What is the purpose of an appraisal in the lending process?

The purpose of an appraisal in the lending process is to estimate a property's value to prevent over-lending. Lenders require an appraisal to ensure that the amount they are financing does not exceed the property's market value. This assessment helps to protect both the lender's investment and the borrower's equity. By having an independent evaluation of the property, lenders can make informed decisions about the loan amount that they are willing to provide, mitigating the risk associated with lending more money than the property is worth. This process ultimately ensures that the financial transaction is sound and that potential losses due to a decline in property value are minimized.

Legal descriptions of the property, calculating closing costs, and determining the property's insurance coverage are important aspects of real estate transactions but do not represent the core purpose of an appraisal. The primary focus is to establish the valuation of the property in question to guide the lending decision.