When you consider refinancing your mortgage, a lot will hinge on the appraisal. If your home’s value is so low that you’re underwater, then you can’t refinance. If your appraisal value puts your home equity at less than 20%, then you’ll get stuck paying for private mortgage insurance (PMI) or having to bring some cash to the table to do a cash-in refinance. What’s more, you might not get the lowest interest rate available, as lenders consider borrowers with less equity to be riskier.
If you’re thinking about refinancing, you should understand the appraisal’s essential role in the process and how you can prepare your home, which is key to achieving a successful refinance.
- A homeowner who plans to refinance a mortgage must first get an appraisal, which typically costs $300 to $500 for a single-family home.
- The appraiser is an independent professional who thoroughly evaluates the home and examines similar properties before arriving at a valuation.
- To increase the odds of a high appraisal, freshen up a home’s paint job, clear away clutter, and highlight hidden features.
- A homeowner who believes an appraisal is too low can appeal, but the chance of an appraiser changing it is very slim unless there is substantial evidence that the value is off.
The Home Appraisal: Key To A Successful Refinance
What Is a Home Appraisal?
An appraisal is a professional opinion of your home’s value and is an important step in the home-buying process. Appraisals are conducted by licensed or certified professionals, who provide opinions as unbiased third parties. The appraiser gets paid for valuing your home but has no skin in the game when it comes to whether you qualify for a mortgage or refinance as a result of their estimate.
An appraiser visits your home for about 30 to a few hours to measure its dimensions, examine amenities, and evaluate the overall condition both inside and out, taking photos of the exterior, the garage, and every interior room.
Then, they examine the transaction records of properties similar to yours—ideally, properties in your neighborhood that have sold recently. Based on the home visit and these records, the appraiser arrives at a professional opinion of how much your property would sell for if you put it on the market. The bank uses this value—along with your income, assets, and credit history—to determine how much it will lend you and on what terms.
Appraisal vs. Refinance Appraisal
Appraisals are also needed if you want to refinance your mortgage. As with a purchase appraisal, a refinance appraisal protects the bank by ensuring that it doesn’t lend the borrower more money than the property is worth. If the property later goes into foreclosure for any reason, the lender wants to be able to resell the property and get its money back.
Two types of refinancing transactions do not require an appraisal: the Federal Housing Administration’s (FHA) streamline refinance and the U.S. Department of Veterans Affairs’ (VA’s) interest rate reduction refinance loan. All other types of refinancing transactions require an appraisal.
How Do Home Appraisals Work?
Federal regulations dictate how lenders and appraisers must behave throughout the appraisal process. After the mid-2000s housing crisis, the U.S. government wanted to increase appraiser independence to prevent the possibility of lending based on inflated home values. The Dodd-Frank Act and the Truth in Lending Act are among the regulations that require appraisals and evaluations to be conducted independently, based on established criteria, and free from outside influence.
Because federal appraiser independence requirements define a narrow scope of acceptable interactions between an appraiser and loan officers, lenders are afraid that having any contact with appraisers could be construed as violating the law by attempting to influence the appraiser’s opinion before the appraisal is completed. Lenders err on the side of caution to avoid the possibility of severe disciplinary action. Loan officers and brokers cannot select the appraiser, nor can the borrower.
The lender may order the appraisal through a third party called an appraisal management company (AMC). “Using an AMC is not a requirement, but that is the common approach to appraiser independence,” says Joe Parsons, a senior loan officer at Pinnacle Home Loans.
Many lenders—especially small, local ones—have direct referral relationships with a small group of individual appraisers and may not use an AMC. Or, the lender may have an in-house independent appraisal department. The appraiser should have local knowledge of the area (called market competence). Appraisers are expected to follow the Uniform Standards of Professional Appraisal Practice (USPAP) issued by The Appraisal Foundation, a professional organization. These standards are not law, however.
Who Pays for the Appraisal?
