An appraisal is the estimation of a home’s current market value, or more broadly defined as an opinion of value that is used for real-estate-related financial transactions. Appraisals are required by a state-licensed or certified appraiser for most transactions above $250,000. An appraiser’s report will typically include the type of property inspection, approaches to value required, and any lender-specific requirements. Appraisals are required by mortgage lenders to be sure that the money they are lending to a new homeowner or a current homeowner is a fair amount for the home. The lenders want to be sure that the buyers are not overpaying for the property. If the borrower stops making payments on the home and the lender needs to sell it, the lender wants to be sure it can recuperate the amount owed on the loan. The value of the home will be calculated by examining the current local housing market and the comparable properties that have recently sold. It will also include the features of the home, square footage, and a number of bedrooms and bathrooms. The appraiser will also look at the overall condition of the home. If there is maintenance or repairs that will need to be completed, the appraiser will note these. The appraiser will then complete the appraisal report on a standard required form. An appraisal can potentially break the deal. If the selling price and the appraisal are not comparable, the lender will not approve the deal without additional funds from the buyer to cover the appraisal gap. An appraisal is an important part of the home buying process because it assures the lender the property has adequate collateral to make the loan. It is also important to note that not all mortgage loans have the same appraisal requirements or guidelines. Given the specific mortgage and lender guidelines and overall economic conditions, an appraisal is not always a concrete determining factor of market value. For instance, in economic environments where real estate values rise rapidly, appraisal values can lag cash sale transactions. 

When dealing with Freddie Mae and Fannie Mac, additional criteria for not only the certification of the appraisers but how they perform the appraisal are outlined by each entity. Fannie Mae and Freddie Mac are federally backed home mortgage companies created by the United States Congress. They provide liquidity (ready access to funds on reasonable terms) to the thousands of banks, savings and loans, and mortgage companies that make loans to finance housing.

“Freddie Mac requires that the Seller obtain an appraisal report that accurately reflects the market value, condition, and marketability of the property. The Seller is responsible for compliance with the Appraiser Independence Requirements (AIR), the selection of the appraiser, the appraiser’s use of the appropriate Freddie Mac appraisal report forms, compliance with the Uniform Appraisal Dataset (UAD), and successful submission of the appraisal report to the Uniform Collateral Data Portal^® (UCDP^®), all as specified in more detail in this chapter. “

“Fannie Mae requires a lender (or its authorized agent) to use appraisers or supervisory appraisers that are state-licensed or state-certified (in accordance with the provisions of Title XI of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 and all applicable state laws). The lender (or its authorized agent) must document that the appraisers it uses are licensed or certified as appropriate under the applicable state law. The lender must ensure that the state license or state certification is active as of the effective date of the appraisal report. The appraiser must note his or her license or certification number on the individual appraisal report forms, in compliance with the Uniform Appraisal Dataset Specification, Appendix D: Field-Specific Standardization Requirements.”

In summary, appraisals determine a property’s worth and provide an unbiased estimate of value. Appraisers can be hired by the lender or seller, or even sometimes the buyer. There are more requirements for not only the appraiser but the type of report that they complete based on where your mortgage is from and who is backing it. For more information check out the websites below.