What is a Home Appraisal?

Massachusetts homebuyers should understand why a lender orders a home appraisal and how it could affect the purchase of a home.

In Massachusetts, real estate appraisers are licensed, and appraisers reach a valuation on a property to provide a lender some security that its loan to the homebuyer (borrower) isn't too large. The lending institution wants some assurance that the money it is lending can be recouped in the current market if the borrower fails to pay the loan as outlined in the note. In other words, the lender wants to know it can sell the house for at least the amount of money lent to the homebuyer.

The appraiser determines a home's value based on the sale prices of other houses in the area that would be considered comparable (also known as "comps") due to square footage, condition, amenities, location, number of bedrooms, number of bathrooms and other characteristics.

A real estate appraisal is not an exact science, and an appraiser's valuation is an opinion. Two appraisers could perform an appraisal on the same house on the same day and value the property differently. If an appraiser's property valuation results in a valuation lower than the sale price agreed upon by the buyer and seller, one of several outcomes would have to happen. The seller will have to lower the price, the buyer will have to bring more cash to the closing table, or if the homebuyer has an appraisal contingency in his sales contract, he or she could terminate the agreement. If the homebuyer plans to use a low down payment loan program, a low appraisal might result in the lender refusing to provide the borrower with a loan commitment letter. It is extremely rare for a lender to order a second appraisal.

Most lenders will collect money for the appraisal from the homebuyer before ordering it. Even if the appraiser's fee is not collected from the borrower beforehand, the cost of the appraisal likely will be passed on to the borrower as a closing cost. Appraisals typically cost between $375 and $550, but the price of the appraisal will increase if more than one visit to the property is necessary.

Federal law requires that homebuyers receive a copy of the completed appraisal from their lender.

The home appraisal will only occur after a homebuyer's offer has been accepted by the home seller, and the homebuyer begins to work with a lender to finance the home. In Massachusetts, it is typical for the lender to order the appraisal after the home seller and home buyer sign the purchase and sale agreement. Buyers do not need to pay for appraisals on every house they choose to make an offer.