Buying your first home is an exciting milestone. You’ve worked hard to improve your credit, save up a down payment, and set aside enough money to cover the cost of unexpected repairs. If you want the process to go smoothly, it’s important to understand each step.
Once a seller accepts your offer, you’ll need to pay for an appraisal. But how much is an appraisal fee? It depends on where you live. Keep reading to learn more about what an appraisal is, why you need one, and how much it’s likely to cost.
What Is a Home Appraisal?
A home appraisal is a professional opinion of a home’s worth. Professional appraisers consider several factors when estimating the value of a residential property:
- Lot size
- Square footage
- Architectural style
- Number of bedrooms
- Number of bathrooms
- Current condition
An appraiser doesn’t just look around a home and guess how much it’s worth. They conduct a thorough inspection, review recent market trends, and research recent sales. Note that appraisers only use comparables to estimate home values. A comparable is a similar property in the same neighborhood.
For example, if you want to know the value of a three-bedroom, two-bathroom home measuring 1,900 square feet, it’s not fair to compare it against a six-bedroom, four-bathroom home measuring 4,000 square feet. The appraiser would look for another three-bedroom home with approximately the same square footage before making an estimate.
Why Do You Need an Appraisal?
A mortgage is a type of secured debt, which means your lender can seize your property and sell it if you don’t repay the loan as agreed. In the mortgage industry, this is known as a foreclosure. The purpose of conducting a foreclosure is to repossess the property, sell it, and use the money from the sale to cover your loan balance.
Before the bank approves your mortgage application, you’ll need an appraisal showing that the home you want to buy is worth at least as much as you want to borrow. This helps the lender manage risk. Lenders also use appraisals to determine your interest rate and calculate the minimum down payment required.
Here’s an example of why you need an appraisal. Assume you applied for a $400,000 mortgage, and the bank gives you the money without verifying the value of your new home. Due to financial hardship, you get behind on your monthly payments. Eventually, the bank initiates foreclosure proceedings.
Suddenly, the bank finds out your home is only worth $200,000. This is far less than the balance remaining on your loan. Even if the bank sells the property right away, it won’t get enough money to satisfy your mortgage. Getting a home appraisal reduces the risk that a lender won’t be able to recoup its funds.
How Much Is an Appraisal Fee?
The home-buying process certainly isn’t cheap. You have to save a down payment, pay for an appraisal, and cover several closing costs. Therefore, it’s natural to wonder how much an appraisal fee will be.
It depends on where you live and who you hire. Appraisers are just like other professional service providers. Some have low fees, while others charge a premium for their expertise. Generally, you can expect to pay more if you live in a city with a high cost of living, such as Los Angeles, New York, or Seattle.
However, a home appraisal usually costs between $300 and $400. This includes an on-site inspection and market research. If your property has unique features, the appraiser may charge a little more than usual to account for extra research time.
An Overview of the Appraisal Process
Now that you understand the costs involved in getting an appraisal, it’s helpful to review the process. If there’s anything you’re not sure about, don’t hesitate to ask your real estate agent or loan officer for more information.
Once a seller accepts your offer, the bank hires a licensed professional to complete the required appraisal. The process begins with a thorough inspection of the home. During an inspection, an appraiser evaluates the structural soundness of the property, looks for potential safety issues, and documents major improvements.
Next, the appraiser conducts in-depth research to complement the information gathered during the inspection. For example, a licensed appraiser typically uses real estate databases, government records, and other sources to gather information on comparable sales. Finally, the appraiser prepares a report documenting their opinion of the home’s value.
Appraisal vs. Home Inspection
Although an appraisal includes an inspection, it’s different from the home inspection used to uncover defects that could cost a buyer thousands of dollars in the future. The purpose of an appraisal is to determine the home’s value, while the purpose of a home inspection is to prevent you from buying a home with bad plumbing, termite damage, and other major problems.
Next Steps
Once your lender receives the appraisal report, an underwriter will decide whether to approve or deny your mortgage application. If you’re approved, the content of the report may affect your interest rate or reduce the amount of money needed at closing.
You can learn more about how to prepare for buying a home, including improving your credit to get a good interest rate on a mortgage, at Credit.com. Start by getting your free credit report card today.
