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Prequalify nowAn appraisal is an independent evaluation of the value of your home. It takes into account the condition of your home, recent sales of similar homes nearby, and unique features and upgrades you have. Appraisals are typically used when buying or refinancing a home, but they can also provide a valuation for contracts, divorces, and other situations. Learn more about the appraisal process, how to prepare for an appraisal, and tips to boost your home’s value.
Understanding the home appraisal process
There are three primary types of appraisals — automated, drive-by, and full. Each type of appraisal gets progressively more in-depth and accurate –as well as expensive –as you move up the order.
Appraisers are independent third parties that do not have a vested interest in your home or its valuation. They undergo training and licensing to learn their trade. Their valuations play a crucial role in home sales and mortgage lending, as well as other situations that rely on independent opinions of value.
An automated appraisal solely compares your home on its description and recent comps. It is also known as a “desktop appraisal” since the appraiser primarily uses tax records and information from the Multiple Listing Service (MLS) through their computer.
A drive-by appraisal uses desktop information combined with the appraiser driving by your home. They evaluate your home’s curb appeal, exterior condition, and the appeal of the neighborhood. Since the appraiser does not enter your home, they do not need to make an appointment with the homeowner.
Full appraisals involve inspecting the interior and exterior of your home, including evaluating its condition, measuring its square footage, and taking pictures. The appraiser schedules an appointment with the homeowner to complete the appraisal. Typically, homeowners allow the appraiser to walk through the home by themselves. You may be able to point out special features or home improvements to accentuate value before they get started, but you cannot attempt to persuade the appraiser to reach a certain value. Once they begin, you should allow them to work uninterrupted.
Why appraisal values are important
Home values are crucial in the home buying and mortgage lending process. When applying for a loan, the mortgage lender typically requires an appraisal to determine the home's value. This value determines your home equity, which is the value of the home minus any loans against it. How much you can borrow, what your down payment is, and what interest rates and fees the lender charges are all impacted by your home's value. If the value is too low, you might not be able to borrow at all.
Lending products are affected differently based on your home’s appraised value. Here are a few examples of how an appraisal can affect your ability to borrow:
- Home equity loan or line of credit (HELOC). A home equity loan is a fixed-rate loan, while HELOCs are variable-rate lines of credit. The borrowing amount is usually a percentage of your home’s value minus any outstanding loans. For example, if you have a $500,000 house with a $300,000 first mortgage, you can borrow up to $150,000 if the bank goes up to 90% loan-to-value (LTV).
- Refinance. When you refinance a home, you replace your current loan with a new one. The appraisal determines the LTV of your new loan, which can affect your eligibility for the loan product, interest rates, and fees. In extreme cases, your appraisal may come in lower than your mortgage balance which can affect your ability to get a loan or require you to come with extra cash out of pocket.
- Home purchase. Appraisals affect your ability to buy a home. When an appraisal comes in higher, you automatically have extra equity on the first day. However, a low appraisal may require a larger down payment or cause your loan to fall apart.
- Home Equity Investment (HEI). With Point’s Home Equity Investment, you gain access to your home’s equity without monthly payments or income verification. Homeowners share their home’s price appreciation with Point.com and based on the home’s starting value. The appraisal not only determines how much equity you can access through an HEI, it also determines if your home is eligible for this program since it requires that homeowners have a large amount of equity.
What do home appraisers look for?
Before booking your appraisal, it helps to understand what home appraisers are looking for. This knowledge helps you know which factors you can and cannot control, how to compare your houses against others, and set realistic expectations for the appraised value.
These are the most common factors appraisers look at:
- Condition of the property. A well-kept home will receive a higher value than an outdated home with obvious repair needs. Appraisers factor in the cost of necessary repairs when determining value.
- Size and layout of the home. Size, functionality, and usability are big factors in a home’s value.
- Exterior appearance. Your home’s first impression is its curb appeal. Fresh paint, a groomed yard, and fresh flowers can make a huge difference.
- Recent upgrades. These upgrades can add extra value to your home and give your home an advantage over similar homes. Examples include kitchen remodels, converting a half-bath to a full bath, or adding more bedrooms and bathrooms.
- Comparable sales. The recent sale price of comparable homes in your local area gives an appraiser an idea of what buyers are willing to pay.
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What hurts a home appraisal?
To get the highest value for your home in an appraisal, it is important to understand what factors could reduce its value when refinancing or trying to sell your home. By knowing these factors, you can address them ahead of time or set realistic expectations.
- Deferred maintenance or visible damage. Damage, incomplete repairs, and deferred maintenance can reduce your home’s value. The appraiser deducts estimated costs of these repairs, affecting the appraisal amount.
- Outdated or non-functional features. An older home with outdated decor, appliances, or layouts may receive a lower value in its appraisal. An updated home offers more value to a prospective buyer and often leads to a high appraisal.
- Lack of sufficient square footage or functional rooms. Appraisers understand the types of features and functionality that buyers are looking for. If your home lacks these features, it could receive deductions in value to compensate.
- Negative neighborhood or housing market conditions. While trends and local market conditions are outside your control, they can cause your appraised value to rise or fall.
- Appraisal value lower than the desired loan amount. When your appraisal comes in below your loan amount, you’ll have to make adjustments. Homebuyers will need to come up with extra cash or negotiate a lower home purchase amount. Existing homeowners will have to take out a smaller loan or wait until their home appreciates further.
What can help a home appraisal?
Increase the odds of a favorable appraisal by taking these action steps.
- Well-maintained property with regular upkeep. Ensure that all regular maintenance items are taken care of. Unfinished projects and obvious maintenance issues will hurt your home’s value.
- Recent renovations or upgrades. Explore options to renovate or upgrade the home to increase its appeal and value, like upgrading the kitchen or adding another bedroom. Don’t over-personalize, and keep the color palette neutral.
- Desirable location and neighborhood amenities. When buying your home, choose a location that is desirable to the greatest number of people. Make a list of local amenities that add value, like public parks, shopping, and quality schools.
- High-quality construction materials and finishes. Use high-quality materials that extend the life of your projects and broaden their appeal. Appraisers may add value for projects that have a long lifespan.
- Recent sales of comparable homes at higher values. Help the appraiser out by making a list of recent sales that benefit your valuation. These comps will help if you need to dispute the appraisal.
Tips to prepare for a home appraisal
There are many steps you can take that are free or don’t cost a lot of money. They offer a huge return on your investment and can drastically improve your appraised value.
- Clean and declutter. Remove clutter by purging unnecessary items, deep cleaning your home, and putting excess furniture in storage.
- Make necessary repairs. Many repairs are cheap to fix and are just a matter of taking the time to handle them. If you’re not handy with tools, watch online videos to learn or ask skilled friends for a favor. A handyman is a cheaper alternative for small projects that don’t require a contractor.
- Enhance curb appeal. Spend the morning pulling weeds, mowing the lawn, trimming bushes, and planting fresh flowers. It will make a huge difference in your curb appeal.
- Make a list of recent upgrades. Help your appraiser understand the time and money you’ve invested in your home. They may be willing to factor in recent upgrades and their estimated cost into their appraisal.
- Provide relevant documentation. Show that you’ve complied with local rules by showing floor plans and permits for your renovations. Include warranties on larger items, like an HVAC system or energy-efficient windows, that add value over time.
Final thoughts
Your home’s appraisal dictates its value and how much you can borrow against it. A low appraisal could negatively impact your interest rate, fee, or how much you can borrow. In some cases, you may not be able to get a new mortgage, or you’ll have to bring extra cash in order to close on the loan. There are simple steps you can take to increase the value of your home that are frugal yet effective.
