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Home Inspection Vs. Appraisal

9-Minute Read
Published on October 29, 2021
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Looking to buy a home? Navigating the world of real estate can feel intimidating if you don’t know home buying terms. And with an investment as large as your home on the line, we know you want to feel confident in your decisions.

Here’s the good news: you can.

Getting an appraisal and home inspection can help you maximize benefits while minimizing potential risks. But what is an appraisal, anyway? When it comes to a home inspection vs. appraisal, what's the difference, and how can these services help you buy a home confidently?

Contrary to what you may have heard, appraisals and inspections are not the same. While both services include assessing the property, they’re doing so for completely different reasons and to benefit the homeowner in completely different ways. Appraisals help you understand a home’s value, while inspections help you understand a home’s condition.

Ready to learn more? Read on to better understand how appraisals and inspections differ and how each one can help you as a home buyer.

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What Is A Real Estate Appraisal?

An appraisal is a process required for almost all mortgage loans that’s used to determine the estimated market value of a home. By law, appraisals are done by licensed third parties not connected with a mortgage company. To determine the value, an appraiser factors in the home’s location, its condition and the value of similar recently sold houses in the area. These are also known as comparables, or comps. Appraisers may gather information online, by walking through the home or with a drive-by appraisal.

After collecting and analyzing comp data, an appraiser creates a final report of the home’s market value. This report helps lenders make a final decision on whether to approve a loan. The lender typically cannot lend more than 97% of the appraised value of the home, so if the appraisal comes back lower than the offer price you’ll have to pay the difference out of pocket, renegotiate with the seller or walk away from the deal. If the appraisal comes back higher than the offer price, you’ll automatically have more equity in the home.

What Is The Real Estate Appraisal Process?

The appraisal process includes walking through the home, researching comparables and creating a final appraisal report. Typically, this process begins after an offer is accepted. Since lenders stand to lose the most if a home is inaccurately priced, they will usually order the appraisal. However, buyers typically foot the bill.

After your lender orders the appraisal, a neutral third party examines the home’s interior and exterior, analyzes comparables and forms a professional opinion on the home’s market value. Appraisers present this information in a report given to both the lender and borrower. These reports follow formats set forth by The Uniform Standards of Professional Appraisal Practice to maintain ethics. As long as the appraisal does not conflict with any offer contingencies, the lender will begin finalizing your loan terms. You will receive closing documents and close on your loan knowing you got a fair price!

When Is An Appraisal Required?

Most lenders require an appraisal before you can close on your loan. However, there are some rare conditions where an appraisal may not be necessary.

In October 2019, federal regulators effectively changed the threshold for appraisals from $250,000 to $400,000.1 This does not mean all home sales under $400,000 are exempt from appraisals. This new regulation does not apply to mortgages held or backed by the Federal Housing Administration, Department of Housing and Urban Development, Department of Veterans Affairs, Fannie Mae or Freddie Mac. Essentially, this change affects privately held mortgages that are not federally backed, and even these lenders may still choose to require appraisals. With about 70 percent of single-family homes financed through federally backed mortgages and lenders looking to protect their financial interests, it’s more likely than not that you will need an appraisal.2 

Benefits Of An Appraisal

Just because it’s 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 what it’s worth.
  • It provides a reason to drop the sale price of the home if the appraisal comes in low.
  • It ensures you pay the right amount of property taxes.

What If The Appraisal Is Low?

Having the appraisal come in low can be stressful for both the buyer and seller. Low appraisals aren’t common, but can happen – especially in a seller’s market. If there aren’t enough homes on the market to satisfy buyer demand, home prices can skyrocket. Some buyers may even be willing to pay over appraised prices to be competitive. As a seller, there are a few things you can try to prevent the deal from falling through if the appraisal comes in low

  • Lower your asking price.
  • Ask the buyer to pay cash over appraisal.
  • Dispute the appraisal.
  • Ask for a second appraisal.

 

As a buyer, low appraisals may work in your favor. The seller may be willing to lower the asking price. This means you can walk away confidently knowing you paid a fair price. However, the seller may be willing to hold off on the sale in hopes of receiving a better – or cash – offer down the road. Having a real estate agent that knows the market can help you make informed, competitive decisions during your transaction. 

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What Is A Real Estate Inspection?

A home inspection is a thorough examination of a home to determine its present condition and uncover any potential red flags. During the inspection process, a home inspector will examine the structure, roof, attic, basement, electrical system, plumbing, exterior and other items on their inspection checklist. If you’re present during the inspection, the inspector will take you through the process, point out issues and reveal anything that could be a problem in the future.

After the inspection, you’ll receive a report of the findings. This report will describe what was inspected and list anything that requires repair. Based on these findings, you may want to negotiate with the seller to have them complete the repairs or pay for part (or all) of the repair costs.

What Is The Real Estate Inspection Process?

The real estate inspection process involves checking the condition of a home. Typically, this process begins when requested by the buyer as a contingency in the offer. If the offer is accepted, the buyer can then hire an inspector of their choice to examine the home’s structural integrity.

An inspector looks for major safety issues or damage in a home. This can include the:

  • Exterior (Is the home structurally sound?)
  • Roof (Is the roof old or damaged?)
  • Electrical system (Are there safety issues? Does the electricity work?)
  • Plumbing (Are there water leaks or sewer line clogs?)
  • Water (Is there water damage? Is water pressure at a safe level?)
  • HVAC systems (Does the heater or AC system work?)

