When financing a home, your lender ensures the property is worth a certain amount. Mortgages have a maximum loan-to-value, or LTV, a percentage which compares the loan amount to the home's value. Lenders finance between 80 percent and 96.5 percent LTV, and sometimes up to 100 percent. A home appraisal tells the lender how much the home is worth. Who pays the appraisal fee depends on the type of transaction and negotiations between the parties involved.
Appraisals benefit mortgage lenders, but also may serve other purposes. They help insurance providers determine how much coverage they can give and help individual sellers price their homes for sale. There are several types of appraisal reports, with the most common involving a full interior and exterior report. Less common, streamlined reports also used in mortgage lending require a drive-by of the property or an automated valuation tool which does not require a visit to the property.
Refinance transactions, in which homeowners pay off a current mortgage with proceeds from a new loan, require the borrower to pay an appraisal fee. Some refinances, known as streamlined, require less documentation and a less rigorous home valuation process. Drive-by appraisals and automated valuations may be used in such instances and cost the borrower less than a walk-through appraisal, which typically costs between $300 and $600. According to Realtor.com, a drive-by appraisal usually costs less than $275. An online automated valuation generally costs less than $100.
A typical sales contract allocates costs, including the appraisal fee, to the buyer or seller. In buyer's markets in which sellers may need to try harder to sell their home, the seller often covers this charge. In seller's markets in which buyers compete for homes, buyers cover the fee themselves. While the contract stipulates who pays, the lender decides when the fee must be paid. The appraisal is typically an up-front fee that must be paid before the appraisal report is completed, usually by check or credit card.
Lenders may waive the appraisal fee, pay for it themselves or let the borrower cover the fee by charging a higher interest rate through no-closing-cost loans. Although a buyer may be responsible for the appraisal fee on contract, the seller may cover the fee through seller-paid closing costs, also known as seller concessions. In such cases, the seller agrees to pay a certain amount of the buyer's costs, in a lump sum at closing, which can cover the appraisal.
- Real Estate ABC: Purpose of a Real Estate Appraisal
- Realtor.com: Who Pays for the Property Appraisal?
- Realtor.com: How Much Does a Mortgage Appraisal Cost?
- Appraisal Institute: Appraisal Institute Calls for Withdrawal of HUD’s Proposed RESPA Rule
- Nations Title Agency: HUD-1 Walkthrough: Explaining Closing Costs
- Appraisal-Network: Online Automated Valuation Models or Comparable Sale Reports
Karina C. Hernandez is a real estate agent in San Diego. She has covered housing and personal finance topics for multiple internet channels over the past 10 years. Karina has a B.A. in English from UCLA and has written for eHow, sfGate, the nest, Quicken, TurboTax, RE/Max, Zacks and Opposing Views.