An appraisal is conducted to assess the current market value of a home so a lender can avoid lending you more money than the house is worth. The lender orders the appraisal to protect their own investment in the event you should default on the loan and go into foreclosure; if they lend you more money than the house is worth, they wouldn’t be able to recoup their costs.
In brief, an appraiser will evaluate the home based on its physical condition (both exterior and interior), features, and location. They’ll research similar real estate sales in the area, often known as “real estate comps.” They’ll use the information they gather to create an appraisal report that lists the appraised value.
If the house appraises for a lower amount than the sales price, you may experience roadblocks in continuing the mortgage process, but your loan officer should be able to guide you. You may be able to renegotiate with the seller, redistribute or add down payment funds, or even dispute an appraisal that seems too low. See more about dealing with a low appraisal on The Balance.
Some buyers include an appraisal contingency in the purchase offer so they’ll be able to walk away if the appraisal comes in under the sales price.
Appraised value vs. assessed value
They’re both “A” words that put a value on a house, so it’s understandable to confuse appraised value with assessed value. However, they aren’t quite the same thing. Remember, the appraisal is ordered by the lender to protect their own interests, and the appraised value will reflect what the home would be expected to sell for on the market at a given time. A home assessment is undertaken by your local government to determine the property tax you’ll pay as a homeowner.
How often homes are assessed and how exactly assessments are calculated varies by state and municipality.