How Home Appraisals Work

An appraisal is a written estimate of a property's market value completed by an appraiser shortly after you request your mortgage.

Lenders use an appraisal report to help determine the maximum loan amount you can borrow. A couple of key questions:

How do appraisers determine the value?
First, they look to recent sale prices for similar properties in the area, and then they inspect the property's physical condition, checking the interior and exterior.

If the appraised value comes back higher than the sale price, you're not affected.

Why is the appraised value important?
But if the appraised value comes back lower than the sales price, that lower appraised value will be used to determine your loan amount. You might have to increase the amount of your down payment to make up the difference between the appraised value and the purchase price.

For example, let's say you want to take out a $160,000 loan on a home with a $200,000 purchase price, which means your loan-to-value ratio (LTV) is 80 percent. This means you are borrowing 80 percent ($160,000) of the total value of the property ($200,000). Most lenders require an 80 percent LTV ratio before increasing interest rates or requiring private mortgage insurance.

If the appraisal comes in lower than the purchase price, say at $190,000, to maintain an 80 percent LTV your loan value can now be no more than $152,000 (80 percent of $190,000). This means you will need to add $8,000 to your down payment to maintain the 80 percent LTV ratio, or pay private mortgage insurance and possibly a higher interest rate.

How do you find an appraiser?
Your lender might be able to give you a suggestion on a reliable appraiser, or the Appraisal Subcommittee offers a search engine to locate certified or licensed appraisers by name, state, city or county.

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