How Does a Home Appraisal Work?

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For Lenders

Lenders use home appraisals to determine the value of a property on which they want to make a loan. An appraisal is essentially "an estimate of fair market value" as of a specific date. The lender makes a loan as a percentage of a home's value estimate. The higher the percentage, the riskier the loan.

For Attorneys

Attorneys use home appraisals in their business as well. Probate and divorce cases usually require a home appraisal. For estate or probate purposes, the property is valued as of the date of death. In divorce situations, both parties will hire an appraiser to value the property in question. Since an appraisal is only an estimate of market value, it is rare that both appraisers will agree on a valuation. The parties will then negotiate a compromise between the two appraisals.

The Appraisal Process

A home inspection begins the appraisal process. The appraiser looks at both the exterior and interior of the home, noting the overall condition. He measures the perimeter to establish square footage. He takes pictures of the home. He then compares this property to other similar recently sold homes in the area. These properties are called "sale comparables." He makes adjustments to the sale comparables to make them as similar as possible to the subject property. Traits deemed inferior are given positive adjustments and vice versa. He takes pictures of these homes as well. All of this information, in addition to other relevant data, is compiled in an appraisal report. Most residential appraisal reports are written in a standardized format and adhere to established Uniform Standards of Professional Appraisal Practice (USPAP).

The Completed Appraisal

The appraisal report is delivered to the client, usually the lender or attorney. In the case of a lender, the appraisal is forwarded to the underwriting department for review. Most of the time the appraisal is accepted right away. In some cases, the underwriter will ask for additional information or clarification. Once the appraisal has cleared the underwriting process, the lender can use it to make a lending decision.