An appraisal is the act or process of developing an opinion of value - or the most probable sales price a property should bring as of a specific date, based on a defined exposure time on the market.

The lender will be looking at the qualifications of the borrowers - do they have adequate income and assets to afford the monthly mortgage payments, do they have a good track record of keeping up with their debt (usually determined from a credit report) and does the property have adequate value to justify the loan requested.

The loan offered (or denied) will be based on the lenders assessment of the risk of making that loan.   Things that make for a riskier loan include:

• A high loan amount in comparison to the property value.
• A loan that takes up a large amount of the borrower's take home pay.
• A loan made to a borrower with too much debt in relationship to their income.
• A loan made on a nonowner occupied property.
• A loan made on a property in an area where home prices might be going down or could go down over time.
• A loan made on a property that does not have good market appeal, and would be difficult to sell if the borrower has trouble making the monthly payments. 

The Appraisal Process:

The appraiser will start the appraisal process by learning all she can about the property to be appraised: from public records, possibly prior or current MLS listings and finally with a actual visit to the property.  Sometimes only a drive-by inspection is made of the property or possibly no inspection at all.  Even computers are sometimes used to determine property values (such as Zillow).  Certainly the accuracy of the value estimate will vary depending on who or what does the appraisal - and their scope of work.    

The appraiser will search for sales, pending sales and even current listings of hopefully similar  homes.  The best comparables are sales of similar size, age, quality homes that have sold recently, nearby.  Dollar adjustments will be applied to the sales prices of the chosen comparables to account for the differences between those properties and the subject property being appraised. 

There is no magic appraisal formula: different appraisers will choose different comparables under the sales comparison approach and apply different adjustments: often resulting in different estimates of market value for the same property. 

The appraiser may research information on local building costs, labor rates and other factors to determine how much it would cost to build the property today.  Other things that go into the cost approach include the value of the land and the contributory value of other improvements to the site (such as landscaping, pools, fencing).  After the cost new is determined the appraiser will depreciate - for loss of value due to the subject's negative location, deterioration of the properties condition (general wear and tear) and / or any determined loss of value due to functional issues (such as not enough bathrooms, an awkward floor plan, or a property that is too nice {over-improved} for the neighborhood). 

A third appraisal approach an appraiser might use is the income approach, where a value is estimated from the rent (income) the property might generate and the typical return an investor would expect to determine property value.