Sep 104 min read

What Is The Meaning Of A Mortgage Appraisal? And What Do Lenders Look For On A Home Appraisal?

A mortgage appraisal is one of the key steps in buying a home.

But what exactly is a mortgage appraisal, and what do lenders look for when evaluating a property’s value? This article will explain the basics of a mortgage appraisal, why it matters, and what factors lenders consider during the appraisal process.

Is This Appraisal Article For Me?

This information is for homebuyers purchasing a new home or current homeowners refinancing their mortgage.

Or if you're neither a home buyer nor a homeowner, perhaps this information will help you in the future when you eventually find yourself in one of those categories. If you're curious about how lenders determine a property's value and what role an appraisal plays in securing your mortgage, this article will help clarify those questions.

My Experience with Mortgage Appraisals

Over the years, as a mortgage professional working in a major Canadian bank and now as a mortgage broker, I’ve worked with numerous homebuyers, helping them secure mortgages for their homes.

Whether it’s a first-time buyer or someone refinancing, one thing remains consistent - the appraisal is a critical step. Many clients are surprised by how much weight the appraisal carries in the lending process. After handling over 250 mortgage applications, I can confidently say that understanding appraisals can significantly impact your mortgage application and, therefore, your home purchase or refinance.

Why Appraisals Matter

A mortgage appraisal is an evaluation of the property conducted by a licensed appraiser.

The goal is to determine the home's market value, which helps the lender decide how much money to lend you. The appraised value acts as a safeguard for lenders, ensuring that the loan amount doesn’t exceed the property’s actual worth. For example, if you’re purchasing a home for $500,000, the lender needs to be sure that the property is actually worth that amount. If the lender decides to lend you $400,000 on the property, they don't want the property's market value to also be $400,000. This is because if they ever need to foreclose on you for not paying the mortgage, they want to be able to recover their full $400,000 when selling the home.

If the appraisal comes in lower than the purchase price, the lender will, nine times out of ten, reduce the loan amount, leaving you to cover the shortfall.

What Do Lenders Look for in a Home Appraisal?

When evaluating a property, appraisers consider several key factors. Here’s a breakdown of what lenders look for:

Location: The property's location plays a significant role in determining its value. Appraisers consider factors like neighbourhood desirability, proximity to schools, amenities, and the overall real estate market in the area.
Condition of the Property: The appraiser will evaluate the physical condition of the property. They’ll look for things like structural integrity, the age of major systems (e.g., HVAC, plumbing, roof), and any signs of necessary repairs or updates. A well-maintained home generally appraises higher than one in need of significant work. We've seen instances when the appraiser told us there was a hole in the roof, a flooded basement and even a missing front door. Word of advice - if this could describe your property, buy another home or refinance and fix those issues first.
Size and Layout: The size of the home, including square footage and number of bedrooms and bathrooms, will impact the appraisal. The appraiser also considers the layout and functionality of the space, as well as any additions or renovations that add value.
Comparable Sales: Appraisers use comparable sales (often called “comps”) to determine a home’s value. These are recent sales of similar properties in the area. The appraiser will adjust the value based on differences between your property and the comps, such as size, condition, or location. Comparable sales are probably the most important factor of any listed here because the other properties show what yours could sell for. Even if you have the most beautiful renovations, if no other properties in the area have upgrades like yours and none have sold, the upgrades don't necessarily help as much as you might think.
Market Trends: The overall real estate market trends also affect the appraisal. If the market is booming, appraisals may reflect higher values. Conversely, in a declining market, appraised values may be more conservative. We saw a booming market happen from about 2019-2022. Home prices were increasing so dramatically that people were purchasing properties for hundreds of thousands of dollars over asking. Most lenders didn't even bat an eye because the appraisals were coming in.

An appraisal isn’t just a formality—it’s a key part of the process that can significantly impact your financing options.

If you're wondering what to do if your appraisal comes in low, check out our article here for some strategies and tips.

Summary (TL;DR)

A mortgage appraisal determines the market value of a property, helping the lender decide how much to loan.

When evaluating a home's value, lenders look at location, condition, size, and comparable sales.
Understanding the appraisal process can help you avoid surprises and ensure smoother financing.

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