How do you appraise a house that hasn’t been built yet? That’s one of the most common questions borrowers have about a One-Time Close construction loan appraisal.
Quick answer: Instead of appraising only what’s currently on the property, the appraiser evaluates the proposed home using information such as building plans, specifications, site conditions, materials, and comparable properties.
The goal is to develop an opinion of the property’s as-completed value—what the land and finished home are expected to be worth once construction is complete, in accordance with the approved plans.
That value can play an important role in determining how much financing the project supports. Here’s what you should expect.
Apply for your single-close construction loan.What is an as-completed appraisal?
An as-completed appraisal estimates the market value of your property as if the proposed construction had been completed in accordance with the plans and specifications provided to the appraiser.
That’s different from buying an existing home.
With an existing property, an appraiser can walk through the house and evaluate its current condition, features, quality, and market value.
With a new construction project, there may be little more than an empty lot when the financing process begins.
The appraiser therefore needs detailed information about what will be in place when construction is finished.
For a single-close construction loan, this appraisal happens before the home is completed because the lender needs to evaluate the proposed property before closing the construction financing.
Why is an appraisal required before construction?
A lender isn’t simply financing the cost of lumber, concrete, appliances, and labor.
It’s making a loan secured by real property.
The lender therefore needs an appraisal to help evaluate whether the proposed home’s expected market value supports the requested financing under the applicable loan program.
The appraisal can affect:
- The loan-to-value calculation
- The maximum financing available for the project
- Required borrower funds
- Whether the proposed transaction works as structured
- Whether changes to the project may be necessary
That’s why the appraisal is more than a formality.
It can influence the entire construction financing plan.
Learn how much you may be able to borrow with a One-Time Close construction loan.How does a One-Time Close construction appraisal work?
Although requirements vary by loan program and lender, the process generally follows several stages.
1. You finalize the plans and specifications
Before an appraiser can value the proposed home, they need to know what you’re building.
Your lender and appraiser may need construction documents such as:
- Building plans or architectural drawings
- Floor plans and exterior elevations
- Materials and finish specifications
- Site or plot plans
- Construction contract and project details
Program-specific requirements may call for additional documentation.
This is one reason major design decisions should be made before the appraisal.
An appraiser can’t accurately evaluate a proposed home when the project’s size, layout, quality, or materials are still changing.
2. The lender orders the appraisal
The lender typically orders the appraisal through the appropriate appraisal process.
You don’t simply hire an appraiser yourself and bring the report to the lender.
The appraisal must satisfy the lender’s requirements and the rules of the applicable mortgage program.
The appraiser then receives the documentation needed to understand the proposed property.
3. The appraiser evaluates the building site
The land itself matters.
The appraiser considers characteristics that may influence market value, such as location, site size, access, neighborhood characteristics, and other relevant property features.
If you already own the land, the appraiser isn’t valuing the proposed house in isolation.
The as-completed value generally considers the lot and completed improvements together.
That’s important because land can be a significant part of a property’s overall value.
4. The appraiser reviews your plans and specifications
The appraiser needs to understand the house that will eventually stand on the property.
That can include its:
- Square footage
- Number of bedrooms and bathrooms
- Layout
- Construction quality
- Materials and finishes
- Garage and other improvements
The appraiser then evaluates the proposed property as though those improvements were completed in accordance with the plans and specifications.
For VA One-Time Close construction loans, for example, current VA guidance states that construction exhibits, permitting information, and material specifications should be provided to the appraiser for the valuation of a proposed construction property.
5. The appraiser researches comparable properties
The appraiser also considers relevant market data.
Comparable properties, sometimes called “comps,” help the appraiser understand how similar homes are valued in the local market.
The best comparisons aren’t necessarily houses that look exactly like your proposed home.
Appraisers evaluate factors such as location, size, quality, features, condition, and other characteristics and make appropriate adjustments when properties differ.
This is where a common construction misconception can cause problems: The cost to build something isn’t necessarily equal to the market value it adds.
You might spend $40,000 on a particular upgrade without increasing the home’s market value by $40,000.
Construction cost and appraised value are related, but they aren’t interchangeable.
6. The appraiser develops the as-completed value
Using the project documents, property information, market data, and applicable appraisal methodology, the appraiser develops an opinion of the property’s expected value when completed.
That becomes the as-completed appraised value.
Your lender then uses the appraisal as part of the underwriting and loan-to-value analysis.