The borrower must pay for the appraisal regardless of whether the loan closes because the appraiser still did the work. While the fee may seem worthwhile if it enables you to get the refinancing terms that you want, it can seem like a waste of money if a low appraisal means that you can’t refinance.
Since lenders cannot discuss a home’s value or anticipated “target value” with an appraiser at the time of assignment, homeowners are not able to get an appraiser’s ballpark estimate of whether their home is likely to appraise high enough for them to refinance before they pay for the service, as they could before the new regulations. At best, you can search for recent comparable sales on websites such as Zillow and Redfin, but these records may be inaccurate or incomplete.
Another option is to ask a real estate agent to do a comparative market analysis (CMA) and provide you with printouts of recent comparable sales from the multiple listing service (MLS), says Bruce Ailion, an agent with RE/MAX Greater Atlanta. Ask nicely, as the agent will be doing you a favor—unlike with a home sale, they won’t earn any commission from your refinance.
What Is the Cost of a Home Appraisal?
Appraisal fees vary by state, but appraisers must charge customary and reasonable fees for the area. Expect to pay the lender $300 to $500 for an appraisal of a standard single-family home.
“More complex properties are more expensive because the inspection takes more time,” says Erin Benton, vice president of Decorum Valuation Services, an appraisal management company in Ellicott City, Md.
What Do Appraisers Look For?
The value that the appraiser gives your home largely depends on the recent sales prices of comparable properties. All the same, you’re mistaken if you think that you can’t do anything to help your home come in at the high end of its potential appraisal value.
Getting your home appraised is similar to going on a first date, says Ailion. While you have no idea how your partner will like or evaluate you, being well-groomed substantially improves your chances of being deemed attractive.
“So it is with the appraisal,” he says. “Your property should be neat and clean, uncluttered, and easy to inspect. Any pets should be contained and [any] smells masked. You don’t want the appraiser to be rushed to get out.”
Here’s how certified residential appraiser Ralph J. Vaccari, president of Vaccari & Associates in Marblehead, Mass., describes his approach to the job: “Generally, it should not matter if your lawn is not mowed or your house is a mess. It’s important to realize, though, that a dirty or unkempt home can increase its appearance of wear and tear beyond normal—and that condition can, in fact, affect value.”
According to Vaccari, the appraiser cares about the following:
- Exterior and interior conditions
- Total room count, with value added to bedrooms and bathrooms
- Functionality, including interior room design and layout, and functional obsolescence
- Improvements to kitchens and baths, windows, the roof, and the home’s systems (heating, electrical, and plumbing) over the previous 15 years that make the home more up to date, functional, and livable by today’s standards
- Condition and age of the home’s plumbing, electrical, and HVAC systems
- Exterior amenities, such as detached garages, decks, and porches. Pools and hot tubs will also add to a home’s value.
- Unappealing features, such as an exterior appearance that’s inconsistent with the rest of the neighborhood, will detract from the value.
It’s a good idea to point out features that may not be immediately apparent that could potentially add to the appraiser’s opinion of value, says Parsons.
Mortgage lending discrimination is illegal. If you think that you’ve been discriminated against based on race, religion, sex, marital status, use of public assistance, national origin, disability, or age, there are steps that you can take. One such step is to file a report with the Consumer Financial Protection Bureau (CFPB) or the U.S. Department of Housing and Urban Development (HUD). Note that the home appraisal process is also subject to bias; push back if you think your home's price has been unfairly devalued.
How Do I Prepare for a Refinance Appraisal?
Preparing your home for an appraiser’s visit is different from preparing it for a prospective buyer. “When you are opening your home to a prospective buyer, you want to trigger emotional responses,” says Parsons. “As a seller, you want that buyer to be able to imagine how happy and comfortable they will be there. No such subjective considerations apply to an appraisal.”
Vaccari adds that a homeowner wouldn’t make a change—such as ripping up old carpet to reveal hardwood floors—for an appraisal as they might for a seller. Still, freshening up the home’s paint, both inside and out, can help, as can clearing away clutter to allow full access and viewing of all areas of the home, including the basement. Be sure that everything works (e.g., run your heating and cooling systems and test your kitchen appliances), and make plans for the children and pets to be somewhere else so that they aren’t a distraction. Finally, says Ailion, “if the tax records are incorrect, point that out.”
