Appraisal

A home appraisal is an independent, licensed professional's estimate of a property's market value, required by mortgage lenders before approving a loan to confirm the home is worth at least the amount being borrowed. It protects the lender's collateral interest, ensuring the loan isn't larger than what the property could realistically sell for if the borrower defaulted.

The appraiser is engaged by the lender, not the buyer or seller, and bases the valuation on comparable recent sales, property condition, and local market factors. An appraisal contingency in a purchase contract protects buyers if the appraised value comes in below the agreed purchase price, allowing renegotiation or exit without losing the earnest money deposit.

There's no formula, appraised value is a professional estimate based on comparable sales analysis, not a calculation with fixed inputs.

A buyer agrees to purchase a home for $450,000, but the lender's appraisal comes back at $430,000 based on recent comparable sales in the area.

• The lender will only finance based on the $430,000 appraised value, not the $450,000 contract price
• With an appraisal contingency, the buyer can renegotiate the purchase price down to $430,000, bring an additional $20,000 in cash to cover the gap, or exit the contract with earnest money returned

Without an appraisal contingency, the buyer would be obligated to either cover the shortfall or risk losing their deposit by backing out.

• Ordered by and works for the lender, not the buyer. The appraiser's job is protecting the lender's collateral position, an independent valuation separate from either party's interests in the transaction.
• A low appraisal creates a real funding gap. The lender won't finance above appraised value, leaving the buyer to negotiate, cover the gap in cash, or exit via contingency.
• Distinct from a home inspection, which serves a different purpose. Appraisal assesses value for lending purposes, inspection assesses physical condition for the buyer's own decision-making, both are typically needed but aren't interchangeable.
• Appraisal contingencies are a key buyer protection. Without one in the contract, a low appraisal can force a buyer to cover the gap or lose their earnest money deposit if they can't or won't proceed.
• Cash purchases can skip the requirement, but often still get one. Without lender involvement, an appraisal isn't mandatory, though some cash buyers order one anyway for independent value confirmation.