When you’re buying, selling, or refinancing a home, one critical step in the process is the home appraisal. This professional evaluation can make or break a transaction, especially if the appraisal value comes in lower than expected. For buyers and refinancers alike, understanding how appraisals work — and what they can mean for your loan — is essential to navigating the real estate journey.
A home appraisal is a licensed appraiser’s unbiased assessment of a property’s fair market value. Lenders require this to determine how much they’re willing to loan on a home, using the property itself as collateral. The goal is to protect the lender from lending more than the home is worth, which could result in a loss if the borrower defaults and the home must be resold. For homebuyers, the appraisal confirms whether the agreed-upon purchase price aligns with current market conditions. For homeowners refinancing their mortgage, the lender uses the appraisal to verify the current value before issuing a new loan.
It’s important not to confuse an appraisal with a home inspection. While both involve a professional examining the property, their purposes are quite different. An appraisal focuses solely on the home’s value and is required by lenders. In contrast, a home inspection is typically initiated by the buyer and focuses on the home’s physical condition, identifying issues with the structure, systems, or appliances that may need repair. Buyers often use the results of an inspection to renegotiate the terms of a sale or request repairs, while appraisals are more concerned with dollars and market value.
Once the appraisal is ordered — usually after a purchase agreement is signed or a refinancing application is submitted — the appraiser may visit the home in person or, in some cases, conduct a remote evaluation. An in-person appraisal is considered more thorough. During the visit, the appraiser evaluates the property’s condition, features, and layout. They’ll also study comparable recent sales, or “comps,” in the area, using multiple listing services, tax records, and local market data to determine where your home stands in value. Neighborhood factors play a role, too. A well-maintained home in a sought-after area with strong schools and accessible transportation options will likely appraise higher than a similar home in a less desirable location.
After completing the evaluation, the appraiser compiles their findings into a formal report — typically a Uniform Residential Appraisal Report — and submits it to the lender. Borrowers are entitled to a copy of this report and should review it carefully for errors. Details about the home’s condition, square footage, and comps used in the analysis should be accurate. If anything seems off, you have the right to challenge the appraisal or request a second opinion.
Numerous factors influence an appraisal, and not all of them are within the homeowner’s control. Market conditions, nearby foreclosures or distressed sales, and fluctuating demand can all impact the final number. However, certain characteristics consistently affect value: the home’s square footage, layout, age, construction quality, and the condition of major systems like the roof and HVAC. Amenities such as a pool or fireplace may also be considered, as well as external features like landscaping and curb appeal. Even homeowners association fees or potential rental income may factor into the analysis.
If the appraisal comes in lower than expected, it can disrupt a sale. For buyers, a low appraisal might allow you to walk away from the deal if you included an appraisal contingency in your contract. You could also use the appraisal to renegotiate the price with the seller. If the seller won’t budge and you still want the home, you may need to increase your down payment to cover the gap between the appraised value and the loan amount. For those refinancing, a low appraisal may reduce the amount you can borrow or require you to bring more equity to the table. In either case, reviewing the report and considering a second opinion may help if you suspect errors in the valuation.
Preparation can make a big difference in the appraisal process. Buyers should understand the terms of their contract and avoid feeling pressured into offering more than a home is worth, particularly if they can’t afford to cover a shortfall. Refinancers can boost their chances of a favorable appraisal by compiling documentation of recent home improvements, cleaning and staging the property for the visit, and gathering their own list of comps to share — though the appraiser is not obligated to use them.
Ultimately, the home appraisal serves as a checkpoint in the real estate process. While it can introduce complications, particularly when values fall short of expectations, it’s an important tool for ensuring sound lending practices and protecting everyone involved from taking on more risk than they can afford. Understanding how it works, how to prepare, and how to respond to the results can empower both buyers and homeowners to make informed decisions with confidence.