Inspections can help you catch many potential problems before buying a home, but not all. Some potential issues require special equipment or may need to be ordered separately, including:

  • Radon testing
  • Pests or termites
  • Chimney inspections
  • Mold inspections

After an inspector examines the home, he or she will report findings to the buyer. You may even be able to request a walkthrough to have potential issues pointed out directly. After an inspection report is received, the buyer and seller can negotiate repairs or other contingencies. If an agreement is reached, the home sale moves forward.

When Is A Home Inspection Required?

While an appraisal is almost always required, inspections are not. Most of the time, the buyer can decide whether to request an inspection. In a competitive market, some buyers consider waiving inspection contingencies to appeal to sellers. However, it’s important to remember inspections can help protect buyers from potential financial risks. If you aren’t sure whether you should have an inspection done, consider consulting your real estate agent or other professional.  

Benefits Of An Inspection

An appraisal is a requirement of a mortgage because it’s in the best interest of the lender to get it done. An inspection should be a requirement for you to buy the home because it’s in your best interest to get it done. Here’s how you can benefit from this service:

  • It can help you protect your investment and reduce any 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.

Home Inspection Vs. Appraisal: What’s The Difference?

Plain and simple, a home appraisal determines the value of the home while a home inspection determines the condition. And since each serves a different purpose, there are a few other differences when it comes to an appraisal vs. inspection:

  • Home appraisals are required by a lender. Home inspections aren’t.
  • You must set up an inspection yourself while the lender will order an appraisal for you.
  • An appraisal may impact your ability to get the loan amount you need. An inspection won’t.
  • Appraisers typically only spot things visible to the naked eye, whereas inspectors use special devices and training to spot deeper issues.
  • Home buyers are allowed and encouraged to walk through the home with the inspector during the inspection. Typically, an appraiser will go through the appraisal process alone.
  • An inspector will explain and educate during the interactive process. An appraiser won’t tell you their findings until they complete their report.
  • A home inspection only examines the condition of the home when making the assessment. A home appraisal considers the condition of the home, comparable home prices, lot size, home features, area crime rates and school zones.
  • The inspector and appraiser have a different set of skills, are trained and certified in different processes and have different areas of expertise.

What Do Home Appraisals And Home Inspections Have In Common?

While they have different processes and serve a different purpose, appraisals and inspections do have a few things in common.

  • They both benefit the homeowner and the lender because they ensure the home is worth what you’re paying for it and that it’s safe to live in.
  • Both will uncover any issues that may affect the sale as well as help you feel secure in your decision to either purchase the home or walk away from the deal.
  • Both services are completed by a third-party professional who has nothing to gain or lose from the results so you can feel confident in their findings.
  • Usually, the homeowner is the one who pays for both the appraisal and the inspection.
  • While it may be more expensive, it’s recommended that you get both an appraisal and an inspection.

Why Should You Get An Appraisal And An Inspection?

The home assessment that happens during the appraisal should never be used in place of a home inspection. An appraiser seeks to find the value of the home, so their inspection will be different from that of an inspector who seeks to find issues with the home. They’ll be looking for different things as they walk through the home.

The inspection that happens during the appraisal process will not be as in-depth as a separate home inspection. As the potential homeowner, it’s in your best interest to get an inspection along with your appraisal.

Wondering whether you should get an appraisal or inspection first? Usually, it’s best to put the inspection first. If expensive repairs or deal-breakers come up during the inspection, the appraisal is a moot point. This means planning the appraisal after inspection may wind up saving you time and money. 

Choosing The Right Inspector

A home inspection won’t be as great of a benefit to you if you hire the wrong person for the job. When hiring an inspector, get recommendations from your real estate agent, family members or friends.

Once you get a name, do your research on the inspector and their company by asking for references and checking out online reviews. You want to work with someone who’s certified and insured and won’t be influenced in their examination. That means you don’t want to hire someone who also does repairs and renovations, as they may make recommendations based on future business they could get from you. If you can, make sure to attend the inspection so you can ensure you’re getting a thorough inspection, learn more about the home and ask the inspector questions as you walk through the house.

 Appraisal And Inspection Costs

While these services are invaluable for home buyers, they do come with a cost. According to HomeAdvisor, you can expect to pay $300 – $400 for an appraisal3 and $270 – $400 for an inspection.4 Of course, the prices for either service may go up if you have a larger home, a multi-unit home or a complex property.

Is It Really Appraisal Vs. Inspection?

While the title of this article is “Appraisal Vs. Home Inspection,” they aren’t competing entities. Both services can work together to protect you and ensure the large investment you’re making is a good one. That’s why it’s recommended you get both completed when you’re going through the home buying process.

Want more information to help you buy a home? Learn more about today’s mortgage rates and see what you may be able to afford with Rocket Mortgage®.

Apply for a Mortgage with Quicken Loans®

Call our Home Loans Experts at (800) 251-9080 to begin your mortgage application, or apply online to review your loan options.

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Victoria Araj

Victoria Araj is a Section Editor for Rocket Mortgage and held roles in mortgage banking, public relations and more in her 15+ years with the company. She holds a bachelor’s degree in journalism with an emphasis in political science from Michigan State University, and a master’s degree in public administration from the University of Michigan.