Many homebuyers are unclear about the differences between a home inspection versus an appraisal. The main difference is that an appraisal deals with the value of a home, while an inspection addresses the integrity of the home’s physical structure.
Both processes provide valuable information regarding the home that could affect your purchase, and one or both may be required by the lender before your mortgage loan can be approved. Therefore, it’s important to know what a home inspection and appraisal are and how they can aid you during closing.
If you’re planning to buy a home, an inspection is an important step in the process. It assesses the condition of the home before you finalize the transaction. It’s also a different step in the process from an appraisal. In most cases, an appraisal is ordered by the lender to confirm or verify the value of the home prior to lending a buyer money for the purchase. Here’s the breakdown of each one and why they’re both important when buying a home.
What is a Home Inspection?
Here’s the key difference between an inspection and an appraisal. Bankrate says:
“In short, while an appraisal helps you understand a home’s value, inspections help you understand a home’s condition.”
The home inspection is a way to determine the current state, safety, and condition of the home before you finalize the sale. If anything is questionable in the inspection process – like the age of the roof, the state of the HVAC system, or just about anything else – you as a buyer have the option to discuss and negotiate any potential issues or repairs with the seller before the transaction is final. Your real estate agent is a key expert to help you through this part of the process.
What Are The Benefits Of An Inspection?
An appraisal is generally a requirement for a mortgage because it helps protect the lender and prevents the borrower from paying too much for a property. An inspection should arguably also be a requirement because it’s in the buyer’s best interests. Here’s how you can benefit from this service:
- It can help you protect your investment and reduce potential risks.
- It will help you determine whether you should buy the home and then help you feel confident in your decision.
- It will help you feel safe and comfortable living in the home.
- It will provide a better understanding of your home’s condition.
- You’ll learn more about the intricacies of your home.
- If you’re building your home, it will ensure proper construction was completed.
- It can provide you leverage when negotiating with the seller.
What is a Home Appraisal?
A home appraisal is an estimate of a home’s fair market value performed by a licensed appraiser. Mortgage lenders often require an appraisal before they’ll approve you for a loan, but home appraisals occur any time someone needs a professional opinion about how much a house is worth.
Homebuyers usually need an appraisal to ensure that the loan amount a lender offers them can cover the cost of the home and that the home is worth enough to secure the loan. A potential buyer must pay for an appraisal of any property they plan to purchase, but the mortgage lender typically hires the appraiser and arranges the process. The fee for a home appraisal will vary, depending on the home location, type of mortgage, size of the loan and type of property, but you can expect to pay around $300 to $500.
Sellers often use an appraisal to ensure that the listing price is correct. This type of appraisal is also known as a pre-listing assessment. People may also seek appraisals when applying for a home equity loan or refinancing, getting a divorce or filing for bankruptcy.
For homebuyers, an appraisal can affect the interest rates they’ll be offered — especially if it comes in low. That could increase the buyer’s loan-to-value (LTV) ratio, which could trigger extra fees or higher interest rates for conventional loan borrowers. These fees and higher interest rates will go into effect August 1, 2023 and apply to those borrowing more than 60% of their home’s value who also have a DTI over 40%.
The National Association of Realtors (NAR) explains:
“A home purchase is typically the largest investment someone will make. Protect yourself by getting your investment appraised! An appraiser will observe the property, analyze the data, and report their findings to their client. For the typical home purchase transaction, the lender usually orders the appraisal to assist in the lender’s decision to provide funds for a mortgage.”
When you apply for a mortgage, an unbiased appraisal (which is required by the lender) is the best way to confirm the value of the home based on the sale price. Regardless of what you’re willing to pay for a house, if you’ll be using a mortgage to fund your purchase, the appraisal will help make sure the bank doesn’t loan you more than what the home is worth.
An appraisal is an evaluation of a property’s value based on its condition, features, and similar home sales in the area. Appraisals are conducted by trained, certified professionals who are licensed to determine the value of a home. Getting an appraisal is a standard part of the mortgage process. Before a mortgage lender will loan you money to buy a home, they want to get an idea of how much the property is worth. The following factors are typically considered during an appraisal:
- Comparable Properties: Appraisers look at recent sales of similar homes in the area to help determine the market value of a home. If homes with similar features in the same neighborhood are selling at a particular price, this will influence the assessed value of the home in question.
- The Property: A home’s physical features such as the age of the home, its square footage, the number of bedroom and bathrooms, lot size, location, view etc., are all taken into consideration when an appraiser is determining the value of a home. Permanent structures on the property, such as an in-ground pool or sprinkler system also impact the value. However, movable structures like sheds and above ground pools are not included in the valuation.
