Understanding the Appraisal Process

The appraisal is a critical step in the home buying process. It protects the lender (and you) from paying more than a property is worth. Here's how it works.

What Is an Appraisal?

An appraisal is an independent assessment of a property's market value, conducted by a licensed appraiser. The lender orders it to verify the home is worth at least as much as the loan amount.

Why Lenders Require It

If you default on your loan, the lender takes the property. They need to know they can sell it for enough to recover their money. An appraisal protects against lending more than the collateral is worth.

How the Process Works

Step 1: Lender Orders Appraisal

After you're under contract, the lender orders an appraisal through an Appraisal Management Company (AMC). You typically pay for it upfront ($400-700).

Step 2: Appraiser Visits Property

The appraiser inspects the home:

• Measures square footage
• Notes number of rooms, features
• Assesses condition
• Takes photos
• Notes any issues (especially for FHA/VA)

Step 3: Comparable Analysis

The appraiser researches recent sales of similar properties ("comps") in the area, then adjusts for differences:

• Your home has a pool, comp doesn't: Add value
• Comp has larger lot: Subtract value
• Your home was updated: Add value

Step 4: Report Delivered

The appraiser delivers a report with their opinion of value. This typically takes 1-2 weeks after the property visit.

What Appraisers Look At

The Property

• Location
• Size (square footage, lot size)
• Number of bedrooms/bathrooms
• Age and condition
• Features (garage, pool, updates)
• Any needed repairs

The Market

• Recent comparable sales
• Current listings
• Market trends
• Neighborhood factors

What If It Comes in Low?

If the appraisal is below your purchase price, you have options:

Option 1: Renegotiate Price

Ask the seller to reduce the price to the appraised value. In a buyer's market, this often works.

Option 2: Meet in the Middle

Buyer and seller split the difference. Seller reduces price somewhat; buyer pays extra above appraised value.

Option 3: Buyer Pays the Gap

You pay the difference between appraised value and purchase price in additional cash. The lender will only loan against appraised value.

Option 4: Challenge the Appraisal

Your lender can request a reconsideration of value if there are:

• Errors in the report
• Better comparable sales the appraiser missed
• Incorrect property details

This doesn't always work, but sometimes appraisers do miss relevant comps.

Option 5: Walk Away

Use your appraisal contingency to cancel the contract and get your earnest money back.

FHA and VA Appraisal Differences

FHA Appraisals

More stringent property requirements:

• Must meet HUD's minimum property standards
• Health and safety issues must be addressed
• Peeling paint, broken windows, etc. need repair

VA Appraisals

Similar property requirements plus:

• Must meet VA's Minimum Property Requirements (MPRs)
• Appraiser issues a Notice of Value (NOV)
• If below purchase price, "Tidewater" process allows input before final value

Protecting Yourself

Appraisal Contingency

Keep this contingency in your contract. It lets you cancel or renegotiate if the appraisal comes in low.

Appraisal Gap Coverage

In competitive markets, some buyers waive appraisal contingencies or agree to cover gaps. Understand the risk: you're committed to paying more than the home may be worth.

Know the Market

If you're offering significantly above asking or above recent comps, appraisal risk increases. Factor this into your offer strategy.

---

Questions about the appraisal process? Contact Greg Franklin or call (559) 816-7780 to discuss.