What Is a Home Appraisal? How the Appraisal Process Works

A home appraisal is an independent professional opinion of a property’s value.

Mortgage lenders use property valuations to help determine whether the home provides adequate collateral for the loan. That makes the appraisal an important part of many home purchases and refinances.

But not every mortgage requires a traditional appraisal anymore. Depending on the loan, property and automated underwriting results, a lender may be able to use an appraisal alternative instead.

Here’s how the home appraisal process works, what affects the value and what buyers can do if the appraisal comes in lower than expected.

Key Takeaways

1. A home appraisal provides an independent opinion of a property’s market value.
2. Appraisers consider comparable sales, property characteristics, condition and market evidence.
3. A low appraisal can affect financing, but buyers may have options to renegotiate or request a review.

What Is a Home Appraisal?

A home appraisal is a property valuation completed for a specific purpose, such as helping a mortgage lender evaluate the home securing a loan.

In a traditional mortgage appraisal, a licensed or certified appraiser analyzes the property and relevant market information and develops an independent opinion of value.

The appraisal is not supposed to produce the number the buyer, seller or lender wants.

Its purpose is to develop a supportable opinion of value based on the property and market evidence.

For a buyer, that can help answer an important question: Does the property provide enough value to support the mortgage being requested?

Why Do Mortgage Lenders Need an Appraisal?

The property is collateral for a mortgage.

If a borrower stops making payments and the lender eventually has to foreclose, the property’s value affects the lender’s potential loss.

A valuation can therefore influence:

• Whether the property provides adequate collateral
• Loan-to-value ratio
• Maximum loan amount
• Mortgage insurance
• Loan pricing
• Whether the property satisfies applicable loan-program requirements

For many conventional purchase mortgages, loan-to-value calculations generally use the lower of the purchase price or appraised value.

That becomes particularly important when a buyer agrees to pay more than the property appraises for.

How Does a Home Appraisal Work?

The exact process depends on the mortgage and valuation method, but a traditional purchase appraisal generally follows several steps.

1. The Lender Determines What Valuation Is Required

After the property and mortgage are submitted for underwriting, the lender determines which valuation requirements apply.

Some loans require a traditional appraisal.

Others may qualify for an appraisal alternative based on the loan program, property data and automated underwriting results.

2. The Appraisal Is Ordered

When a traditional appraisal is required, the lender or an appraisal management company generally arranges the assignment.

The buyer doesn’t simply choose an appraiser who agrees with the purchase price.

Federal appraisal-independence rules are intended to protect the valuation from pressure by lenders, mortgage professionals, real estate professionals and other interested parties.

3. Property Information Is Collected

For a traditional appraisal, the appraiser may observe the interior and exterior of the home and record relevant property characteristics.

Those can include:

• Living area
• Lot characteristics
• Number of bedrooms and bathrooms
• Property type and design
• Age
• Condition
• Quality of construction
• Renovations and improvements
• Garages and other features
• Relevant site characteristics

The appraiser isn’t performing the same examination as a home inspector.

The property observation supports the valuation assignment, while the buyer’s home inspection focuses more specifically on understanding the condition of the home’s systems and components.

4. The Appraiser Researches the Market

Property characteristics alone don’t determine value.

The appraiser also analyzes market information, especially sales of comparable properties.

The goal is to determine how buyers in that market have valued properties that compete with the home being appraised.

5. Comparable Sales Are Analyzed

Comparable sales, often called “comps,” are recently sold properties used as market evidence.

The appraiser compares the subject property with those sales and analyzes relevant differences.

For example, a comparable may differ in:

• Living area
• Lot size
• Condition
• Age
• Number of rooms
• Location within the market
• Garage or parking
• Property features
• Sale timing

The appraiser can make market-supported adjustments when those differences affect value.

6. The Appraiser Develops an Opinion of Value

The appraiser considers the available approaches to value and reconciles the market evidence into a final opinion.

For most owner-occupied residential properties, the sales comparison approach plays a major role.

Other approaches can become more relevant depending on the property. Income analysis, for example, can matter for two- to four-unit properties and other homes where rental income is an important market consideration.

