What Is a Home Appraisal?

Your offer was accepted at $425,000. You're excited. Then your lender orders an appraisal, and it comes back at $410,000. Suddenly, there's a $15,000 gap between what you agreed to pay and what the lender says the home is worth. What happens now?

A home appraisal is a professional evaluation of a property's market value, conducted by a licensed, independent appraiser. Your lender orders one to make sure the home is worth at least as much as the amount you're borrowing. After all, the home is the lender's collateral. If you default, they want to know they can sell the property and recover their investment.

Table of Contents

• Why Appraisals Are Required
• How the Appraisal Process Works
  • Step 1: Lender Orders the Appraisal
  • Step 2: The Property Inspection
  • Step 3: Comparable Sales Analysis
  • Step 4: The Appraisal Report
• How Much Does an Appraisal Cost?
• What Happens If the Appraisal Comes in Low?
  • Renegotiate the Purchase Price
  • Pay the Difference in Cash
  • Meet in the Middle
  • Challenge the Appraisal
  • Walk Away
• Appraisal vs. Home Inspection
• Appraisals for Refinancing
• Tips for a Smooth Appraisal
• Your Appraisal, Your Protection

Why Appraisals Are Required

Lenders don't just take your word (or the seller's word) for what a home is worth. In the excitement of a competitive market, buyers sometimes agree to pay more than a property's fair value. The appraisal serves as an independent check on the transaction.

Without appraisals, a buyer could pay $500,000 for a home worth $400,000, borrow $475,000 (95% of the inflated price), and the lender would be exposed to significant risk if the buyer defaulted.

Appraisals are required for:

• Virtually all conventional purchase mortgages
• FHA and VA loans (with additional property condition requirements)
• Most refinances (though some programs offer appraisal waivers)

The appraisal protects the lender, but it also protects you from overpaying for a home.

How the Appraisal Process Works

Step 1: Lender Orders the Appraisal

After you go under contract, your lender orders the appraisal through an appraisal management company (AMC). You don't get to choose the appraiser, and neither does the lender's loan officer. This independence is mandated by federal regulations to prevent conflicts of interest.

Step 2: The Property Inspection

The appraiser visits the property, typically spending 30 minutes to an hour inside and outside the home. They're evaluating:

Exterior factors:

• Overall condition of the structure
• Lot size and landscaping
• Garage, driveway, and outbuildings
• Roof condition
• Neighborhood characteristics

Interior factors:

• Square footage (they measure it themselves)
• Number of bedrooms and bathrooms
• Kitchen and bathroom condition and updates
• Flooring, paint, and overall finish quality
• Basement or attic (finished vs. unfinished)
• Mechanical systems (HVAC, plumbing, electrical)
• Any visible damage or needed repairs

Step 3: Comparable Sales Analysis

This is the core of the appraisal. The appraiser identifies 3 to 6 recently sold properties ("comps") that are similar to the subject property in:

• Location (ideally within 1 mile, in the same neighborhood)
• Size (similar square footage, bedroom/bathroom count)
• Condition and quality
• Age and style
• Lot size

The appraiser adjusts the comp prices up or down based on differences. For example, if a comp sold for $420,000 but has one more bathroom than the subject property, the appraiser might adjust the comp down by $5,000 to $10,000. If another comp has a smaller lot, they'd adjust it upward.

Step 4: The Appraisal Report

The appraiser compiles everything into a formal report that includes:

• The estimated market value
• A description of the property and its condition
• Photos of the interior and exterior
• The comparable sales used and adjustments made
• A map showing the property and comps
• An analysis of the local real estate market

The report goes to the lender, who shares it with you.

How Much Does an Appraisal Cost?

Typical appraisal fees range from $400 to $700 for a standard single-family home. The cost depends on:

You pay for the appraisal upfront, usually at the time it's ordered. This fee is non-refundable, even if the deal falls through. The appraisal cost is part of your overall closing costs and will appear on your loan estimate.

For jumbo loans, some lenders require two independent appraisals, doubling the cost.

What Happens If the Appraisal Comes in Low?

This is the scenario every buyer dreads. You agreed to pay $425,000, but the appraisal says the home is worth $410,000. The lender calculates your loan based on the appraised value, not the purchase price. So on a loan with 10% down:

• Based on purchase price: $425,000 - $42,500 = $382,500 loan
• Based on appraisal: $410,000 - $41,000 = $369,000 loan
• Gap you need to cover: $13,500 extra cash

The loan-to-value ratio is calculated using the lower of the purchase price or appraised value. That means if the appraisal is low, you either need more cash or need to adjust the deal.

Here are your options:

Renegotiate the Purchase Price

Ask the seller to lower the price to the appraised value. In a buyer's market, sellers may agree rather than risk losing the deal and having to relist. In a competitive market, sellers may refuse.

Pay the Difference in Cash

If you have the funds, you can cover the gap between the appraised value and the purchase price out of pocket. Your down payment effectively gets larger. This is sometimes called an "appraisal gap" payment.

Some buyers include an appraisal gap guarantee in their offer, promising to cover up to a certain amount if the appraisal comes in low. This is common in competitive markets and makes your offer more attractive to sellers.

Meet in the Middle

Negotiate a compromise. If the appraisal came in $15,000 low, maybe the seller drops the price by $10,000 and you bring $5,000 extra to the table.

Challenge the Appraisal

If you believe the appraisal is inaccurate, you can request a reconsideration of value (ROV). Provide additional comparable sales that the appraiser may have missed, or point out factual errors in the report. Your real estate agent can help compile this information.

An ROV doesn't guarantee a higher value, but if there are legitimate comps that support a higher price, it's worth pursuing.

Walk Away

If your contract includes an appraisal contingency (and most do), you can cancel the deal and get your earnest money back. This is sometimes the smartest move if the gap is large and neither side will budge.

Appraisal vs. Home Inspection

These are two different things, and confusing them is a common mistake.

An appraiser notes the overall condition of the home but isn't looking for hidden problems the way an inspector does. You should always get both.

Appraisals for Refinancing

When you refinance, the appraisal determines how much equity you have in the home, which affects your new LTV and whether you'll need PMI.

If you've made improvements to the home since you bought it, a refinance appraisal might show a higher value, giving you more equity. Common improvements that appraisers value include kitchen and bathroom remodels, additional square footage, and major system upgrades (new roof, HVAC, etc.).

Some refinance programs, particularly streamline refinances for FHA and VA loans, offer appraisal waivers. Desktop appraisals (where the appraiser uses data without visiting the property) have also become more common, typically costing $100 to $300 less than a full appraisal.

Tips for a Smooth Appraisal

For buyers:

• Understand that you can't control the appraisal outcome
• Have a plan for what you'll do if it comes in low
• Include an appraisal contingency in your offer for protection

For sellers and homeowners (refinancing):

• Make the home presentable (clean, decluttered, well-lit)
• Complete any minor repairs before the inspection
• Provide a list of recent improvements with costs
• Share any comparable sales you're aware of that support your price
• Make sure the appraiser can access all areas of the home

Your Appraisal, Your Protection

A home appraisal is a required step in the mortgage process that protects both you and the lender from overpaying. The appraiser's independent assessment of market value determines how much the lender will loan and directly affects your LTV ratio.

Most appraisals confirm the purchase price and the process goes smoothly. But if the appraisal comes in low, knowing your options (renegotiate, pay the gap, challenge, or walk away) helps you navigate the situation confidently. Budget $400 to $700 for the appraisal as part of your closing costs, and understand that it's a one-time fee that provides valuable protection for your investment.