What Is an Appraisal Report for a Home Loan, and Why Is It Required?

For the bank to be able to recover its claim if the loan is not repaid, the value of the property taken as collateral must be reliably known. An appraisal report has an impartial expert determine this value. The bank relies not on the price the seller wants or on the buyer's statement but on the determination of an independent expert.

Banking legislation requires that properties accepted as loan collateral be valued by authorised firms. Since the detailed conditions may vary with the regulations, which firms the bank works with and which conditions it requires depend on its own practice.

Banks generally lend up to a certain percentage of a property's appraised value; these percentages may vary with the bank, the regulations of the period and the type of property. If the sale price is above the appraised value, the difference and the portion outside the loan percentage are paid upfront by the buyer.

Let us make this concrete with a hypothetical example. Suppose a home's sale price is 100 units, its appraised value is 90 units, and the bank lends up to 80 percent of the appraised value. The maximum loan would then be 72 units and the buyer would need to cover 28 units from their own funds. If the appraised value had come out equal to the sale price, the loan would have been 80 units. The percentages and rules are purely illustrative; you should ask your bank for the figures that apply in your situation.

After the loan application is made, the bank assigns a valuation firm for the property. The expert inspects the property on site, prepares the report and sends it to the bank. The bank determines the loan decision and amount according to this report. You obtain the report through the bank's own system; a report prepared externally is mostly not accepted by the bank.

During the on-site inspection, the expert checks the property's location, age, floor and facade, interior condition and whether the title deed and the actual situation match. An independent unit that appears as residential on the title deed but is actually used as a workplace, or the presence of an addition contrary to the project, can affect the value and loan eligibility.

This is a common outcome and often does not mean an error; listing prices are sometimes above the prices actually achieved in the market. First ask your bank for the reasoning behind the report and the comparables used. If you can cover the difference, you can proceed by increasing the down payment.

If you cannot cover the difference, the options are to renegotiate the price with the seller, recalculate the loan amount under the bank's conditions or turn to another property. If you believe the report contains a clear factual error, for example wrong area information or a wrong description of the property, notify the bank of it in writing. Objecting to the value itself depends on the procedures of the bank and the firm.

Preparing the title deed, occupancy permit and zoning documents in full and up to date, ensuring the expert can access the property easily and, if necessary, telling them in advance who will open the door will speed up the process. Giving the property's address, block-parcel and independent unit number correctly also prevents the wrong property from being inspected.

Agreeing in advance with the seller on the appraisal day, informing the tenant if there is one and making sure the property is clean and accessible is a practical contribution. For the general workings of the valuation process, you may also look at our article How to Get a Real Estate Valuation Report

In determining a home's value, the expert first looks at location: the area, the character of the street, transport, proximity to schools, healthcare and shopping, and the quality of surrounding development. The property's own features are then assessed: net and gross area, room layout, floor, facade, view, building age, building maintenance, heating system, parking, lift and complex facilities all affect value.

Legal factors are also important. The presence of a mortgage, attachment or annotations on the title deed, whether an occupancy permit exists, the building's compliance with the project and the independent unit's status on the title deed can affect the appraised value and loan eligibility. For example, a bank may be hesitant to lend on a building without an occupancy permit; this depends on the bank's own policy.

Finally, market data comes into play: the prices of similar homes recently sold in the area and listings currently on sale are compared. If the market is changing quickly, it becomes even more important that the valuation date is current and the comparables are recent. You can find the basic logic of valuation in our article What Is Real Estate Valuation and Why Does It Matter?

Doing your own preliminary research before applying for a loan helps you keep your expectations realistic. Looking into the recent sale prices of similar apartments in the same building gives an idea of the approximate value range of the home; however, the final appraised value is formed according to the expert's on-site inspection and the comparables they select.

Before applying for the loan, prepare the property's title deed and occupancy documents, check whether there is a mortgage or attachment on the title deed, set the price in the sales contract in line with the appraised value, and learn the bank's loan percentage and conditions.

In the preliminary agreement with the seller, it is useful to discuss that the appraisal result may affect the price. If the value comes out lower than expected, who will cover the difference, will the sale be cancelled, will the price be renegotiated? If the answers to these questions are known in advance, there are no surprises.

Setting the sale price far above market value, submitting incomplete documents and failing to give the expert access to the property are common mistakes. These situations can cause the appraised value to come out lower than expected or the process to drag on.

Another mistake is to think of the appraised value as a document that confirms the sale price. The appraisal is for the bank's risk assessment; if the report's value comes out below the sale price, the bank lends only on that value, and the buyer has to cover the difference.

Hypothetical example: an apartment is being sold for 2,000,000 units and the appraised value comes out at 1,800,000 units. The bank applies its loan percentage to 1,800,000 units; if the percentage is 70 percent, the loan is 1,260,000 units. The amount the buyer must pay upfront is then 740,000 units. These figures and the percentage are only to illustrate the logic; actual loan percentages vary with the bank, the period and the property.

In such a case, three routes can be considered. The first is to renegotiate the price with the seller; the second is for the buyer to cover the additional down payment; the third is to examine the basis of the result and, if there is wrong or missing information, request a correction within the bank's procedure. A low appraised value can sometimes stem from missing documents or from the property's features being reflected incorrectly, so it is essential to read the content of the report.

Different experts can arrive at different values from one bank to another; the reason is small differences in the choice of comparables or in assumptions. A low appraised value at one bank therefore does not mean the property would receive the same value everywhere. Still, if you are going to use a loan, the value the bank sets is the value that determines the loan amount at that bank.