Otherwise, Vaccari says, it is the appraiser’s responsibility to discover problems and ask questions where warranted.
If You Secure a Good Appraisal
Congratulations! You have completed a major step toward refinancing your mortgage and saving money. Now it’s time to go through the next series of steps with your loan officer. If you’ve secured a favorable appraisal, use a tool such as the CFPB’s mortgage calculator to research interest rates on a refinanced mortgage for a home of your value. Being armed with these figures can give you some bargaining power when you meet with your lender.
What if I Don’t Agree with My Home Appraisal?
Sometimes the appraiser’s value is not only lower than you would like it to be but also lower than you think your home is worth. “An appraisal is just one person’s opinion,” Ailion says. “While this is a trained and educated opinion, as with all professions, there are good and bad practitioners.”
Given the strict federal regulations governing the process, is there anything that you can do about a low appraisal? “If the homeowner does not like the value of the appraisal, they can write a letter of appeal to the lender or AMC, but the chance of an appraiser changing their opinion is very slim unless the homeowner has overwhelming evidence that the value is off,” says Benton.
Your appeal will only succeed if you can show that the appraiser made a significant error, such as listing the square footage or room count incorrectly; disregarding an important amenity such as a pool or spa; or disregarding a comparable sale that might support a higher value while “cherry-picking” a less suitable comparable that would indicate a lower value, says Parsons.
You might also make a case, says Ailion, by pointing out that the comparables used were in an inferior school district or an inferior subdivision that did not have a homeowners association with swimming pools and tennis courts, that all the comparables were distressed or real estate-owned sales, or that they have other negative externalities influencing value, such as being on a busy street.
“Explain why they are different and not equal to yours,” says Ailion. “You must prove something is in error with the comparables selected.”
What Can I Do if My Home Appraisal Is Low?
If you are not able to successfully challenge a low appraisal, how do you ensure that the refinance goes through? If the appraisal pegs you at less than 80% equity, then you will not meet the necessary 80% loan-to-value (LTV) ratio and will need to pay PMI unless you choose to do a cash-in refinance, which means adding enough money at the closing to get to that magical 80%.
You can choose to pay the PMI for now. If home values continue to rise, you can later provide comparable sales to your mortgage servicer and ask it to remove PMI, even if you have not yet paid down much of your principal.
How Long Does a Home Appraisal Take?
The home appraisal process typically takes anywhere from a fews days to a few weeks. The time frame depends on the property, the complexity of the appraisal, and the appraiser’s schedule (i.e., how busy they are). The appraiser may spend 30 minutes or up to several hours examining the home in person. Once the appraiser has evaluated the home, it takes a week or two to compile the appraisal report.
What Happens After the Appraisal?
After the appraisal, the next step is underwriting. The mortgage lender reviews the loan file to ensure that everything is in order, assesses the risk, and either approves or denies the application. Some borrowers might receive conditional approval, meaning that some item needs to be resolved or explained. If the mortgage or refinance is approved, the next step in the process is closing.
What Hurts a Home Appraisal?
If you’re trying to buy or refinance a home, a good appraisal is key. If the appraisal comes in too low, you might not be approved, or you could face higher interest rates. A number of factors can negatively affect your appraisal, including:
- Deferred maintenance
- Dated or undesirable finishes
- Not being up front about needed repairs
- Comparable properties that are “outliers” (e.g., sold to relatives, under duress, or a foreclosure)
- Market conditions
- Appraiser experience
The Bottom Line
Understanding how the appraisal process works will give you the best chance of getting an appraiser to assign the highest possible value to your property. Purchase and refinance appraisals don’t always come in at the values that borrowers hope for, and they are a human process with room for subjectivity and mistakes. You can appeal a low appraisal, but you’ll only succeed with strong-enough data to back up your claim.