Is the construction budget the same as the appraised value?
No. This distinction is essential.
- Construction cost refers to what you spend to complete the project.
- Appraised value is an opinion of what the completed property is worth in its market.
Those numbers can be different.
Imagine your total land and construction cost is $650,000.
That doesn’t automatically make the completed property worth $650,000.
If expensive design choices aren’t supported by the local market, the as-completed appraisal could be lower than your project cost.
The opposite can also occur: the completed property’s appraised value may exceed the documented project cost.
But you shouldn’t build your financing strategy around an assumption that the appraisal will come in above cost.
How does the appraisal affect your loan amount?
The answer depends on your loan program and transaction.
For certain conventional single-close construction-to-permanent purchase transactions, Fannie Mae currently calculates loan-to-value using the lesser of:
- The purchase price, including the construction cost and lot price
- The property’s as-completed appraised value
That distinction can become especially important when the proposed home’s cost exceeds the market-supported value.
For example, suppose your land and construction costs total $700,000, but the as-completed appraisal is lower.
Your lender doesn’t simply ignore the appraisal and base financing on the higher construction cost.
The lower value may affect your loan-to-value calculation and the amount of financing available.
What happens if your One-Time Close appraisal comes in low?
A low construction appraisal doesn’t necessarily mean your project is over.
But it can mean the financing needs to change.
Depending on your loan program, project, and financial qualifications, potential options may include:
- Reviewing the appraisal for factual errors
- Providing relevant information through the lender’s permitted appraisal-review process
- Reducing eligible construction costs
- Changing certain plans or upgrades
- Increasing your eligible cash contribution
Which options are available depends on the circumstances.
You generally can’t solve an appraisal gap by simply asking the appraiser to increase the value to match your construction contract.
Appraisal independence rules are designed to protect the valuation process.
Your first call should be to your loan officer. They can explain how the appraised value affects your transaction and what options may be available.
Building a home and wondering whether your plans fit your financing? Talk with GO Mortgage about your One-Time Close construction loan options before you commit to the final construction budget.
What can cause a new construction appraisal to come in low?
There’s no single cause.
A lower-than-expected appraisal may result from the relationship between your proposed home and its local market. For example, you may encounter problems if:
You’re overbuilding for the neighborhood
A much larger or more expensive home may not see a dollar-for-dollar increase in value if surrounding market data doesn’t support it.
Your upgrades cost more than the value they add
Luxury materials and highly personalized features can be expensive.
That doesn’t guarantee buyers in your market would pay an equivalent premium for them.
Comparable properties don’t support the expected value
A unique home can be harder to compare with recent market activity.
The appraiser still needs market evidence to support the value conclusion.
The project changed after the original plans
Significant changes to square footage, layout, quality, or specifications can create problems if the home being built no longer matches what was originally appraised.
That’s another reason to communicate major changes with your builder and lender before authorizing them.
What happens if you make changes after the appraisal?
Change orders are common during construction.
You might decide to upgrade countertops, expand a room, change flooring, or add another feature after closing.
But don’t assume spending more automatically increases your home’s appraised value—or your construction loan amount.
A change can affect:
- The construction budget
- Available contingency funds
- Remaining loan proceeds
- Construction timeline
- The property’s value
- The lender’s project requirements
Depending on the scope of the change and your loan terms, lender approval or additional documentation may be required.
Talk with your lender before authorizing a major change.
See what happens when construction costs push your home over budget.Is there another appraisal when construction is finished?
Completion requirements depend on the loan program and transaction.
For applicable Fannie Mae single-close construction-to-permanent financing, a completion report is required at the end of construction.
Current Fannie Mae guidance requires an Appraisal Update and/or Completion Report to document completion and address the property’s value.
If that process indicates the property’s value has declined, a new appraisal may be required, and the borrower may need to be requalified based on the updated loan-to-value ratio.
VA One-Time Close construction loans also have completion requirements. Current VA guidance provides for a final inspection or Certificate of Occupancy as part of completing the construction process.
So the initial appraisal doesn’t mean the lender ignores the property for the rest of the build. The lender still needs evidence that the home was completed as required.
Is the final inspection the same as the original appraisal?
Not necessarily. They serve different purposes.
- The original appraisal develops an opinion of the property’s value based on the proposed construction.
- A completion inspection or report generally addresses whether the home was completed in accordance with the applicable requirements and plans.
