The difference Between a Home Inspection vs Appraisal
When buying a home, there are many different stages to go through before it belongs to you. A home inspection and home appraisal are two of these important stages that can concern buyers.
If you confuse appraisals and inspections, you aren’t alone. Both the inspection and the appraisal involve a professional examining the property and producing a report, however, they aren’t the same.
The inspection focuses on the condition of the home, and the appraisal provides a valuation. Let’s take a closer look at what you can expect from an appraisal vs inspection.
What is a Real Estate Appraisal?
An appraisal is used to find the value of a home. Your lender requires an appraisal so that they know they aren’t lending more than the property is worth. Since the property will be used as collateral for the loan, the lender wants to make sure it is worth the price you have agreed to pay.
If the property is worth less than the mortgage, the lender is at risk of losing money should you fail to keep up with the mortgage payments. To reduce the chance of this happening, the lender requires an appraiser to independently assess the value of the home.
If the appraisal shows that the property is worth the amount you have offered or more, then the sale can progress. But if the appraiser concludes that the home is worth less than the price you have agreed with the seller, there could be problems.
What Happens During a Home Appraisal?
The appraisal is carried out by a licensed professional who has to be independent when assessing the value. The appraiser considers many factors when determining the price. They will include the location of the home, its features, its condition, the number of bedrooms and bathrooms, and more in their assessment.
The appraiser will gather information online and visit the home to help find the value. Comparable sales information will be found to get an accurate picture of the current value.
These comps will normally be similar homes that have sold in the same area within the last three months. If there haven’t been many sales in the area, they might have to use comps further away. The differences between the properties will be factored into the appraiser’s assessment to find an accurate valuation of the home.
An appraisal report will be created, giving an estimate of the current market value. This will follow the Uniform Standards of Professional Appraisal Practice, and the homebuyer will also receive a copy. The lender will use this assessment in their decision to approve the home loan.
Is an Appraisal Necessary?
Most of the time the lender will require an appraisal to ensure they aren’t taking on too much risk. But in some situations, although rare, an appraisal won’t be required.
The threshold for appraisals, set by federal regulators, has increased to $400,000. But even if your home is under that threshold, there is a good chance an appraisal will still be required. This threshold doesn’t apply to government-backed programs like FHA loans, VA loans, USDA loans, as well as Fannie Mae and Freddie Mac.
If you have a privately held mortgage that isn’t insured by the government, the threshold could apply. Despite this, many lenders need an appraisal to be completed to minimize their risk.
There are guidelines from Fannie Mae and Freddie Mac that can allow an appraisal waiver. However, the rules can be complicated and depend on the down payment and the number of units being purchased or refinanced.
Even if an appraisal isn’t required, there can be benefits to getting one anyway. It will show you that you aren’t paying too much for the home and could help in negotiations with the seller. It might improve your chances of approval with the lender and will show you how much you should be paying in property taxes.
What if the Appraisal is Low?
The lender isn’t going to finance a loan for more than the property is worth, so if the appraisal comes in lower than expected, there could be problems. This can mean renegotiating the price with the seller or funding the appraisal gap yourself. Since your finances might already be stretched, finding thousands of dollars to cover the difference could be challenging.
Low appraisals can be more likely in rising seller’s markets when the comparable sales data lags behind the current market conditions. When there are fewer homes available to meet the demand from buyers, prices will increase. Buyers will have to pay more to get the home they want due to the competition, which drives up house prices. Situations like this make low appraisals more likely, though they aren’t common overall.
Even though a low appraisal might seem like a bad thing, it can benefit buyers. It might result in the seller reducing the sales price and making sure the buyer is paying a fair price for the home.
If the seller won’t budge on the price, an appraisal contingency allows the buyer to walk away with their earnest money deposit.
If all else fails, it is possible to dispute the appraisal assessment and have a new appraisal conducted. However, for this to be successful there needs to be some evidence that the appraiser made a mistake in their findings. It also means more expenses for the buyer, who has to pay for another appraisal. And even if there is a new appraisal, there is no guarantee the result will be any different.
Even though the appraisal can be a stressful time for the buyer and seller, most of the time the appraisal won’t be low. The appraisal could also be higher than the price offered, and if that happens, the buyer will instantly have more equity when the sale closes.
