An appraisal is an unbiased, professional estimate of the value of a property. Before issuing a mortgage on a property, most lenders (banks, credit unions, private lenders, etc) will want to ensure the asset in which they are lending against has a certain value that mitigates their risk. A lender has the following options to determine true market value of the property:
(for more information on these various appraisal terms, see FAQ)
Appraisal for a sale:
Often an appraisal is completed when someone is buying a home or investment property. The appraisal is requested by the lender (or mortgage broker) in order to confirm the sale price is well supported. Sometimes buyers will pay over market value and sometimes they will get a deal. The appraisal is completed so the lender has assurance their loan to value ratios are in line, that the property is well maintained and marketable and that there are no major issues with the property.
In a sale situation, it is the listing realtor that provides access to the home and the appraiser completes the interior and exterior inspection and sends the completed report directly to the lender for review. If the appraisal comes in high, the lender will approve the mortgage at the agreed upon loan to value, if the appraisal comes in low, it can negatively impact the mortgage or even cancel financing altogether.
Appraisal for refinance:
When there is no sale, and a homeowner is refinancing the property it is even more important that an appraisal is completed. An appraisal for refinancing purposes is done to determine how much the homeowner can borrow. The higher the appraised value, the more money the homeowner can borrower in the form of a mortgage. If the lender has agreed on an 80% loan to value (LTV) and the home is appraised at $1,000,000, they borrower can get a mortgage of up to $800,000.