What Is a Home Appraisal? A Complete Guide for Buyers

Home Buying

Sep 29

When you're ready to buy a home and have most of the big steps (pre-approval, house hunting, and making an offer) behind you, there’s one more hurdle that can make or break the deal before you finalize your mortgage: the home appraisal. This critical step, in short, ensures the property you're purchasing is worth the price you're paying. Here’s what buyers need to know about how appraisals work, what affects the value of a home, and what to do if the results surprise you.

What is a home appraisal?

A home appraisal is an independent, professional assessment of a property's fair market value and a popular home loan approval prerequisite. Conducted by a licensed or certified appraiser, this process helps ensure the home is worth what the buyer has agreed to pay and keeps the lender from financing more than the property’s value. Lenders rely on the appraisal as a safeguard; should the borrower default on the mortgage, the lender must be confident the home will resell to recover the loan amount. An appraisal isn’t only required when purchasing a home, therefore, but also when refinancing or applying for a home equity loan.

Appraisers are hired by lenders, not buyers or sellers, and must remain impartial. After inspecting the home and analyzing recent sales of comparable properties, they issue a detailed report outlining the estimated value, property characteristics, and how the valuation was determined. This isn’t a permanent process; should the loan not close within about four months of the report, a new appraisal may be needed to reflect current market conditions (with any changes in the home’s condition or surrounding neighborhood possibly affecting the outcome).

Why appraisals matter for buyers

If the appraisal matches or exceeds your purchase price, you’re good as gold. Your financing may be at risk, however, if it comes in low. For example, if you agree to buy a home for $400,000 but the appraisal comes in at $350,000, your lender may only finance the latter amount. That means you'd need to either:

Pay the $50,000 difference out of pocket
Negotiate with the seller to lower the price
Walk away from the deal altogether (if you have an appraisal contingency)

Alternatively, a high appraisal can work in your favor. If the home is valued above the agreed-upon sale price, you can instantly gain equity that comes with several potential benefits such as:

Built-in equity from day one, strengthening your financial position as a homeowner
Potentially better loan terms if your lender recalculates your loan-to-value ratio
Increased resale value if you choose to sell in the future
More flexibility for future refinancing or home equity loans

What does a home appraiser look for?

Appraisers don’t just take a quick glance at a property and slap on a number. Rather, their job is to assess the property's value based on dozens of factors including:

Location and proximity to schools, transit, or major employers
Square footage, layout, and number of bedrooms/bathrooms
Lot size and topography
Condition of major systems (roof, HVAC, plumbing, etc.)
Recent improvements or upgrades
Neighborhood sales trends
“Comps” AKA recently sold, similar homes nearby

They’ll also evaluate factors like HOA fees, landscaping, and even the presence of external issues (i.e., nearby power lines or flood zones) that could impact value.

How the appraisal process works

Here’s what to expect, step by step…

The lender orders the appraisal after your offer is accepted and you’re under contract.
The appraiser visits the home to conduct an on-site inspection or, sometimes, performs a remote appraisal (taking photos and measurements and doing a full walk-through).
The appraiser researches market data, pulling comparable recent sales and analyzing public records, MLS data, and tax history.
The report is completed within a few business days, with the appraiser sending it to the lender who must make it available to you upon request.
You review the results, looking for any errors (e.g., incorrect square footage, outdated comps, or missing improvements) and mentioning any concerns immediately.

How much does an appraisal cost?

Most buyers pay for the appraisal as part of their closing costs, with this expense typically ranging from $300 to $400 for conventional loans but sometimes higher for:

FHA loans ($500–$750+)
VA loans ($500–$1,500)
USDA loans (~$775, on average)

Your lender will include this fee in your loan estimate.

What to do if the appraisal comes in lower than expected

A low appraisal, often referred to as an “appraisal gap,” can create significant homebuying challenges. If the appraised value comes in lower than the agreed-upon purchase price, for example, your lender may be unwilling to approve the full loan amount you need to close the sale: leaving you scrambling to bridge the difference or risk losing the home altogether.

