Appraisals and Your Home Mortgage Loan


When you get a mortgage loan to buy your home, your lender will require an appraisal to confirm the value of the property. Why? The property serves as collateral for your loan, and lenders want to be sure that they can at least recover the amount loaned if they have to sell because of default. With your final loan commitment contingent on a satisfactory appraisal, and because that appraisal assures you are paying a fair price for the home, it is a good idea to get familiar with the appraisal process even before you make your first purchase offer.

What is an appraisal? A real estate appraisal is an assessment process that results in an impartial opinion of a property’s value. More specifically, it is an estimate of how much a given property will sell for in an open and competitive real estate market. Lenders typically contract with an independent licensed appraiser to perform the appraisal process, which is carried out according to professional practice guidelines. The process is thorough and detailed and involves an inspection of the property that is being appraised (the subject property), verification of property data though public records, analysis of market data, and application of a value approach.

The major phase of the appraisal process involves the application of a value approach.

Sales Comparison and Cost Approach
Two of the most common approaches used for residential properties are the sales comparison approach and the cost approach. The sales comparison approach looks at the subject property with respect to similar properties, called comps that have sold in the area. The premise of this approach is that the market value of the subject property is directly related to the prices of similar, competitive properties. The comparative analysis focuses on similarities and differences among properties that affect value. In other words, the appraiser compares physical characteristics and makes monetary adjustments for each comp to bring it more in line with the subject property. Those adjustments are based on contributory values of characteristics as determined by the market. For example, a bathroom in a given market may have a contributory value of $5,000. If the comp has one less bathroom than the subject property, then the sales price of the comp would be adjusted upward by $5,000.

The cost approach takes the value of the land into consideration along with an estimate of how much it would cost to replace the home if it were destroyed. The premise here is that the market value is what a reasonable buyer would pay for a suitable substitute property. This approach is useful for new construction where the costs involved in building are known. It can also be helpful in situations where a lack of market activity limits the usefulness of the sales comparison approach or where the characteristics of available comparable properties differ significantly from the subject property, making precise valuation difficult.

What can you expect to see in an appraisal report? Reports vary in form and content however examples of the types of information included in a typical report are:

  • Photos of the subject property and comps
  • Detailed description of the subject property
  • Side-by-side comparison of the subject property with up to three comps
  • Evaluation of the real estate market in the area
  • Notes about any factors that might negatively impact the subject property’s value
  • Estimate of the average sales time for the subject property

Should you worry about the outcome of the appraisal? It is a very important part of the mortgage process, and your loan could certainly be declined if the property does not qualify as adequate security. You probably should not agonize too much about appraised value because more often than not, it has an uncanny way of being right in line with the asking price. This is especially true when the seller had an appraisal done to determine the asking price, or an experienced real estate agent performed a comparative market analysis to arrive at the price.

Remember though, that in addition to the appraised value, the lender studies the entire appraisal report when determining whether the property qualifies as adequate security for your loan. Other factors like estimated time to sell the property are incorporated into their decision process. If problems do arise from the appraisal, don’t immediately push the panic button. Work with the seller and lender on compromises and solutions to try and carry the deal forward.

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2 thoughts on “Appraisals and Your Home Mortgage Loan”

  1. Thank you for this basic information about property appraisals. You have very well explained it in layman terms.

  2. In your article, you stated that we should remember though, that in addition to the appraised value, the lender studies the entire appraisal report when determining whether the property qualifies as adequate security for our loan. My cousin and his wife have been wanting to purchase their first home but don’t know where to start. I wonder what types of things most appraisers look at when they are appraising a home.

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