A mortgage appraisal is a critical step in the home buying or refinancing process, yet it remains one of the most misunderstood aspects for many homebuyers. Understanding what to expect and how to prepare can help ensure a smooth transaction. Here’s your comprehensive guide to mortgage appraisals, with special focus on the lender-appraiser relationship and what it means for you as a borrower.
The Lender-Appraiser Relationship: Understanding Who’s Who
Despite the fact that you as the borrower typically pay for the appraisal, you are not actually the appraiser’s client – the lender is. This distinction is crucial for understanding how the process works and what rights you have regarding the appraisal report.
Who Orders the Appraisal?
When you apply for a mortgage, your lender initiates the appraisal process, not you as the borrower. This arrangement exists because the lender needs an unbiased assessment of the property’s value to ensure they’re not lending more than the home is worth. The lender will either:
- Order the appraisal directly from an individual appraiser
- Engage an Appraisal Management Company (AMC)
This structured process protects all parties involved by ensuring the appraiser remains independent and objective in their valuation.
The Role of Appraisal Management Companies (AMCs)
After the 2008 housing crisis, regulations changed significantly to prevent the improper influence that contributed to the market collapse. Today, many lenders use Appraisal Management Companies (AMCs) as intermediaries in the appraisal process.
An AMC is supposed to serve as a buffer between lenders and appraisers, performing several key functions:
- Receiving appraisal requests from lenders
- Selecting qualified, licensed appraisers for specific properties
- Managing communication between parties
- Reviewing completed appraisals for quality and compliance
- Delivering the final report to the lender
This system purportedly helps maintain appraiser independence and regulatory compliance while streamlining the process for lenders.
However, AMCs have generated significant controversy. Many borrowers remain unaware that AMCs typically retain 30-50% (some reportedly as high as 80%!) of the appraisal fee while paying appraisers substantially less than what consumers are charged. This fee-splitting is largely undisclosed, raising very serious transparency concerns. Additionally, some AMCs have been proven to assign appraisals based on lowest fees and fastest turn times rather than competency, potentially compromising quality.
A recent white paper, published by Joshua Tucker, Chairman of the Appraisal Regulatory Compliance Council (ARCC) exposed the profiteering and fee skimming by a large number of AMCs. Furthermore, their business model volatility has also led to numerous AMC bankruptcies, often leaving appraisers unpaid for completed work. Responding to these issues, a growing number of lenders are returning to direct engagement with qualified appraisers, ensuring fair compensation for expertise and typically higher quality reports.
Regulatory Framework for Appraiser Independence
Federal regulations, including the Dodd-Frank Wall Street Reform and Consumer Protection Act, established strict requirements for appraiser independence. These rules prevent mortgage brokers, loan officers, and even you as the homebuyer from selecting or directly influencing the appraiser.
The appraiser must maintain a confidential and fiduciary relationship with their client (the lender) and provide an unbiased, objective opinion of value without external pressure. This independence is crucial for the integrity of the entire mortgage system.
The Appraisal Process
Initial Steps
The appraisal process typically begins after you’ve made an offer on a home or applied for refinancing:
- Your lender orders the appraisal through their established channels
- A professional appraiser is assigned based on expertise, location, and availability
- The inspection is scheduled for inspection
- Relevant documents and property information are gathered
Property Inspection
During the property visit, the appraiser will:
- Take measurements of the home
- Document features and amenities
- Assess the overall condition
- Take photographs for the report
- Note any improvements or renovations
The inspection typically takes between 20 minutes to a few hours, depending on the property’s size and complexity.
Market Analysis
After the inspection, the appraiser conducts a thorough market analysis that includes:
- Researching recent comparable sales in your area
- Analyzing current market trends
- Evaluating location characteristics
- Considering property characteristics
- Assessing local economic conditions
What Appraisers Look For
Property Features
- Livable area (rather than just total square footage)
- Room count
- Construction quality
- Updates and renovations
- Overall condition and any obvious deferred maintenance (needed repairs)
Location Factors
- Proximity to amenities
- Market demand
- Local development
- External factors (busy streets, railroads, commercial uses nearby)
- Flood zones and environmental considerations
What Happens to the Appraisal Report?
Once completed, the appraisal report is delivered to the lender, not directly to you as the borrower. This reflects the client relationship between the appraiser and the lender.
Accessing Your Appraisal Report
Although you’re not the client, federal regulations require that borrowers receive a copy of the appraisal report at least three business days before closing. You cannot, however, contact the appraiser directly with questions or concerns – these must be directed through your lender.
If you want to share the appraisal report with a third party, this requires written authorization from the lender and possibly the appraiser, as they maintain ownership of the intellectual property in the report.
