Why Do You Pay Appraisal Fees to Buy or Sell?
An appraisal fee covers the cost of having a professional appraiser evaluate a home and estimate its market value. Although this and other fees when buying a home should appear on your Loan Estimate form, the house appraisal cost is often around $300 to $450 for a single-family home in 2020. Prices depend on the appraiser, the property location, and the complexity of the appraisal.
A house appraisal usually occurs after a seller accepts an offer on a home and before closing on the sale. This typically follows a home inspection because there’s no need to pay for an appraisal if there’s something wrong with the property. The buyer generally pays the fee for the appraisal at closing unless they negotiate for the seller to pay it.
If you're a buyer or a seller faced with this expense, you might be wondering why you have to get an appraisal and pay the appraisal fee. Understanding the homebuying process can help you budget and plan for your next home purchase or sale.
Reasons for Appraisals and Fees
Appraisals are often required by lenders as a condition of closing, but they are useful for lenders, buyers, and sellers.
Appraisals Provide Lenders a Loan Guarantee
When you take out 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 sale proceeds to pay off your debt.
Appraisals prove to lenders that the sale price of a home aligns with its value. This assures the lender that the value of the property securing the loan is sufficient to allow the lender to recoup its losses in the event of a default. By knowing the estimated value of the home, lenders can extend a loan of a reasonable amount to buyers. This benefits the lender by enabling them to recover the money upon the sale of the home in case the buyer defaults and the home goes into foreclosure.
If, for example, a lender granted a buyer a loan of $400,000 on a home with a market value of only $200,000, and then the buyer defaulted on the loan, the lender would find it difficult to recoup the loaned amount when reselling the home in foreclosure. Appraisals prevent this risky scenario and protect the lender's assets.
When lenders reduce risk, they can (ideally) offer lower rates to borrowers.
Appraisals Ensure Unbiased Home Estimates
Lenders don't visit neighborhoods and look at houses with you, and they may not be 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 inspect the quality of materials or the condition of your home in person, and can't 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 in the deal.
Appraisals Can Keep Buyers From Overpaying
Even though an appraisal is a lender requirement, the buyer assumes the house appraisal cost unless they negotiate for the seller to pay it. The appraisal fee accounts for the appraiser's time and expertise in evaluating and photographing the property, estimating its value, and preparing an appraisal report.
While buyers and sellers may not enjoy spending a few hundred dollars on an appraisal, the fee is small relative to the large investment a buyer makes in a home. Getting the estimated value of a home from an appraisal allows the buyer to negotiate a fair sale price and avoid paying much more for a home than it is actually worth.
They Keep Sellers From Making Low-Ball Sales
Sellers also stand to gain from appraisals, even if they agree to pay the appraisal fee. When sellers know the market value of their home, they can avoid accepting unreasonably low offers from prospective buyers. As a result, they can maximize their returns on the sale of the property and avoid seller's regret.
An appraiser estimates how much a home is worth. To arrive at that estimate, the appraiser needs to visit, evaluate, and document the property, which they usually do through a series of steps.
In most cases, appraisers go inside the house to see the condition and features of the interior. Over a period of a few hours, appraisers will take measurements and photos to verify the house's square footage and other characteristics like the layout, number of rooms, property materials, health and safety issues, and recent remodels.
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 square footage, number of bedrooms and bathrooms, and location.
After visiting properties, an appraiser creates a report detailing the property in question, including the appraised market value and comparable properties. You’ll receive a copy of that report, usually within seven business days, and it’s a good idea to read through it and save a copy for your records.
An appraisal only helps you and your lender understand the market value of a property. For more details about the condition of a property, you’ll need a home inspection, which is entirely for your benefit. Don’t expect an appraiser to point out every defect or get into a crawlspace to search for issues—an inspector should perform a more thorough review of the property.
Understanding the Appraisal Value
An appraisal needs to come in high enough to justify the loan you’re getting. In many cases, that value must match the purchase price on the contract. Again, lenders need to know that there’s more than enough value in the home to get their money back. A loan-to-value ratio (the amount owed on the loan divided by the appraisal value) should be less than 80% to be on the safe side. If the ratio is higher, you may be viewed as a risky borrower and may have to pay private mortgage insurance (PMI) as a result.
If an appraisal comes in too low, your loan might not get approved as-is. To buy that home, you have several options:
- Review the appraisal report to identify potential errors and dispute the appraisal value.
- Find a different lending arrangement, potentially through a smaller loan.
- Get another appraisal done and hope for a higher estimate. However, don’t expect appraisers to “help” loans go through.
- Make a bigger down payment to make up the difference and achieve a more acceptable loan-to-value ratio.
If, in contrast, a house appraises at a value higher than the purchase price, that’s usually no problem—unless you’re the seller and you’re asking for too little. Any additional value is additional equity in your home. That said, appraisals typically come in near the agreed-upon purchase price.
PMI can cost you tens of thousands of dollars over the loan term, so do your best to avoid this unnecessary expense.
For most loans, your lender will hire an appraisal provider, so appraisal fees depend partly on who your lender uses. You may not be able to shop around for a less-expensive appraiser.
Before the mortgage crisis, some appraisers were accused of inflating home prices to help loans get approved, sometimes at the request of lenders themselves. 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 have become far more independent and less willing to "help" deals go through.
However, you can check the credentials of the appraiser who will conduct your house appraisal. Conduct a search for appraisers by location or license number through the National Registry of Appraisers. If the search reveals pending investigations for the appraiser, raise this fact with your lender to ensure you work with a reputable appraiser.