7. The Lender Reviews the Valuation

The appraiser develops the opinion of value, but the lender still has responsibilities related to reviewing the collateral and determining whether the mortgage satisfies its requirements.

The lender may identify questions that need clarification or correction before underwriting is complete.

8. The Borrower Receives a Copy

For a typical first-lien home mortgage, borrowers are generally entitled to receive copies of appraisals and other written valuations obtained by the lender.

Federal rules generally require delivery promptly after completion and no later than three business days before closing, subject to the applicable rules and any permitted waiver.

Read the report instead of looking only at the final number.

What Does a Home Appraiser Look At?

An appraiser evaluates characteristics that the market indicates can affect property value.

What Are Comps in a Home Appraisal?

Comparable sales are one of the most important sources of evidence in a residential appraisal.

A good comparable isn’t simply the house that sold most recently or the home that’s physically closest.

The appraiser looks for sales that are competitive with the subject property and appeal to similar market participants.

For conventional appraisals subject to Fannie Mae requirements, comparable properties should have similar physical and legal characteristics, including factors such as site, room count, finished area, style and condition.

Fannie Mae generally requires at least three closed comparable sales in the sales comparison approach.

Recent sales are preferred, but the newest sale isn’t automatically the best comparable.

An older property that closely resembles the subject may provide better evidence than a very recent sale requiring numerous adjustments.

How Do Appraisal Adjustments Work?

No two homes are exactly alike.

Appraisers can therefore adjust comparable sales to account for differences that market evidence shows affect value.

Suppose a comparable has substantially more finished living area than the home being appraised.

The appraiser may make an adjustment based on how buyers in that market react to the difference.

The adjustment should not simply use a generic rule such as assigning the same dollar amount per square foot to every house.

Current Fannie Mae guidance specifically requires adjustments to reflect market reaction rather than arbitrary rules of thumb.

The same principle can apply to differences involving:

• Condition
• Renovations
• Garage spaces
• Lot characteristics
• Location
• Market conditions
• Seller concessions

How Much Does Location Matter in an Appraisal?

Location can have a substantial effect because buyers don’t value otherwise identical properties equally in every market area.

Appraisers analyze where the subject competes for buyers and how sale prices differ across that market.

But appraisals should not rely on subjective or discriminatory descriptions of the people living in an area.

Fannie Mae specifically identifies terms such as “good neighborhood,” “poor neighborhood,” “desirable neighborhood” and “undesirable neighborhood” as unacceptable appraisal practices.

Instead, the analysis should focus on objective market evidence and property characteristics.

Does the Condition of the Home Affect an Appraisal?

Yes.

Condition can influence how buyers value a property and therefore affect comparable-sale analysis.

An appraiser may consider visible issues such as:

• Deferred maintenance
• Roof condition
• Visible structural concerns
• Damaged finishes
• Incomplete construction
• Quality of renovations
• Overall property condition

But an appraisal is not designed to identify every defect in the home.

The appraiser generally isn’t performing invasive testing, opening walls or conducting the same system-by-system evaluation as a home inspector.

Home Appraisal vs. Home Inspection

An appraisal and a home inspection serve different purposes.

Even when a mortgage appraisal includes property-condition observations, buyers shouldn’t treat it as a replacement for an independent inspection.

Our home inspection cost guide explains what a standard buyer inspection includes and what affects the price.

Appraisal vs. AVM vs. CMA vs. Assessed Value

Homebuyers encounter several different types of property values.

These numbers don’t have to match.

A property might have a $400,000 contract price, a different online estimate and a different tax assessment while ultimately receiving another value in the mortgage appraisal.

Our guide to automated valuation models explains why online estimates and mortgage valuations can differ.

Does Every Mortgage Require a Traditional Appraisal?

No.

Mortgage valuation has changed substantially.

Depending on the transaction and underwriting results, conventional lenders can now encounter several valuation options.

Traditional Appraisal

An appraiser develops an opinion of value using property observations, market research and appraisal analysis.

