Home Appraisals: All You Need To Know
A home appraisal is a critical step in the mortgage process.
Mortgage lenders use appraisals to determine a home’s market value, which helps them ensure a home is worth the amount being paid for it.
Lenders don't conduct home appraisals themselves. Appraisals are carried out by licensed third-party professionals, who typically charge between $300 and $600 for this service.
Multiple factors are used to determine a home's value, including its location, age and condition.
If a home's appraised value aligns with the selling price, you're golden. But if an appraisal comes in below what you agreed to pay, there could be trouble.
When do you need an appraisal?
If you’re using a mortgage to buy a home, you’ll need an appraisal. Home appraisals take place after your bid has been accepted by the seller but before the mortgage has been finalized.
Lenders use appraisal results to ensure that the house is worth the money they’re loaning. If you’re buying a home with cash or otherwise don’t need a mortgage, an appraisal isn’t required but may still be worth getting.
There are some situations outside of a home purchase in which you might need to hire a home appraiser, including:
Divorce proceedings.
Insurance claims.
Property tax appeals.
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Hiring a home appraiser
Typically, your lender finds and hires an appraiser, while the appraisal becomes one of the closing costs you're required to pay before taking possession of your new home.
The lender — not the buyer — is technically the appraiser’s client, so the appraisal report is sent to the lender. Buyers typically don’t receive copies of the appraisal, and some lenders may refuse to provide copies even if asked.
Things an appraiser looks at
Home appraisers place a value on the overall property by evaluating individual features and details.
Interior features to be evaluated include:
Square footage.
Number of bathrooms.
Number of bedrooms.
Updates vs remodels for kitchen and baths.
Foundation type.
Whether the basement is full or partial, finished or unfinished.
Crawl space and/or attic.
Materials used on walls, floors, and windows.
Appliances and amenities.
Exterior aspects will also be considered, such as:
Neighbourhood.
Lot size.
Type of driveway and car storage.
In addition to these factors, the appraiser will also consider the age of the home, its current condition and local housing market trends.
Home appraisal vs home inspection
A home appraisal determines the value of a property. A home inspection examines the physical structure of the home, from roof to foundation, to ensure that things are safe and in working order.
Unlike an appraisal, an inspection is optional. It can be done either before or after an appraisal.
What happens if the appraisal value is less than the sale price?
If the appraised value of a home comes in under the sale price, lenders are almost certain to reduce the size of the mortgage they'll approve for that property. In these cases, buyers generally have to make up the funding shortfall by providing a larger down payment. If that's not an option, you can also try:
Renegotiating with the seller.
Asking your lender if they will consider a second appraisal — which you’d likely pay for.
Reapplying with another lender and hope that the second appraisal will give you a higher value.
There’s no guarantee that any of these strategies will work. If you are unable to secure the mortgage you need, you may not be able to proceed with the purchase.
The uncertainty around appraisals is why many buyers put financing clauses into their offers. With such a clause in place, buyers are able to legally walk away from a purchase if financing falls through.
Frequently asked questions
Who pays for a home appraisal?
Who pays for a home appraisal?
Usually, the purchaser of the home being appraised will pay for the appraisal. Sometimes the lender will pick up the cost or roll it into its mortgage administration fees.
How much does an appraisal cost?
How much does an appraisal cost?
It's typical to pay $300-$600 for a home appraisal in Canada, but your actual cost will depend on who is hired, where the appraisal takes place and the size of the property.
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Clay Jarvis
Clay Jarvis
