What is a Home Appraisal? How It Affects Your Loan and Value

A home appraisal is a professional assessment of your property's market value, ordered by a mortgage lender to ensure the loan amount does not exceed the home's worth. If the appraisal comes in lower than the purchase price, it can jeopardize the loan approval, requiring you to pay the difference, renegotiate the price, or contest the report. Understanding the appraisal process, what appraisers evaluate, and how to prepare your home is critical for a successful real estate transaction.

What is a Home Appraisal and Why is it Required?

A home appraisal is an unbiased opinion of a property's value conducted by a state-licensed or certified professional. Lenders require an appraisal during the home buying or refinancing process to protect their investment. The appraisal confirms that the property serves as sufficient collateral for the loan. If a borrower defaults, the lender needs to be confident they can recoup the loan amount by selling the property. This objective valuation is a cornerstone of the mortgage underwriting process.

How Does a Home Appraisal Affect Your Mortgage Loan?

The appraisal directly impacts your mortgage approval and terms. The lender uses the appraised value to calculate your loan-to-value ratio (LTV), a key risk assessment metric. LTV is the loan amount divided by the appraised value.

• Appraisal Matches or Exceeds Offer Price: The loan process proceeds normally.
• Appraisal is Lower Than Offer Price: This creates a significant hurdle. The lender will only loan based on the lower appraised value. For example, if you agree to buy a home for $400,000 but the appraisal values it at $380,000, the lender bases the loan on $380,000. You must then cover the $20,000 difference in cash, renegotiate with the seller, or challenge the appraisal.

When refinancing, a strong appraisal can help you secure a lower interest rate. A lower LTV, often below 80%, signals less risk to the lender, which can qualify you for better terms. According to recent industry analysis, an LTV ratio of 75% or lower can significantly improve your refinancing options.

What Do Appraisers Look For During a Valuation?

Appraisers determine fair market value—what a willing buyer would pay a willing seller—by evaluating several key factors. They consider both the property itself and recent sales of comparable homes ("comps") in the area.

The appraiser will note any flaws, such as a cracked foundation or outdated electrical systems, that could negatively impact the value.

How Can You Increase Your Home’s Appraised Value?

Based on our experience assessment, strategic preparation can positively influence the appraisal outcome. While you cannot change your home's location or size, you can enhance its condition and presentation.

1. Address Minor Repairs: Fix leaky faucets, broken windows, cracked tiles, and any electrical issues. These small items signal that the home has been well-maintained.
2. Enhance Curb Appeal: First impressions matter. Mow the lawn, trim bushes, and ensure the exterior looks neat and inviting.
3. Deep Clean and Declutter: A clean, spacious-looking home allows the appraiser to see its full potential. Remove personal items and excess furniture.
4. Compile a List of Improvements: Create a simple list of major upgrades, such as a new roof, HVAC system, or kitchen remodel, including the date and cost. This provides verifiable evidence of the home's added value.
5. Provide Your Own Comps: If you know of recent sales of similar, high-value homes in your neighborhood, you can politely share this information with the appraiser for consideration.

The most effective way to increase appraised value is to demonstrate excellent maintenance and document any significant upgrades that justify a higher valuation. While cosmetic updates can help, major structural or system improvements typically yield the best return in an appraiser's evaluation.