Desktop Appraisal

A desktop appraisal is completed by an appraiser without the appraiser conducting the traditional on-site property inspection.

The appraiser instead relies on available property information, market data and other permitted sources.

Hybrid Appraisal

A hybrid appraisal separates property-data collection from the valuation.

A trained third party can collect standardized interior and exterior property information, photos and other data. An appraiser then uses that information to complete the valuation.

Value Acceptance

Fannie Mae’s value acceptance option allows certain eligible loans to proceed without an appraisal when Desktop Underwriter accepts the property value submitted by the lender.

Eligibility is determined through automated underwriting and available collateral data.

Value Acceptance With Property Data

Some eligible Fannie Mae transactions require a standardized property data collection instead of an appraisal.

A trained and vetted property data collector observes the interior and exterior and submits standardized property information, but does not develop an opinion of value.

Freddie Mac ACE Options

Freddie Mac similarly offers Automated Collateral Evaluation, or ACE, for certain eligible mortgages.

ACE can waive the appraisal-report requirement, while ACE + Property Data Report adds an on-site standardized property-data collection without requiring a traditional appraisal report.

These aren’t options the borrower simply chooses from a menu.

The lender’s automated underwriting results, mortgage requirements and property determine which valuation path is available.

Who Orders the Home Appraisal?

When a mortgage requires an appraisal, the lender generally orders or arranges it.

That’s intentional.

Federal valuation-independence rules prohibit attempts to pressure an appraiser into producing a particular value.

For example, a loan officer cannot tell an appraiser that the property needs to reach the contract price for the loan to close and pressure the appraiser to make it happen.

Real estate professionals also cannot coerce an appraiser into assigning a particular value.

Who Pays for the Home Appraisal?

The borrower commonly pays the appraisal fee when an appraisal is required, although the exact payment process varies by lender and transaction.

The fee should appear among the applicable mortgage costs disclosed by the lender.

An appraisal commonly costs several hundred dollars, but the actual price can vary based on:

• Location
• Property type
• Property size
• Complexity
• Appraiser availability
• Required report type

Unusual, rural or multifamily properties can require more extensive work than a straightforward suburban single-family home.

How Long Does a Home Appraisal Take?

There isn’t one universal appraisal timeline.

The overall process can take several days to a couple of weeks or longer depending on appraiser availability, access to the property, complexity and lender review.

The actual property visit may be relatively short compared with the research and analysis completed afterward.

Appraisal timing can become particularly important when the purchase contract includes a tight financing or closing deadline.

Does the Appraiser Know the Purchase Price?

In a purchase transaction, the appraiser generally reviews the sales contract and analyzes the transaction.

But the purchase price does not dictate the appraisal result.

The fact that a buyer agreed to pay $500,000 does not require the appraiser to conclude that the property is worth $500,000.

Federal rules protect the appraiser’s independent judgment, and conventional appraisal requirements call for analysis of the contract and relevant market evidence.

What Happens if the Appraisal Matches the Purchase Price?

If the appraisal supports the purchase price and the property otherwise satisfies applicable requirements, the lender can continue processing the mortgage.

That doesn’t mean the loan is automatically approved.

The borrower still has to satisfy underwriting requirements involving factors such as:

• Income
• Assets
• Credit
• Debts
• Insurance
• Title
• Other loan conditions

What Happens if the Appraisal Is Higher Than the Purchase Price?

A high appraisal generally doesn’t change the price the buyer and seller already agreed to pay.

If you sign a contract to buy a home for $400,000 and it appraises for $420,000, the seller doesn’t automatically get to increase the price by $20,000.

The purchase contract still governs the transaction.

A higher appraisal also doesn’t mean the lender simply gives the buyer additional money.

The mortgage remains subject to the loan amount, down payment, LTV calculation and other underwriting requirements.

What Happens if the Appraisal Is Lower Than the Purchase Price?

A low appraisal creates an appraisal gap.

For example:

• Purchase price: $400,000
• Appraised value: $380,000
• Appraisal gap: $20,000

The buyer and seller then have several potential paths forward.

