When you’re thinking about buying a home – which also usually means getting a mortgage – there are a lot of potentially complicated and confusing things that can make your head spin. One that often gets a lot of questions is the home appraisal.
In fact, in one of our First-Time Home Buyer Q&A Google Hangout videos, we got asked, “What is a home appraisal and why does a home buyer need an appraisal?”
What Is an Appraisal?
In the video, Michael Brocker, a regional team leader for Title Source, the nation’s largest independent provider of title insurance, property valuations and settlement servicing, defines an appraisal as a professional appraiser’s opinion of market value of a home.
He goes on to explain that the appraiser will come to your home to gather information about it, and then go back to his/her office and put together the appraisal report.
How Does an Appraisal Work?
The three main things the appraiser’s going to look at are
- Size and style of the home
- Availability/type of comparables
And this is where it gets a little more complicated, because the appraiser includes comparable sales – often called comps – in the appraisal of your home. After gathering all of this data, the appraiser has to put it all together to come up with a value for the home. This includes weighting comps by looking at things like which one most reflects the sale property and how the market values the different aspects of the home for sale.
Comps can generate a lot of frustration for homeowners/buyers because they’ll often change – or at least appear to change – the value of a home more than was expected, leading to disagreements about the true value of the home.
Why Is an Appraisal Necessary?
Brocker notes there are several reasons why it’s necessary to get your home appraised:
- The buyer needs to make sure he/she is purchasing a home that is worth what they are paying for it.
- The lender needs to confirm that the home is worth the amount they are lending to buy it.
- It’s required for loans backed by government-sponsored entities like Fannie Mae, the Federal Housing Administration (FHA) or the Department of Veterans Affairs (VA).
As you can see, appraisals aren’t too complicated or scary once you learn how they work. They’re used to ensure that the price the homeowner is asking is the fair and accurate value for the home.
If you have questions that we didn’t cover here, let us know in the comments below!