When you borrow to buy or refinance a home, you’ll need an appraisal—here’s a quick guide to how they work.

When home buyers get a loan to purchase or refinance a home, the lender requires an appraisal, but do you know why? Primarily, the bank wants to make sure that the home’s value covers the amount of the loan in case the borrower fails to pay it back. Also, an appraisal also offers protection for home buyers to make sure they don’t overpay. Whether you’re buying or refinancing a home, it’s good to understand how appraisals work. Here’s a brief overview.

Who appraises the property?

Significant financial decisions are made based on property values, so it makes sense that appraisers need training and licensing.

In Michigan, a minimum of 75 hours of qualifying education is required for Limited Real Estate Appraisers. A State Licensed Real Estate Appraiser will have at least 150 hours education and 1,000 hours of experience. A Certified Residential Real Estate Appraiser must complete 200 hours of appraiser education and have 1,500 hours of experience.

Regardless of their license level, an appraiser provides an independent, unbiased assessment of a property’s value.

What’s covered in an appraisal report?

The appraisal report documents several factors that influence the property’s value, including:

• the home’s characteristics, size and foundation type
• condition of interior and exterior
• improvements made to the home, like updated windows, kitchens or baths
• materials used for construction
• comparable homes in the area for sale and recently sold
• any factors about the home or neighborhood that influence the market value

To see more factors considered, check out this blank Uniform Residential Appraisal Report.

The report will also include a map and photographs of the property.

How much does an appraisal cost?

If you’re getting your home loan through Consumers, a $400 fee will be assessed—or $450 for FHA loans.

Is a home inspection needed if there’s an appraisal?

The roles of an appraiser and inspector are distinct and their reports serve different purposes.

An appraiser looks at the condition of the structure and how it affects the property’s value. A home inspector looks at a home and its systems to identify existing and potential problems. A thorough home inspection can give you a good idea about what kind of maintenance and systems replacement a home will need and when.

So, yes, if you’re buying a new home, you’ll want an inspection and an appraisal.

What if the appraised value seems wrong?

If you think an appraisal is wrong, the first thing to do is review the report for factual errors. Was there a significant upgrade that was overlooked? Are the comps truly comparable? If you have different data, ask the appraiser to re-evaluate.

If there are no obvious errors, you can get a second appraisal. Make sure that you hire an appraiser who’s familiar with the property’s community.

Keep in mind, though, that a second appraiser may come up with a similar value to the first one. In that case, you may have to renegotiate or walk away from the deal.

Consumers helps more than 1,000 members finance land, homes, and home improvement projects each year. When you need a mortgage or home equity line of credit, call us at 800.991.2221. We’re here to help you get the home of your dreams!