The Seller Can Reduce the Price

The seller may agree to lower the purchase price to the appraised value or another negotiated amount.

The Buyer Can Bring Additional Cash

The buyer may be able to increase the cash contribution to complete the purchase.

The additional cash required isn’t always identical to the full appraisal gap because the lender’s LTV calculation and original down payment matter.

The Parties Can Split the Difference

The seller might lower the price while the buyer contributes more cash.

The Buyer Can Request a Reconsideration of Value

If the appraisal appears to contain factual errors or missed relevant information, the borrower can ask the lender about a reconsideration of value.

The Loan Can Potentially Be Restructured

Depending on the mortgage and buyer’s finances, changing the loan amount or other financing terms may be possible.

The Transaction Can End

An appraisal or financing contingency may provide a contractual path to terminate if the value doesn’t support the purchase.

What happens to earnest money and other obligations depends on the purchase agreement.

Our guide to appraisal gaps explains these choices and the financing impact in more detail.

Buyers can also model how a lower supported value could affect the money required for closing using a cash-to-close calculator.

Can You Challenge a Home Appraisal?

Yes, but the process isn’t simply an appeal because you dislike the value.

A borrower can ask the lender about a reconsideration of value, commonly called an ROV.

A useful ROV request can identify evidence such as:

• Incorrect square footage
• Incorrect room count
• Missing improvements
• Incorrect property characteristics
• More relevant comparable sales
• Errors in the comparable data
• Other factual omissions

Federal regulators recognize the ROV process as a way for borrowers to raise concerns about inaccurate valuations.

A request does not guarantee that the value will change.

The goal is to have legitimate information reviewed, not to pressure the appraiser into reaching the contract price.

Can You Ask for a Second Appraisal?

Potentially, but borrowers shouldn’t assume they can simply order a second appraisal and substitute whichever value they prefer.

The lender determines which valuation satisfies the mortgage requirements.

Federal valuation rules do permit creditors to obtain multiple valuations in appropriate circumstances, but appraisal-independence requirements still apply.

If you think the original appraisal is materially wrong, start with the lender’s reconsideration-of-value process.

Can the Real Estate Agent Give the Appraiser Comps?

Providing legitimate property and market information is different from pressuring an appraiser.

Federal valuation-independence rules allow appropriate property information, including comparable properties, to be considered.

A real estate agent may have information about:

• Recent comparable sales
• Property improvements
• Renovations
• Features that may not be obvious
• Relevant market activity

What the agent cannot properly do is demand a particular value or attempt to coerce the appraiser.

Can an Appraisal Be Biased?

Appraisals are subject to fair lending and nondiscrimination requirements.

Valuation conclusions cannot lawfully be based on prohibited discriminatory factors.

Fannie Mae also prohibits appraisal language and practices that characterize neighborhoods using subjective terms tied to desirability or demographic characteristics.

If a borrower believes prohibited bias or other material errors affected the valuation, that concern can be raised through the lender’s reconsideration-of-value process and other available complaint channels.

Does an FHA Appraisal Work Differently?

FHA appraisals evaluate value while also addressing applicable FHA property requirements.

That doesn’t mean an FHA appraiser performs a full home inspection.

HUD specifically tells borrowers that an FHA appraisal is not a home inspection.

Certain property conditions may nevertheless need to be addressed before FHA financing can close.

What About VA and USDA Appraisals?

Government-backed loan programs can have their own appraisal and property requirements.

VA financing, for example, uses VA appraisal requirements and minimum property requirements.

USDA-financed properties must satisfy the applicable USDA property requirements.

A buyer should therefore avoid assuming that an appraisal acceptable for one mortgage program will automatically satisfy another program.

Do You Need an Appraisal to Refinance?

Sometimes.

A refinance may require a current valuation because the lender needs to understand the home’s value and resulting loan-to-value ratio.

But some refinances can qualify for appraisal waivers or streamlined programs without a traditional appraisal.

Eligibility depends on the mortgage program, automated underwriting findings, property and lender requirements.

If you’re refinancing rather than buying, the refinance appraisal process can work somewhat differently from a purchase transaction.

