What Are Appraisal Fees and What Are They For?

Definition and Explanation

Evaluating an Empty Kitchen
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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 in most markets, but unique properties and remote homes can cost more to appraise. Without an acceptable appraisal, you cannot borrow 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 (with a check or credit card), but they are sometimes paid at closing.

Why Your Lender Needs an Appraisal

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. So how can they be confident that they’ll get their money back?

When you get a home loan, the property you buy 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 by the property you buy (all of this is in the fine print of your loan agreements).

Lenders need to be sure that they are not giving you too much money. They want to know that the house is worth more than you’re borrowing so that (unless there’s a major drop in home prices) they can easily recover their money.

To find out what your home is worth, they 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 will go to the house in question and take a look around – in most cases going inside the house to see the condition and features of the interior.

Appraisers generally verify square footage and other characteristics inside and out. For example:

  • Has the kitchen or bathroom been remodeled?
  • What materials are the floors covered with, and are they in good shape?
  • Are there any obvious health or safety issues? An appraisal is not nearly as thorough as an inspection.

Next, the appraiser compares the home to other homes in the area (looking at recent sales and the characteristics of those homes – such as finished square footage, number of bedrooms and bathrooms, etc. – but the appraiser does not visit the interior of those “comparable” homes).

After visiting properties, an appraiser creates a report detailing the property in question, including the appraised market value. You’re entitled to receive a copy of that report, and it’s a good idea to read through and save the report.

Low Appraisals

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% loan to value ratio is often a safe guideline.

If an appraisal comes in too low, it can ruin a deal.

You might not be able to buy a home (or you’ll have to find a different lending arrangement), or you might need to get another appraisal done and hope for a higher estimate. You can also make a larger down payment to make up the difference.

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.

How Much Is Too Much?

It’s worth finding out how much appraisal fees are in your area before you pay anybody. With some loans, you’re allowed to shop around and choose your appraiser. Just ask your lender what the requirements are (required certifications or licenses).

There’s no harm in picking your own appraiser – although your lender’s appraiser might be just fine. In the past, you could sometimes count on your lender’s (or your agent’s) appraiser to give you the number you needed.

Since the mortgage crisis, appraisers are much more independent and unwilling to “help” a deal go through.