An appraisal is an independent, professional opinion of a property’s value. It is completed by a licensed appraiser who examines the home, studies recent sales in the area, and applies established valuation methods to determine what the property is worth in the current market.
While standardized techniques are used, appraisal is still subjective, and three different appraisers could appraise the same house and arrive at three different values. That’s exactly why the appraisal must come from an independent, licensed third party rather than anyone with a stake in the transaction. Lenders require an appraisal when they need to make sure the home is worth at least as much as the amount being borrowed. This applies not just to purchases but to refinances as well. The appraisal can protect both the lender and the borrower from overpaying or taking on more risk than the property supports.
An appraisal usually begins with a visit to the home. On a purchase, the appraiser is accompanied by the listing agent. During this inspection, the appraiser looks at the property’s size, layout, condition, updates, and overall appeal. They note things like the number of bedrooms, the quality of the kitchen and bathrooms, the age of major systems, and any obvious repairs that may be needed. They also consider the location and surrounding amenities. The goal is to understand the property, not just its square footage.
After the inspection, the appraiser studies comparable sales, often called “comps.” These are nearby homes that have sold recently and are similar in size, style, age, and condition. The appraiser adjusts these sales up or down to account for differences, whether that’s an extra bedroom, a renovated kitchen, a bigger lot, or a lesser view.
The final result is the appraised value, which is the number the lender uses. If the appraisal comes in lower than the agreed-upon purchase price, the buyer and seller may need to renegotiate, the buyer may need to bring additional funds, or the loan may need to be restructured. If the appraisal comes in at or above the purchase price, the loan can move forward as planned. On a refinance, a low appraisal can mean adjusting the loan amount or, in some cases, not being able to refinance at all.
An appraisal is not the same as a home inspection. An inspection looks for defects, safety issues, and needed repairs, and it’s the buyer who typically orders one, purely for their own knowledge. An appraisal looks at market value, and it’s ordered by the lender. That said, the two aren’t entirely separate worlds. If an appraiser notices something like exposed wiring, a failing roof, peeling paint in a home built before 1978, or a foundation crack, they’ll flag it. Depending on what they find, the lender may require the issue be corrected before closing or may require a further inspection by a licensed specialist to confirm it isn’t serious. So, while the appraiser isn’t doing an inspector’s job, they’re also not ignoring obvious problems that could affect the home’s safety or value. Both processes matter, but they serve different purposes, and one doesn’t substitute for the other.
In everyday terms, an appraisal is simply a professional estimate of what a home is worth. It is one of the key steps in the mortgage process and helps ensure that the loan amount matches the true value of the property.