Does an Online Home Estimate Replace an Appraisal?

No.

An automated valuation model can be useful for estimating a home’s potential value during early research.

But a consumer-facing online estimate isn’t automatically the valuation your mortgage lender will use.

That distinction remains true even though lenders themselves increasingly use automated valuation technology and appraisal alternatives in eligible mortgage transactions.

An online estimate can be a useful data point. It shouldn’t be treated as a guaranteed sale price or lender-approved property value.

Home Appraisal Checklist for Buyers

1. Ask your lender whether the loan requires a traditional appraisal or another valuation method.
2. Review the appraisal fee on your mortgage disclosures.
3. Keep the purchase timeline in mind when the appraisal is ordered.
4. Get a separate home inspection rather than relying on the appraisal for property condition.
5. Review the appraisal report when you receive it.
6. Check basic property facts and comparable sales for potential errors.
7. Ask the lender about an ROV if you identify legitimate valuation concerns.
8. Understand your appraisal contingency and appraisal-gap obligations.
9. Ask for updated loan figures if a low appraisal changes the financing.

Bottom Line

A home appraisal provides an independent opinion of a property’s value and can play a major role in mortgage underwriting.

Appraisers analyze the home, comparable sales and relevant market information rather than simply confirming the purchase price.

But the modern mortgage valuation process doesn’t always involve a traditional appraisal. Eligible conventional mortgages can use alternatives such as value acceptance, property data collections, hybrid appraisals or other approved valuation methods.

If you do receive a traditional appraisal, read the report carefully. A low value doesn’t necessarily end the purchase, and a borrower can ask the lender to review legitimate factual errors or stronger market evidence through the reconsideration-of-value process.

FAQ

What is a home appraisal?

A home appraisal is an independent professional opinion of a property’s value completed for a specific purpose, such as mortgage lending.

Is a home appraisal required when buying a house?

Not always. Many mortgages require an appraisal, but some eligible conventional loans can use appraisal alternatives such as value acceptance or property-data-based valuation options.

Who orders the appraisal?

The mortgage lender generally orders or arranges an appraisal when one is required. Appraisal-independence rules are intended to prevent interested parties from pressuring the appraiser to reach a particular value.

Who pays for a home appraisal?

The borrower commonly pays the appraisal cost when one is required. The exact fee depends on property type, location, complexity and appraiser availability.

What does an appraiser look at?

An appraiser can consider property size, condition, site characteristics, rooms, design, improvements, comparable sales, location and current market conditions, among other relevant factors.

What are comps in an appraisal?

Comps are comparable properties whose sales provide evidence of how buyers have valued homes similar to the property being appraised.

Is an appraisal the same as a home inspection?

No. An appraisal focuses primarily on valuation and applicable mortgage property requirements. A home inspection focuses more specifically on helping the buyer understand the property’s physical condition.

What happens if the appraisal is lower than the offer?

The seller may lower the price, the buyer may contribute additional cash, the parties may negotiate a compromise, financing may be restructured or the transaction may end depending on the contract.

Can you challenge a low appraisal?

Yes. Borrowers can ask their lender about a reconsideration of value if they identify factual errors, missing information, better comparable sales or other legitimate concerns. A review does not guarantee the value will increase.

Can you get a second appraisal?

Potentially, but the lender determines which valuation can be used for the mortgage. You generally cannot simply order another appraisal and choose the higher result.

What happens if the appraisal is higher than the purchase price?

The contract price generally remains the amount the buyer and seller agreed to. A higher appraisal does not automatically increase the purchase price or loan amount.

How long does an appraisal take?

Timing varies, but the overall appraisal process can take several days to a couple of weeks or longer depending on property complexity, access, local appraiser availability and lender review.

Can a mortgage close without an appraisal?

Yes, in some cases. Fannie Mae value acceptance and Freddie Mac ACE can allow certain eligible mortgages to close without a traditional appraisal report.

Does an online home estimate count as an appraisal?

No. A consumer-facing automated home-value estimate is not the same as a professional appraisal or necessarily the valuation a lender will accept for a mortgage.