Fortunately, buyers who find themselves in this situation have several options and can…

Double-check the appraisal report for factual errors, carefully reviewing it for any inaccuracies (e.g., incorrect square footage, overlooked upgrades or renovations, or inappropriate comparable sales (comps)). Even small details, if wrong, can affect the final valuation.
Request a reconsideration of value (ROV), formally appealing via your lender if you identify legitimate discrepancies or feel the comps used were not truly comparable. This process allows you to submit additional information for the appraiser to review, and while not guaranteed, it can lead to a valuation adjustment.
Negotiate a new price with the seller to better reflect the appraised value. In many cases, sellers will agree to a reduction rather than risk having the sale fall through.
Make up the difference with a larger down payment if negotiations aren’t successful and you still want to proceed with the purchase, choosing to cover the gap in this way so the transaction can move forward even without a change to the loan amount.
Request a second appraisal if you strongly disagree with the results, reaching out to a different licensed professional but noting lenders aren’t obligated to accept a second opinion—and doing so often comes with additional costs and delays.

While a low appraisal is often frustrating, being proactive and understanding your options can help you navigate the situation with minimal disruption to your homebuying journey.

Appraisal accuracy and how to address concerns

Home appraisals should be objective assessments based on data, property condition, and market trends but (as with any process involving human judgment) do occasionally miss the mark due to outdated comps, incorrect home details, or inconsistencies regarding the application of local market factors. If you believe your home was undervalued or spot errors in the report, you can:

Request a copy of the full appraisal report from your lender (you’re entitled to it!).
Review details carefully for accuracy, examining square footage, upgrades, neighborhood data, and comparable homes used.
Submit a reconsideration of value (ROV) if you identify any factual mistakes or feel comps aren’t appropriate.
Work with your lender or agent to present additional data or recent comps perhaps not considered.

If concerns persist or you feel the appraisal process was unfair or lacked transparency, you can always contact your state appraisal board or the Consumer Financial Protection Bureau (CFPB) to learn more about your rights. While most appraisals are conducted professionally and fairly, it’s important for buyers and homeowners to feel empowered to ask questions and advocate for a thorough, accurate valuation.

Appraisals for refinancing or home equity loans

Thinking of refinancing your current mortgage or applying for a home equity loan? An appraisal is an important part of these processes, whereby the lender will order a new appraisal to assess your home's current fair market value—which plays a central role in determining your loan eligibility, interest rate, and borrowing limits.

A key factor here is your loan-to-value ratio (LTV), meaning the percentage of your home’s value tied up in debt. While a lower LTV can help you qualify for better loan terms and lower interest rates, you may be required to purchase private mortgage insurance (PMI) if your home’s appraised value has decreased (or your equity is less than 20%); this protects the lender in case of default and adds to your monthly costs.

A refinancing appraisal works similarly to a purchase appraisal, tasking the appraiser with inspecting the property, comparing it to similar home sales, and assessing the condition and any upgrades or improvements—which is why it’s especially important to document any renovations, repairs, or upgrades made since your original purchase. Even smaller improvements (e.g., updated appliances, landscaping, or new flooring) can contribute positively to your home’s overall valuation.

Tip: Keep detailed records of work performed including receipts, permits, and before-and-after photos. Providing this information to the appraiser can help ensure your improvements are fully considered in the valuation.

An accurate and favorable appraisal can make a meaningful difference when refinancing, potentially lowering your monthly payments or even eliminating the need for PMI altogether.

In sum: appraisals are key

A home appraisal is an important checkpoint protecting both you and your lender. Whether the process confirms a good deal or sends up a red flag, knowing how it works and what to expect gives you a major advantage as a homebuyer. When the time comes to do this, don’t stress, but do stay engaged. With the right knowledge, you can respond well to any surprises and move one step closer to closing day.

Have questions about the home-buying process? Schedule a FREE discovery call with one of our CFP® professionals to get them answered.