Home appraisals explained: how they work, what a low appraisal means, and your options

What is a home appraisal?

A home appraisal is a professional estimate of a property's market value, performed by a state-licensed or certified appraiser who is independent of the buyer, seller, and agents. A lender requires one for most purchases and many refinances because the home is the collateral for the loan. If the borrower defaults, the lender wants to be confident it could recover its money by selling the property. The appraisal protects the lender, and indirectly it protects you from overpaying.

Who orders and pays for the appraisal?

The lender orders the appraisal, usually through an independent appraisal management company, so that the buyer and the agents cannot pick or pressure the appraiser. The borrower typically pays the fee at application or at closing, and it appears in the Loan Estimate and Closing Disclosure. Costs vary by location, property size, and complexity, and commonly run a few hundred dollars up to $700 or more for large or unusual homes. You have the right to receive a copy of the appraisal report promptly and at least three business days before closing.

How does the appraisal process work?

1. The lender orders it after the contract is signed and your application is in process.
2. The appraiser inspects the property, typically for 30 minutes to an hour. They measure the home, photograph the interior and exterior, and note the condition, layout, upgrades, and problems.
3. They research comparable sales ("comps"): recent sales of similar homes nearby, often within about a mile and the past six months, adjusted for differences such as size, bedrooms, lot, condition, and features.
4. They reach a value conclusion and write a report, usually within a few days to a week, although busy markets can delay it.
5. The lender reviews it and uses it in the loan decision.

What does an appraiser look at?

• Location and neighborhood trends, such as schools, noise, and nearby land use.
• Square footage, layout, number of bedrooms and bathrooms.
• Age and condition of the roof, foundation, systems, and finishes.
• Upgrades and additions, and whether they were permitted.
• Lot size and features.
• Recent comparable sales and current competing listings.

Appraisers do not test plumbing or wiring the way an inspector does, but they note visible problems that affect value or safety. FHA and VA appraisals also verify that the home meets minimum property standards.

Appraisal vs. home inspection vs. tax assessment

Skipping the inspection because an appraisal is scheduled is a mistake: the appraisal will not uncover most hidden defects.

What happens if the appraisal comes in low?

A low appraisal means the appraiser values the home at less than the contract price. The lender will only lend against the lower number. This is more common when prices are moving quickly or when a home is priced above recent sales.

Your options include:

1. Renegotiate the price. Ask the seller to lower it to the appraised value, or to split the difference.
2. Pay the gap in cash. Some buyers include an appraisal gap clause in their offer, promising to cover a shortfall up to an amount.
3. Request a reconsideration of value. If you or your agent have better comparable sales that the appraiser missed, the lender can ask the appraiser to review. Provide recent, similar sales with dates and addresses.
4. Order a second appraisal. Some lenders allow it, but the lender may not accept a value from an appraiser you selected, and rules differ by loan type.
5. Increase your down payment or change the loan. Bring more cash or choose a program with a different structure.
6. Walk away. If your contract has an appraisal or financing contingency, you can typically cancel and recover your earnest money. Check the terms and deadlines.

In a slower market, like the one described in our inventory report, buyers have more leverage to renegotiate when a low appraisal happens.

Tips for buyers

• Keep your appraisal contingency, or use a gap clause with a limit you can afford.
• Ask your agent for comparable sales before you make an offer so the price is grounded in recent sales.
• Have cash reserves in case of a shortfall.
• Read the appraisal report: check the comps, the square footage, and the condition rating for errors.

Tips for sellers

• Price the home in line with recent sales.
• Provide a list of improvements, permits, and upgrades to the appraiser.
• Make the home accessible and tidy, and fix visible deferred maintenance.
• Provide the agent with comparable sales in case a reconsideration is needed.

Are appraisals ever waived?

Yes. Some low-risk loans qualify for an appraisal waiver or a property data report, in which the lender uses automated data instead of a full appraisal. Refinances, streamlines, and home equity loans often use automated valuations or lighter reviews. For example, FHA and VA streamline refinances may not require an appraisal. Streamline refinances explained. A waiver may save money but leaves you without an independent check on price. For a cash-out refinance or a HELOC, the appraised value sets how much you can borrow. Cash-out refinance limits.

Appraisals by loan type

How to read your appraisal report

• Subject section: confirm the address, ownership, square footage, and lot size are right.
• Improvements: check the number of bedrooms and bathrooms and any additions or renovations noted.
• Comparable sales grid: review three to six comparable sales, their dates, distances, and adjustments. Look for sales that are older, farther away, or very different.
• Condition and quality ratings: these affect adjustments.
• Opinion of value and reconciliation: the appraiser's final number and reasoning.

Appraisal myths

• "The appraisal is the same as an inspection." It is not. It estimates value and does not test the home's systems.
• "A newly remodeled kitchen adds its full cost to value." Not always. Appraisers rely on what comparable homes sold for.
• "The appraiser works for me." The lender orders the appraisal and uses it to protect its interest.
• "A low appraisal ends the deal." It creates a decision point with several options.