What Are Appraisal Fees and What Are They For?
Definition and Explanation
An appraisal fee covers the cost of having a professional appraiser evaluate a home and estimate the market value of the home. The cost is often around $300 to $500, but prices depend on the specific property. Unique properties, large houses, and remote locations typically cost more to appraise. Without an acceptable appraisal, you cannot borrow money to purchase or refinance a home.
Appraisal fees should be shown to you up-front on your Loan Estimate or Good Faith Estimate, but the exact amount of the fee might be unknown when the estimate is created. You often pay those fees out-of-pocket using a check or credit card, but sometimes you pay for appraisals at closing.
Why Lenders Need Appraisals
Lenders need to know that they are not giving you a reasonable amount of money. They want to verify that the house is worth more than you’re borrowing so that they can recover their money—unless there’s a significant drop in home prices.
A loan guarantee: When you get a mortgage loan, the property serves as collateral for the loan: If you stop making payments, the lender can take possession of the property, sell it, and use the sales proceeds to pay off your debt. In other words, the loan is secured or guaranteed by the property you buy. Most people believe that foreclosure will never happen to them, and hopefully, it doesn’t, but you agree to all of this in your loan contracts.
Unbiased information: Lenders do not visit neighborhoods and look at houses with you, and they are not experts on your local real estate market. The people and organizations lending you money might be thousands of miles away, and your loan might be sold off to investors all around the world. They’ll never see the quality of materials or the condition of your home in person, so how can they be confident that they’ll get their money back? To find out what your home is worth, lenders get an appraisal from an independent professional who is not emotionally or financially involved with the deal.
What Does an Appraiser Do?
An appraiser estimates how much a home is worth. To arrive at that estimate, the appraiser needs to visit and evaluate the property. In most cases, appraisers go inside the house to see the condition and features of the interior.
Appraisers should take measurements to verify square footage and other characteristics inside and out. For example:
- Has the kitchen or bathroom been remodeled? How long ago, and does the work look professional?
- What materials are the floors covered with, and are they in good condition?
- Are there any obvious health or safety issues? An appraisal is not nearly as thorough as an inspection.
Comparables: Appraisers also compare the home to other homes in the area. To do so, they evaluate recent sales and the characteristics of those homes such as finished square footage, number of bedrooms and bathrooms, location, and more. But appraisers typically do not visit the interior of those “comparable” homes.
Appraisal report: After visiting properties, an appraiser creates a report detailing the property in question, including the appraised market value and comparable properties. You’re entitled to receive a copy of that report, and it’s a good idea to read through the report and save a copy.
No inspection: An appraisal helps your lender understand the market value of a property. For more details about the condition of a property, you’ll need an inspection, which is entirely for your benefit. Don’t expect an appraiser to point out every defect or get into a crawlspace to look for issues—an inspector should perform a more thorough review of the property.
An appraisal needs to come in high enough to justify the loan you’re getting. In many cases, that value must match the price you’re under contract for. Again, lenders need to know that there’s more than enough value in the home to get their money back, and an 80 percent loan-to-value ratio is often a safe guideline.
If an appraisal comes in too low, your loan generally will not get approved as-is. To buy that home, you have several options:
- Find a different lending arrangement, by using a smaller loan or a higher loan to value ratio.
- Get another appraisal done and hope for a higher estimate, but don’t expect appraisers to “help” loans go through.
- Make a bigger down payment to make up the difference and keep your loan at an acceptable loan-to-value ratio.
High appraisals: If a house appraises at a value higher than the purchase price, that’s no problem—unless you’re the seller and you’re asking for too little. Any additional value is additional equity in your home. However, appraisals typically come in near the agreed upon purchase price.
For most loans, your lender chooses an appraisal provider, so appraisal fees depend partly on who your lender uses. You typically can’t shop around for a less-expensive appraiser.
Before the mortgage crisis, some appraisers were accused of inflating home prices to help loans get approved. Mortgage brokers and real estate agents may have had an incentive to choose appraisers who returned the answers they wanted—not necessarily the most accurate answers. Since then, appraisers are far more independent, and they are unwilling to help deals go through.
You can hire your own appraiser, whether you’re buying or selling. You may get valuable information, but the appraisal most likely will not be used as part of the loan approval process.