisal is essentially a value check for the property you’re buying. An appraiser—think of them as the value experts—will assess the home’s worth based on various factors. They check out the property to make sure you’re not overpaying and to protect your lender from risky deals. It’s like getting a second opinion on what you’re shelling out for your new digs.

Important Note: You can’t shop for an appraisal. Your lender will order the appraisal for your new home—this ensures it’s impartial. You can’t choose your appraiser because allowing borrowers to pick one could lead to a conflict of interest. 

If you could select your appraiser, you might pick someone who undervalues the property to make sure your loan goes through, which is what mortgage companies want to avoid, also being in the best interest of the buyer.

Undervaluing the property to ensure the loan goes through can hurt the buyer in the long run. Here’s why:

1. Overpaying for the home: If the appraiser undervalues the property, you might be approved for a loan based on that lower value. This could lead to you paying more than the house is truly worth. When it’s time to sell, you may struggle to get your money back or even face a loss if the market doesn’t catch up to the inflated price.
2. Mortgage terms could be unfavorable: With a lower valuation, you may qualify for a larger loan than necessary, which could result in higher monthly payments or worse loan terms. Overextending your budget could lead to financial strain in the future.
3. Risk of negative equity: If the house is overvalued, you may owe more than the property is worth. If the market shifts or property values drop, you might find yourself in a situation where you owe more than what your home can sell for—a situation known as being “underwater” on your mortgage.
4. Impact on homeownership investment: The appraisal helps ensure the home’s value aligns with its actual worth in the market. This protects not only the lender but you as the borrower. If the property value isn’t assessed accurately, you might enter homeownership under less-than-ideal financial conditions.

So, while the process may seem inconvenient, the reason you can’t pick the appraiser is to ensure fairness and avoid these potential pitfalls.

At Tomo Mortgage, we keep our rates competitive, right in line with what you’d expect for most properties. You’ll need to cover this fee before closing, but think of it as a must-do move to lock in the deal and make sure you’re not getting ripped off on the price of your new home.

When do I pay for a home appraisal? 

More often than not you’ll pay for the appraisal upfront—usually when the appraisal is ordered. This fee is typically paid directly to the lender or the third-party service organizing the appraisal, and it’s part of your out-of-pocket expenses before closing. The cost typically ranges from $400 to $1,000 (depending on location and property size).

Occasionally lenders will roll the cost of the appraisal  into the final closing costs, which means you’ll pay it when you officially close on your home.

Keep in mind, the appraiser is a third-party professional hired by your lender to give an unbiased estimate of the property’s value. You’re paying for their time and expertise, and while your lender organizes the process, it’s you who foots the bill.

Make sure to check your Loan Estimate or Closing Disclosure documents to see exactly how much your appraisal is costing and when it’s due.

Do I find the home appraiser myself?

• Lender-ordered process: When you’re financing a home purchase, the lender is responsible for ordering the appraisal. They do this to ensure they get an unbiased, accurate estimate of the property’s value. You don’t get to shop around for the appraiser yourself.
• Why you can’t pick: This is to avoid any potential conflicts of interest. If buyers could choose their own appraiser, there’s a risk that the value might be inflated to meet the sales price or loan amount, which could put the lender at risk.
• Appraisal management companies (AMCs): Many lenders work through an appraisal management company (AMC), which assigns the appraiser from a pool of qualified professionals. This ensures the process is independent and compliant with regulations.

Is a home appraisal always required?

It’s not always required, but skipping it is a bit like buying a car without knowing if it’s roadworthy. It costs a few hundred bucks, but it’s worth it for peace of mind and to avoid potentially paying way more than you should.

Are all properties appraised the same way?

No, not all properties are appraised the same way. The appraisal process varies depending on the type of property, the location if you are in Austin, TX or Denver, CO for example, and even the type of loan you’re using. Here’s how it can differ:

1. Type of Property

• Single-family homes: Appraisals for standard homes are straightforward. The appraiser will focus on the home’s condition, square footage, and recent sales of similar homes (comps) in the area.
• Condos and townhomes: Appraisals for condos also consider the unit itself but place more weight on the building’s amenities and the condition of the entire complex. Comps may focus on other units within the same building.
• Multi-unit properties: For 2-4 unit properties, appraisers look at rental income potential in addition to market value. This makes the process more complex.
• Rural properties and land: Rural homes and land appraisals can be tricky. Fewer comps may make it harder to find comparable sales, and factors like acreage, outbuildings, and zoning may significantly affect value.

2. Loan Type

• FHA or VA loans: If you’re using an FHA or VA loan, the appraisal process is more stringent. Appraisers must follow specific guidelines that go beyond just determining market value. They also assess the home’s safety, security, and soundness. This can lead to required repairs before the loan can be approved.
• Conventional loans: With a conventional loan, appraisers focus solely on the market value of the property and less on whether the home meets specific safety standards.

If you’re buying with an FHA loan, be prepared for a more thorough appraisal process with potential repairs. Conventional loans give more flexibility on property conditions but can result in higher down payments or stricter loan qualifications.

3. Special Circumstances

• New construction: Appraisals for new construction homes focus on the projected value based on blueprints and builder estimates, which can differ from traditional appraisals.
• Luxury homes: High-end or luxury properties may require specialized appraisers who are familiar with evaluating unique features like custom finishes, large lots, or private amenities that aren’t common in most homes.

4. Unique Factors

Appraisers will adjust their approach based on unusual property features, including:

• Historical homes: Preservation rules, age, and architectural significance could impact the appraisal.
• Environmental issues: Things like flood zones, proximity to hazardous sites, or wildfire risk could affect a property’s value.

If you’re ready to start your journey to homeownership, get pre approved with Tomo Mortgage today.