Whether you are buying or refinancing, getting a mortgage means getting an appraisal. Although a licensed appraiser does use some judgment in coming up with an opinion of value, the process is not as arbitrary or subjective as you might think. This movie explains how it all works.
One important part of your mortgage process is the appraisal. The lender will require this report to be sure there is adequate security for the loan they are about to give you. They want to have a good idea of the property’s value as part of the underwriting process.
Here’s how an appraisal is done. The appraiser, who is licensed by the State, will visit your property. He or she will measure it, take pictures and, for some loan programs, do a quick inspection to make sure there are no health or safety problems. The appraiser will describe the property, called the Subject Property, in a standardized way: square footage, room count, amenities, lot size, condition…things like that.
Then the appraiser will find at least three other properties (”comparable sales” or “comps”) similar to the subject and in close proximity that have have sold within the previous six months. They will describe each one of these in the same standardized way as they did the subject.
Having done that, the appraiser makes dollar adjustments to the comps to make them the equivalent of the subject. A comp with 200 square feet more living space than the subject would carry a negative adjustment of around $10,000. After adjusting the comps, the appraiser calculates a weighted average to arrive at an opinion of value. The lender will use this value to calculate its maximum loan. If your transaction is a purchase, the lender will use the lower of the appraised value or the agreed purchase price.