The fair market value of a house is a critical element of the homebuying process. It influences how much buyers will pay and how much of a mortgage loan lenders are willing to approve.
Fair market value is also factored into everything from refinancing a mortgage and property taxes to estate planning and legal disputes.
But how is this important figure calculated?
Here's what you need to know about fair market value, including what it means, how it's determined and what it's used for.
What we'll cover
What is the fair market value of a home?
The fair market value of a property is the approximate price that an informed and unpressured buyer would pay to an informed and unpressured seller. It's not necessarily the list price or the price that a home ultimately sells for.
Lenders will use a home's fair market value to determine the mortgage they will offer a prospective buyer. If you want to refinance your mortgage, your home's fair market value greatly influences how much you're able to get in cash-out equity.
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Rocket Mortgage
Annual Percentage Rate (APR)
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Credit needed
620 for conventional loans
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0% for VA, 1% for RocketONE+, 3% for conventional, 3.5% for FHA, 10% to 15% for jumbo
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How is fair market value calculated?
There's no set formula for fair market value, but assessors will look at a house's age, location, square footage and the number of beds and bathrooms, as well as special features like a garage or pool.
They'll then look at what several comparable homes, or "comps," have sold for recently.
Other reasons to know your home's fair market value
Even if you're not in the market for a mortgage or refinancing, fair market value is taken into consideration when assessing homeowners insurance premiums and property taxes.
Knowing your home's fair market value is also an important part of retirement and estate planning and in legal proceedings where assets are divided, like a divorce.
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Bottom line
The fair market value of a home is a key piece of information whether you're buying, selling or looking to refinance your mortgage. It's also important to know for retirement and estate planning, or if you're going through a major life change, like a divorce.
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