What Does a Home Inspection Process Involve?
Before you buy a home, you should ensure you aren’t making a big mistake. Your finances will be tied to the property for many years, so you don’t want any nasty and expensive surprises.
When you have an inspection on a property you want to buy, the inspector should uncover any issues you’ll want to know about before purchasing.
There could be serious damage to the structure of the home that isn’t obvious to the untrained eye. Perhaps the HVAC system is nearing the end of its useful life, something that will be costly to replace. The home inspection will alert buyers to issues that could help them avoid costly bills later on.
When the home inspection happens, you don’t have to attend, but it can be a good idea. If you have any questions about the condition of the property, the inspector can address these concerns.
What Happens During a Home Inspection?
An inspection can take several hours, and it is normal for the buyer or their real estate agent to hire the inspector. It is also the buyer who pays for the inspection even if the lender requires it. After a buyer’s offer has been accepted with a home inspection contingency included, the inspection can be scheduled.
During the home inspection, the inspector will examine the home to assess the condition. Some of the major parts of a home the inspector will look at include:
- Roof – Are there signs of damage, and how old is the roof?
- Exterior – Is the structure sound?
- Plumbing – Is there any indication of water leaks?
- HVAC – Does the AC system function?
The inspector will find issues with the home that may not be obvious. They will also highlight potential issues that you should be aware of if you do decide to buy the home. Additional testing may be required depending on the location of the home or things found during the inspection. The buyer might be advised that extra tests are necessary to test for radon, termites, mold, and more.
With the inspection complete, the inspector will create a report highlighting any damage found and give their assessment of the home. When more serious issues are uncovered, this report can be used to negotiate with the seller. If there are serious structural issues, or if the seller isn’t willing to make repairs or reduce the price, the buyer can walk away.
Not everything mentioned in the inspection report is something that needs to be negotiated with the seller, however. Normal wear and tear should be expected and shouldn’t be something that puts you off buying the home.
Do You Need a Home Inspection?
While your lender may not require a home inspection, it is usually recommended. The inspection will show you any current issues and reveal potential future problems that you might have to deal with.
When purchasing a home, it is common to include an inspection contingency. This contingency gives the buyer the chance to back out of the purchase with their earnest money deposit should serious problems be found during the inspection.
While many issues could be resolved with the seller, allowing the purchase to continue, some things are more serious. The seller may agree to make repairs or reduce the price for many things found by the inspector. But if the home is found to have structural issues, the home inspection contingency lets the buyer move on and search for another property.
Comparing Inspections and Home Appraisals
There are similarities between inspections and appraisals as they both help ensure the home is worth the price and show that it is safe. Home inspectors and appraisers will highlight issues with the property, though the inspection is more thorough. This protects the buyer and helps reduce the risk for the lender.
Inspectors and appraisers are trained and licensed, and it is usually the buyer who has to pay for these services. But there are many differences as well.
An appraisal focuses on the value and is based on the local market and the home’s condition. Instead, the inspection makes sure the home is safe to live in, checking the condition of the main features and reporting that to the buyer.
The lender doesn’t necessarily require home inspections, but appraisals usually are. The appraisal could prevent you from getting the loan you need to purchase the home, but the result of the inspection won’t normally affect this.
Summing Up Home Inspections and Appraisals
When you start the process of purchasing a home, some of the home buyer stages can seem complicated and confusing. Appraisals and home inspections are both important stages in the process, but they aren’t the same.
The appraisal and inspection can sound like daunting stages on your way to purchasing a home, but they don’t need to be intimidating. When you are purchasing a home, understanding these stages and how they affect your purchase could make the process less stressful.
Both an inspection and an appraisal can help the buyer avoid making a bad decision on a home. They could prevent you from spending too much on your next home, or from buying a property that has serious structural damage.
While these might be an unwanted extra expense, avoiding them, even if you can, might not be the best decision.
About the author: This article was written by Luke Skar of MadisonMortgageGuys.com. As the Social Media Strategist, his role is to provide original content for all of their social media profiles as well as generate new leads from his website.
We provide award-winning customer service to clients who need to purchase a home or refinance an existing mortgage.
