Appraisal
An appraisal is an independent, licensed professional's opinion of a home's market value. The lender orders it (the buyer typically pays, usually a few hundred dollars) before approving a mortgage, because the home is the loan's collateral — the lender needs to know it isn't lending more than the property is worth.
The appraiser inspects the home's size, condition, and features, then compares it to recent sales of similar nearby homes ("comps") to arrive at a value. The result feeds directly into the loan-to-value ratio: lenders base LTV on the lower of the purchase price and the appraised value.
If the appraisal comes in below the agreed price — an "appraisal gap" — the lender will only size the loan against the appraised value. The buyer must then cover the gap in cash, renegotiate the price with the seller, or walk away (an appraisal contingency in the contract preserves that option along with the earnest money deposit).
An appraisal protects the lender and is not a substitute for a home inspection, which checks the property's condition for the buyer's benefit.
Related terms: Loan-to-Value Ratio (LTV), Underwriting, Earnest Money.