Don’t assume every construction draw inspection is a new appraisal, either.
During construction, inspections may be used to verify progress before the lender releases the next draw.
That’s different from developing a new opinion of market value.
Learn how construction draws and inspections work during a One-Time Close loan.Can you get an appraisal waiver on a One-Time Close construction loan?
Don’t assume you can skip the appraisal.
For Fannie Mae transactions, construction-to-permanent loans—including single-close and two-close loans—are currently ineligible for value acceptance, also known as an appraisal waiver.
That makes sense when you consider what’s being financed. The lender needs to evaluate a proposed property that doesn’t yet exist in completed form.
Your loan officer can explain the appraisal requirements for your particular loan program.
Does the appraiser approve your builder or construction budget?
No. The appraiser, lender, and builder have different roles.
- The appraiser develops an independent opinion of the property’s value.
- The lender evaluates your loan application, project, construction documents, builder, budget, and applicable underwriting requirements.
- The builder is responsible for completing the agreed construction work under the applicable contract.
An appraisal isn’t a guarantee that your construction budget is sufficient, your builder will perform as expected, or your home will sell for the appraised value later.
It’s one part of the lender’s overall construction-loan evaluation.
How can you prepare for a construction loan appraisal?
You can’t control the appraised value, and you shouldn’t try to influence the appraiser’s independent conclusion.
But you can make sure the project is clearly documented.
Before the appraisal:
- Finalize the plans: Avoid ordering an appraisal while major design decisions remain unresolved
- Create detailed specifications: Clearly identify the materials, finishes, fixtures, and features being proposed
- Use a realistic construction budget: Make sure the contract and specifications describe the same project
- Tell your lender about the land: Existing ownership, liens, and land acquisition can affect the transaction
- Avoid assuming cost equals value: Consider whether expensive upgrades make sense for the property’s market
Clear documentation helps everyone evaluate the same proposed home.
FAQ: One-Time Close construction loan appraisals
The appraiser uses the proposed home’s plans, specifications, site information, and relevant market data to develop an opinion of its as-completed value.
As-completed value is the appraiser’s opinion of what the property is expected to be worth when the proposed home and improvements have been completed according to the plans and specifications.
Project documentation helps the lender and appraiser understand what’s being built. Specific documentation requirements vary by program, but detailed plans and specifications are central to the valuation of proposed construction.
The appraisal of the completed property generally considers the site and proposed improvements together. How existing land ownership or equity affects your financing depends on the loan program and transaction.
Not necessarily. Construction cost and market value aren’t the same. An upgrade may cost more than the additional market value it creates.
A lower value can affect the loan-to-value calculation and available financing. Depending on your situation, you may need to review the appraisal through the lender, revise project costs, modify the project, or contribute additional eligible funds.
If you believe an appraisal contains errors or relevant market information wasn’t considered, contact your lender. There are established processes for appraisal review or reconsideration where applicable. Don’t contact or pressure the appraiser to reach a particular value.
Construction loans commonly use inspections or other documentation to verify progress before construction draws are released. These progress inspections aren’t necessarily the same as the original appraisal.
Completion requirements vary by program. The lender generally requires appropriate documentation demonstrating that construction has been completed in accordance with applicable requirements.
A value that doesn’t support the proposed financing can prevent the transaction from proceeding exactly as originally structured. Whether the project can be modified depends on the loan program, lender requirements, the project, and the borrower’s qualifications.
Understand the appraisal before you finalize your build
A One-Time Close construction loan appraisal isn’t based on a finished house because there isn’t one yet.
Instead, the appraiser uses your proposed plans, specifications, building site, and market evidence to develop an as-completed value.
That value can directly affect your construction financing. It’s also why the order of operations matters.
Ideally, you want your financing range, land, builder, plans, construction budget, and appraisal working together before construction starts.
A beautiful custom home can still pose financing problems if the cost of building it significantly exceeds what the local market can support.
Understanding this before you start gives you more opportunity to adjust the project rather than discovering a valuation gap after you’ve committed to the build.
Planning your new home? Get started with GO Mortgage to discuss your One-Time Close construction loan options and what to expect from the appraisal process.
This article is for general informational purposes only and isn’t a commitment to lend, guarantee of approval, guarantee of property value, or individualized financial advice. Appraisal, construction, property, builder, loan-to-value, and underwriting requirements vary by loan program and lender.