Home Appraisals Explained: What They Are and Why They Matter
A home appraisal is an independent, professional estimate of a property's fair market value, ordered by the lender to confirm the home is worth enough to support the loan amount.
Official Source: Consumer Financial Protection Bureau (CFPB) — "What Are Appraisals and Why Do I Need to Look at Them?" — https://www.consumerfinance.gov/ask-cfpb/what-are-appraisals-and-why-do-i-need-to-look-at-them-en-167/
Appraisals affect far more than a formality on your closing checklist — they can directly determine your down payment requirements, whether your loan is approved at all, and how much equity you actually have in the home. This guide explains how the appraisal process works, what happens when an appraisal comes in lower than the purchase price, and the steps you can take to challenge an appraisal you believe is inaccurate.
Table of Contents
- Definition
- Why Lenders Require an Appraisal
- How Appraisers Determine Value
- What Happens When an Appraisal Is Low
- The Reconsideration of Value Process
- Your Right to Receive a Copy of the Appraisal
- Step-by-Step: Preparing for an Appraisal
- A Real-World Example
- Common Mistakes
- Expert Tips
- Related Calculators
- Frequently Asked Questions
- References
- Conclusion
Definition
A home appraisal is a professional, independent estimate of a property's fair market value, conducted by a licensed or certified appraiser and used by lenders to confirm the home adequately secures the requested loan amount.
Why Lenders Require an Appraisal
Lenders order appraisals to manage their own risk. If a home's true value is lower than the loan amount, the lender is exposed to greater risk if the borrower defaults. According to consumer protection guidance from the FDIC, an appraisal helps confirm the relationship between a property's fair market value and the amount you might be approved to borrow, which directly affects both your loan approval and how much equity you'll have in the home.
How Appraisers Determine Value
Appraisers typically use one or more standard approaches to estimate value:
| Approach | How It Works |
|---|---|
| Sales Comparison Approach | Compares the home to recent sales of similar nearby properties |
| Cost Approach | Estimates what it would cost to rebuild an identical home on a similar lot, minus depreciation |
| Income Approach | Estimates value based on potential rental income, typically used for investment properties |
For most single-family home purchases, the sales comparison approach is the most commonly used method, relying on recent, comparable sales in the immediate area.
What Happens When an Appraisal Is Low
If an appraisal comes in below the agreed purchase price, it creates what's often called an "appraisal gap" — the difference between the appraised value and the contract price. Because lenders base loan amounts on the lower of the appraised value or purchase price, a low appraisal can mean:
- The buyer may need to bring additional cash to cover the gap between the loan amount and the purchase price.
- The buyer and seller may renegotiate the purchase price based on the new appraised value.
- The buyer may request a second appraisal or a reconsideration of value if they believe the original was inaccurate.
- In some cases, the deal may fall through if neither side is willing or able to bridge the gap, particularly without an appraisal contingency in the purchase contract.
The Reconsideration of Value Process
If you believe your appraisal contains errors or overlooked relevant information, you have the right to request a reconsideration of value (ROV) from your lender. According to the CFPB, this process allows borrowers to point out factual errors, inadequate comparable properties, or other issues affecting the reported value. To support an ROV request, borrowers can provide:
- A corrected plat map or lot size documentation.
- Accurate measurements of the home's total livable square footage.
- Photos and receipts documenting recent updates, renovations, or improvements.
- A list of comparable homes sold nearby within the past 12 months that weren't included in the original report.
Lenders are not obligated to change the appraised value or order a new appraisal, but responsible lenders generally have a defined process for reviewing these requests.
Your Right to Receive a Copy of the Appraisal
Under federal rules, you're generally entitled to receive a free copy of any appraisal or written valuation developed in connection with your loan application, delivered no later than three business days before closing. You cannot be charged an additional fee just for receiving this copy, though you may be charged a reasonable fee for the lender's cost of preparing the appraisal itself.
Step-by-Step: Preparing for an Appraisal
- Make sure the home is clean, decluttered, and accessible for the appraiser's visit.
- Provide a list of recent updates, renovations, or repairs, along with receipts if available.
- Research recent comparable sales in your neighborhood so you have realistic expectations.
- Consider including an appraisal contingency in your purchase contract, which can protect you if the appraisal comes in low.
- Review your appraisal copy carefully as soon as you receive it, checking for factual errors.
- If you believe the appraisal is inaccurate, gather supporting documentation and request a reconsideration of value promptly.
A Real-World Example
A buyer agrees to purchase a home for $400,000, but the appraisal comes back at $385,000. Since the lender will only finance based on the lower of the two figures, the buyer may need to cover the $15,000 gap in cash, renegotiate the price with the seller, or challenge the appraisal if they believe comparable sales support a higher value. If the buyer's contract included an appraisal contingency, they may also have the option to walk away from the deal without losing their earnest money deposit.
Common Mistakes
- Not including an appraisal contingency in the purchase contract, leaving no protection if the appraisal comes in low.
- Assuming a low appraisal automatically means the deal is over, without exploring renegotiation or a reconsideration of value.
- Not reviewing the appraisal report carefully for factual errors, such as incorrect square footage.
- Forgetting to document recent home improvements before the appraiser's visit.
- Assuming the appraisal is the same as a home inspection — they serve different purposes.
Expert Tips
- Provide the appraiser with a written list of upgrades and recent comparable sales before or during the visit.
- Review your appraisal report line by line for errors as soon as you receive your copy.
- If you plan to challenge an appraisal, gather strong comparable sales data rather than relying on general disagreement with the number.
- Discuss appraisal contingencies with your real estate agent before submitting an offer, particularly in competitive markets.
Related Calculators
Related Articles
- What Is a Mortgage? A Complete Beginner's Guide
- Closing Costs Explained: What to Expect When Buying a Home
Frequently Asked Questions
Who pays for a home appraisal?
The buyer typically pays for the appraisal as part of the closing costs, even though the lender orders it, since the appraisal primarily protects the lender's interest in the loan.
Can I challenge a low appraisal?
Yes. You can request a reconsideration of value from your lender, providing supporting documentation such as corrected property details or additional comparable sales that weren't included in the original report.
What is an appraisal contingency?
An appraisal contingency is a clause in a purchase contract that allows a buyer to renegotiate or exit the deal without penalty if the appraisal comes in below the agreed purchase price.
Is an appraisal the same as a home inspection?
No. An appraisal estimates the home's market value for the lender, while a home inspection evaluates the physical condition of the property for the buyer's own information and protection.
References
- Consumer Financial Protection Bureau – What Are Appraisals and Why Do I Need to Look at Them?
- Consumer Financial Protection Bureau – Reconsideration of Value Process
- FDIC – Understanding Appraisals and Why They Matter
Conclusion
A home appraisal plays a direct role in whether your loan is approved and how much you'll need to bring to closing, making it one of the more consequential steps in the mortgage process. Understanding how appraisers determine value, and knowing your options if an appraisal comes in low, can help you navigate the process with more confidence. This article is educational only and not financial, legal, or appraisal advice; appraisal processes and contingency options vary by contract and lender, so consult your real estate agent or lender for guidance specific to your transaction.