An appraisal plays a key part in any mortgage loan or refinance process. It acts as a check-in on your home’s value and helps the lender determine what kind of loan they can offer, as well as how much risk they’re willing to take on when determining whether to approve you for a home loan.

Let’s look at the basics of appraisals so you can understand everything about the process. From there, we’ll look at the importance of appraisals for lenders, as well as how appraisal fees are handled.

What are appraisals?

Appraisals allow a neutral third party to determine the value of a home. Either during the initial mortgage or refinancing process, your lender or you (typically your lender) will contact the appraiser and arrange a visit involving a walkthrough and documentation of the state of the home. The length of the appraisal visit will depend on several variables, such as a home’s size, condition, and location.

At the end of your appraisal, you will receive a written document telling you how much your home is worth. It may also include an assessment of other homes in the neighbourhood. If your lender has arranged the appraisal, you will also be provided with a written copy when the process is finished.

What factors are considered during the appraisal?

The appraiser’s job is to assess the overall condition, size, and quality of the property. If any major changes have been made, an appraiser will also want to know how those changes affect the home’s value.

Factors an appraiser will often consider include:

Size

Knowing the exact size of the property is a major part of the process. While evaluating the home, the appraiser looks for changes to square footage, including additions like extra bathrooms or bedrooms. The number of bedrooms and total square footage will go into the appraisal report.

  • How you can prepare: While you can’t do much about the size or layout of your house, you can provide the appraiser with documentation about any construction that’s been done. Appraisers may also appreciate it if you declutter your home so they can move around more easily.

Condition

Considering the condition of the property isn’t as simple as making sure things are dusted and tidy — though those can be important, too. The appraiser will look at the interior and exterior of the house to see if the property needs any major repairs, including whether the plumbing and HVAC systems are working properly.

  • How you can prepare: Run your systems to see if they work and invest in improvements ahead of time. Basic tidiness goes a long way. Do a deep clean of your home to make sure it’s looking great.

Outside amenities

Anything added to the outside of the property could affect the value. An appraiser will check out detached garages and other structures, decks, and pools. These additions can make the home more desirable and potentially raise its value.

  • How you can prepare: Curb appeal can help a lot in the appraisal process. Some homeowners choose to work on the outside of their homes before an appraisal, doing yard work, cleaning the house’s exterior, and overall making the property shine at its best.

Major improvements

An appraiser is interested in long-lasting, permanent improvements to the property: major plumbing work, new electrical wiring, roof repairs — anything that would make the home more functional and up to date.

  • How you can prepare: Keep and frequently update a list of improvements you’ve made to the property over the years, along with paperwork showing when the work took place and the monetary value of the improvement.

Your location and values of other homes in the area

Where you live can directly affect the value of your home, even if the home itself is in great condition. The local housing market plays a big factor, including the prices of comparable nearby homes. If a neighbourhood is more desirable to live in, the market value of the home could go up, and the appraisal would have a higher value.

How you can prepare: Research comparable homes in the area — those with similar size, square footage, age, and condition to yours — to see what they’re being valued at.

Why are appraisals necessary?

During a mortgage or a refinance, an appraisal helps a lender know how much a home would sell for on the open market. That way, they can weigh the risk of their loan, as well as what mortgage or refinance rates to offer borrowers. If a property owner can’t make payments for any reason, the bank can put the property into foreclosure and try to recoup its loan by selling it. For that reason, it’s important to know a home’s value before lending against it.

Who pays for an appraisal, and how much is it?

Even though the appraiser is a third party during the home loan process, the borrower is typically responsible for covering the cost. Keep in mind you’ll typically be responsible for an appraisal cost even if you don’t arrange the appraisal yourself.

The appraisal fee can be paid as part of the closing costs when signing the loan, or it could be included in the principal loan amount. The cost of the appraisal can vary widely based on the size and location of the property. Be ready for this when considering a mortgage or a refinance and prepare to cover the necessary expenses.