Mortgage Talk: Home Appraisal Requirements and Who Pays for It

Making the commitment to buy your first home is exciting. At Addition Financial, we love working with first-time homebuyers. We understand they have questions – and we work hard to make sure they have the information they need to move through the process with a minimal amount of stress.

One question we frequently hear has to do with the requirement for a home appraisal and the cost. In this post, we'll explain why your mortgage lender will require an estimate of the value of the property you are buying, what you should expect the cost to be and who is responsible for covering the cost.

Estimating the value of property is necessary in many situations, not just for the purchase of a home. For example, a property valuation is conducted every few years by the state for tax purposes. Property valuations are based on a brief inspection of the property and are generally lower than the market value of the home, but that's a good thing, right? Less value equals a lower tax bill. Homeowners do not pay for tax valuations.

Is a Home Appraisal Really Necessary?

Yes! Before a home is placed on the market, a sales price must be established. Typically, the real estate agent who lists the property for the sellers will provide a market valuation which is different from an appraisal. It is based on a brief inspection of the property (sometimes just photos), the final sales price of other homes in the area and factors like the number of bedrooms and bathrooms in the home.

The market value is used to determine the sales price. If the sellers are in a hurry, they may price the home under market value in order to attract buyers. Real estate agents do not charge for market valuations because they will earn a commission that covers their work.

Once a buyer and seller have negotiated for a purchase price, and the buyer is ready to complete the mortgage process, your mortgage lender will need to determine whether the house you are buying is worth the sales price that has been established. A full appraisal will be ordered at that point.

The appraisal is conducted by a third party, someone without a vested interest in the sale of the property who must be paid for their time and expertise. The cost of a home appraisal will vary depending on where you live. It may also vary based on the price of the property you're buying. It's a good rule of thumb to assume an appraisal will cost between $450 and $600. An appraisal on a luxury property with a high sales price could cost $1,000 or more.

The Real Cost Guide to Buying a Home in 2019

Who Pays for the Home Appraisal?

Now, let’s talk about whose responsibility it is to pay for the home appraisal. The short answer is that the expense is most often the buyer’s responsibility. Here’s why:

  1. The buyer is the one who needs a loan – and the loan is based on the home appraisal
  2. The seller is going to be more concerned with market value than an appraisal
  3. The lender will require the appraisal as part of the application process

In most cases, you’ll be the one paying for the appraisal. However, that doesn’t mean the appraiser works for you. They work for your lender and represent the lender’s interests. Their job is to ensure the lender isn’t overextending themselves on the loan.

Can You Save on Home Appraisal Costs?

One question we hear a lot is this: “Can I save money on home appraisal costs or do I just have to accept what the lender tells me?”

It’s a good question to ask, particularly if money is tight and you’re trying to keep the costs associated with buying a home to a minimum.

Most lenders keep a list of preferred vendors for home appraisals. We do think it’s a good idea to ask your lender how they choose appraisers. Some lenders prefer to use an Appraisal Management Company, or AMC.

AMCs aren’t supposed to charge more, but they do take a cut from the appraiser’s fee. Being informed will ensure you don’t overpay for the home appraisal.

It might also be worth asking your lender if they can offer any relief on the home appraisal. Sometimes, lenders will include the home appraisal and not pass the costs onto the borrower. That’s usually a sales method to entice homebuyers to choose them over their competitors.

However, don’t be surprised if your lender isn’t willing to bend on the home appraisal cost. Just be prepared to pay the fee as part of your closing costs. In the end, the home appraisal protects both you and your lender from overpaying for the property. Market value is one thing, but you don’t want to be stuck owning a home that’s worth less than you paid for it.

It can be difficult to accept the cost of a home appraisal when you’re facing the prospect of paying a mortgage each month, but it’s a necessary part of the home-buying process. Ask questions and most of all, try to think of it as something that will protect you as well as your lender.

To learn more about Addition Financial’s flexible mortgage options, please click here.

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