- The Structure: Appraisers look at the overall structure and condition of the home. The quality and condition of things like the foundation, roofing, and siding, are all taken into consideration when determining the value of the property. Appraisers are looking for cracks, damages, leaks and code compliance. The quality of materials used in the structure are also looked at. The higher the quality of the materials, the greater the value.
- Interior Condition: An appraiser will look at the material and qualify of anything inside the home that would be left behind if you were to move – walls, flooring, windows, doors, major appliances, plumbing, light fixtures, etc. Other permanent features, such as air conditioning, smoke detectors, security systems and fireplaces are also taken into account when determining a home’s value. Any remodeled or upgraded areas can help increase the appraised value. Homes that need major improvements will appraise for a lower value than those that are in better condition.
When is an appraisal required?
Lenders generally require a home appraisal in order to approve financing for a mortgage. This is to ensure that they’re not originating a loan that’s too risky — in other words, that the home isn’t worth less than its sale price.
What Are The Benefits Of An Appraisal?
Just because an appraisal is required doesn’t mean you can’t take advantage of this service. Here’s how an appraisal will benefit you:
- It helps you get approved for a mortgage.
- It ensures you’re not paying more for the home than it’s worth.
- It provides a reason to renegotiate the sale price of the home if the appraisal comes in low.
- It ensures you pay the right amount of property taxes.
What does it mean to get a home inspection?
A home inspection is a thorough investigation into the condition of the property and reveals any repairs that need to be made. The key difference between an appraisal and inspection is that the appraisal focuses on the home’s value, while the inspection focuses on the home’s condition. Unlike a home appraisal, a home inspection is usually optional. However, in some cases a lender or loan program may require a home inspection as part of your mortgage application.
Once a buyer has made an offer, they have the option to hire a home inspector to visit the home and perform an inspection. A home inspection is a tool that can protect the buyer, and the results give a buyer the opportunity to decide if they want to walk away and find another home to purchase, buy the house “as-is” or attempt to negotiate with the seller and hold them responsible for the repairs before the home is officially sold. Generally, the fee for a home inspection is between $300 and $500, and is based on a number of factors, including the home’s size and where it’s located.
When is a home inspection required?
Home inspections aren’t usually required by lenders, but they’re strongly recommended so that the homebuyer fully understands the home’s current condition, and knows the likelihood of any future issues before closing.
A home inspection contingency is typically included in the purchase agreement, hammering out details about the home inspection’s timing and findings. If it uncovers major structural issues, for example, the buyer will then have the right to back out of the purchase. Or they might request a reduction in the home price or repairs by the seller.
Differences between an appraisal and inspection
Although home appraisals and home inspections are somewhat similar, there are a few key differences.
- Purpose. The purpose of appraisal is to determine the fair market value of the property, while an inspection determines the condition of the home and identifies any items in need of repair.
- Required versus optional. While a home appraisal is traditionally required by mortgage lenders, a home inspection generally is not required.
- Who can perform it. A home appraisal is performed by a home appraiser who evaluates the home’s value, while a home inspection is performed by a home inspector who evaluates the home’s condition.
Similarities between an appraisal and inspection
Home appraisals and home inspections have a few similarities, and this can explain why many people get them confused.
- Both examine the interior and exterior condition of the home. Some of the information gathered by an appraiser and an inspector may overlap, but the aim of the two processes is different.
- Both offer some sort of protection to the buyer. An appraisal ensures that you get the proper loan amount and that the house is worth enough to secure the loan. An inspection, meanwhile, identifies any repairs that need to be made, giving the buyer the opportunity to walk away, buy the house as-is or negotiate for the seller to make repairs.
- The buyer typically pays. For both an appraisal and an inspection, the buyer pays because they’re the party receiving a benefit from the process.
The inspection and the appraisal are critical steps when buying a home, and you don’t need to manage them by yourself. While they both involve examining the home, appraisals and home inspections have different aims. Let’s connect today so you have the expert guidance you need to navigate the entire homebuying process.
SOURCES: https://www.mykcm.com/blog/whats-the-difference-between-a-home-inspection-and-an-appraisal, https://www.lendingtree.com/home/mortgage/home-appraisal-vs-home-inspection-whats-the-difference/https://www.bankrate.com/real-estate/home-appraisal-vs-inspection/#prepare, https://theinspectorscompany.com/2018/05/03/house-appraisal-vs-house-inspection-company/?matchtype=&network=g&device=c&adposition=&keyword=&campaign=1045407062&adgroup=50790394989&gclid=Cj0KCQjwxYOiBhC9ARIsANiEIfbURkr2oH29pXkknnj9Pyh45V-BJxZgy8m0GRy9CLEFAiZzSq7guiYaAiukEALw_wcB,