Definition
The professional estimate of property value determined by a licensed appraiser and used by lenders to determine maximum mortgage amount. Appraised value may differ from purchase price.
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Lenders require appraisals to ensure property value supports the loan amount. Appraisers use sales comparison, cost approach, and income approach methods. The appraised value determines the maximum loan-to-value ratio the lender will support. Low appraisals can block financing; high appraisals support higher loan amounts. Appraisers are independent professionals protecting lender interests.
Pro Tip
Understand that appraisals protect the lender. Conservative appraisals are common.
Example
A buyer agreed to purchase a home for $450,000 with a 20% down payment ($90,000) and $360,000 mortgage. The appraisal came in at $450,000, supporting the loan amount.