Addressing Appraisal Concerns
If you face appraisal issues, consider these options:
- Ask your lender to review the report for factual errors
- Provide additional comparable sales information through your lender
- Submit documentation of improvements or features that may have been overlooked
- Consider renegotiating the purchase price with the seller
Remember that while you can challenge aspects of the appraisal, the process must go through the lender, as they are the appraiser’s client.
Preparing for Your Appraisal
Documentation to Prepare
To help ensure an accurate appraisal, compile:
- A list of recent improvements with dates and costs
- Maintenance records for major systems
- Floor plans if available
- Previous appraisals, if you have them
- Permit documentation for any major work
- Plat of Survey, if available
- Condo documents and HOA contact information (for condominiums)
Property Preparation
Make your property show its best by:
- Cleaning and decluttering all areas
- Completing minor repairs
- Improving curb appeal
- Ensuring the appraiser can access all areas of the home
- Having your documentation organized and available
- Securing pets and children during the inspection
Cost Considerations
Typical Appraisal Fees
Appraisal costs vary based on property type, location, and complexity:
- Single-family homes: $300-$800
- Multi-family properties: $600-$1,500
- Complex properties: $800+
- Rush orders: Additional fees may apply
The national average cost for a standard home appraisal is approximately $356-$500, according to recent industry surveys.
Payment Responsibility
While the borrower typically pays for the appraisal:
- The fee is usually your responsibility as the buyer/borrower
- It may be negotiable in some purchase transactions
- The cost is typically included in your closing costs (though not broken down to show what the AMC charges or takes)
- Some lenders require payment upfront
- The fee may be refundable in certain circumstances
Special Appraisal Situations
Refinance Appraisals
When refinancing, the appraisal process is similar to purchase appraisals but:
- Focuses more on the current condition
- Takes into account market changes since purchase
- Reviews improvements made since you bought the home
- Compares to your original purchase price
- May have additional preparation steps
Hybrid Appraisals and Property Data Collectors
Some lenders may attempt to use a hybrid appraisal approach, which can be concerning for homeowners:
- Uses unlicensed, uninsured Property Data Collectors (PDCs) to inspect the home
- Sends that data to a licensed appraiser who completes the appraisal without physically visiting the property
- May result in less accurate valuations due to the disconnect between inspection and analysis
- Often surprises both homeowners and real estate agents
When working with a lender, ask specifically whether they use hybrid appraisals and consider the potential risks of this approach.
No-Appraisal Options
In certain situations, you might qualify for an appraisal waiver:
- FHA streamline refinance loans
- VA interest rate reduction refinance loans (IRRRL)
- USDA streamlined assist refinance loans
- Conventional loan “value acceptance” (formerly called appraisal waivers)
While these options might seem appealing due to cost and time savings, they come with significant risks. Without a professional evaluation, you may overpay for a property or miss critical condition issues that could cost thousands to remedy later. Automated valuation models often lack the nuance of local market knowledge and can’t assess property condition, potentially leaving you financially exposed.
Consider requesting a traditional appraisal even when offered a waiver, as the modest upfront cost provides valuable protection and negotiating leverage. Alternatively, obtaining your own independent appraisal directly from a qualified professional can provide peace of mind before making one of life’s largest financial commitments.
FHA/VA Appraisals
Government-backed loans have special requirements:
- Additional property requirements
- Stricter standards for safety and habitability
- Specific focus on structural integrity
- Required certifications
- Potentially longer processing time
Working with Your Appraiser
Best Practices
- Provide full access to all areas of the property
- Respond promptly to inspection scheduling requests
- Be on time for the inspection appointment
- Share relevant information about improvements
- Stay available for questions during the process
- Respect the appraiser’s independence
- Direct questions through your lender
- Verify the appraiser’s license and credentials for every appraisal
What to Avoid
- Delaying scheduling or requesting multiple date changes
- Pressuring the appraiser about value
- Hovering during the inspection
- Missing the appointment or showing up late
- Withholding information about the property
- Aggressive communication or demands
- Setting unrealistic expectations
After the Appraisal
Report Review
When you receive your copy of the appraisal:
- Check for accuracy in property details
- Verify that all improvements are noted
- Review the comparable properties used
- Understand any adjustments made
- Note the final valuation conclusion
Conclusion
Remember, while you pay for the appraisal, the mortgage lender is the appraiser’s client. This arrangement exists to ensure objectivity and protect all parties involved in the transaction. A professional appraisal remains a vital safeguard in the mortgage lending system, ensuring that properties are valued fairly and accurately for both lenders and borrowers alike.