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Appraisal Vs. Inspection: How Are They Different?

7-Minute Read
Published on January 3, 2024
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Contrary to what you may have heard, appraisals and inspections aren’t the same. While both services involve assessing the property, they serve different purposes and benefit prospective homeowners differently. Appraisals help you understand a home’s value, while inspections help you understand a home’s condition.

Let’s dive deeper into the differences between appraisals and inspections and how each has a specific role when buying a home.

What Is A Real Estate Appraisal?

Most mortgage lenders require an appraisal to establish the estimated value of a home. By law, appraisals are done by independent, licensed third parties with no connection to a mortgage company to help ensure objectivity. To determine a home’s value, appraisers factor in a home’s location and condition and compare the home to similar, recently sold properties in the area, also known as "comps" or comparables.

After analyzing comp data, an appraiser creates a final report detailing the home’s market value. The report helps lenders make a final decision on whether to approve a home loan.

If the appraisal comes back lower than the offer price, you can 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.

The Home Appraisal Process

The appraisal process – which usually kicks off once your offer is accepted – typically begins with an appraiser inspecting the property in person, gathering data online or acquiring information from a third-party individual who collected data through an on-site visit or drive-by appraisal. Next, the appraiser researches the comparables and then generates a final appraisal report.

While lenders typically order the appraisal to ensure the property’s value matches the home buyer’s offer, the home buyer usually covers the bill.

When Is An Appraisal Required?

Most lenders require an appraisal before you can close on your mortgage.

About 70% of single-family homes are financed with federally backed mortgages. Because lenders want to avoid lending more money than a property is worth, you’ll likely need an appraisal. If you’re using a Federal Housing Administration (FHA) to finance your home purchase, you’ll need an FHA appraisal. If you’re using a Department of Veterans Affairs (VA) loan, a VA appraisal will be required before you can close.

However, there are some exceptions. Fannie Mae and Freddie Mac have guidelines outlining when you can get an appraisal waiver. Also, some FHA and VA refinance options don’t require an appraisal.

What Are The Benefits Of An Appraisal?

Just because an appraisal is usually required doesn’t mean you can’t take advantage of it. Here’s how an appraisal benefits home buyers:

  • It helps with mortgage
  • It ensures you’re not paying more for the home than it’s worth.
  • It provides a basis to renegotiate a home’s sale price if the appraisal comes in low.
  • It helps ensure you pay the right amount in property taxes.

What Is A Real Estate Inspection?

A real estate 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 examines 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, pointing out issues and revealing anything that may be a problem in the future.

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

The Home 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 their purchase offer. If the offer is accepted, the buyer can 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, such as:

  • 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 any water damage? Is the water pressure level safe?)
  • HVAC system (Does the heater or air conditioning system work?)

Inspections can help you uncover many problems or potential problems before buying a home, but your inspector may not find all of them. Some issues require special equipment or separate inspections, including:

  • Radon testing
  • Pest or termite inspection
  • Chimney inspection
  • Mold inspection

After the inspector examines the home, they’ll report their findings to the buyer. The buyer and seller can use the report’s findings to negotiate repairs or other contingencies. Once the two parties reach an agreement, the home sale can move ahead.

When Is A Home Inspection Required?

While an appraisal is almost always required, inspections generally aren’t. While buyers can request an inspection at their discretion, appraisers are obligated to conduct a basic check of a property’s health and safety. If they have concerns, they may require the inspection of flagged areas or issues.

In a competitive market, some buyers waive the home inspection contingency to make their offer more appealing to sellers. While waiving the contingency may win you the house, an inspection is a powerful tool that can help protect you from financial risks. If you aren’t sure whether to have an inspection done, talk to your real estate agent or another real estate professional.

What Are The Benefits Of An Inspection?

An appraisal is generally required because it helps protect the lender from lending too much and prevents the borrower from paying too much for a property. An inspection should arguably be a requirement because it’s in a buyer’s best interests. Here’s how you can benefit from a home inspection:

  • It can help protect your investment and reduce potential risks.
  • It can help you confidently determine whether to buy a home.
  • 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 a home, it will help ensure proper construction.
  • It can give you leverage when negotiating with the seller.

Appraisal Vs. Inspection FAQs

Still have questions about home appraisals and inspections? Here are answers to some frequently asked questions.

Do I need a home appraisal and a home inspection?

You shouldn’t use an appraiser's assessment of a home during an appraisal as a substitute for a home inspection. Appraisers and inspectors focus on different aspects of a home.

An appraiser’s inspection isn’t as in-depth as a standard, standalone home inspection. Home buyers can benefit from scheduling a formal inspection of a property’s structural integrity and safety.

Should I get a home inspection or home appraisal first?

It’s usually best to get an inspection first. The appraisal will be unnecessary if the inspector uncovers expensive repairs or deal breakers. You may save time and money if the inspection comes before the appraisal.

How do I find the right home inspector?

Ask your real estate agent, family members or friends for recommendations. Once you get a few names, check for references and read online reviews.

Ideally, your home inspector should be certified, insured and objective. If you can attend the inspection, you can assess the thoroughness of the inspection, learn more about the property and get answers to your questions about the home in real time.

What if my home appraisal is low?

Low appraisals are infrequent, but they happen – especially in a seller’s market. Home prices typically skyrocket when the housing stock is too small to satisfy buyer demand. Some buyers pay more than a property’s appraised value to make a competitive offer.

A low appraisal may benefit a home buyer because the seller may agree to lower their asking price. The seller can also decide to hold off on the sale until they receive a better offer. Rely on your real estate agent’s expertise to help you make informed, competitive decisions.

What if I want to back out of a contract after a home inspection or home appraisal?

Your ability to get out of a home purchase will depend on the language in your agreement. Adding a home inspection and appraisal contingency to your purchase offer can make all the difference.

The Bottom Line

Though it may look like it, appraisals and inspections aren’t in competition. Both processes work together to protect you and ensure the significant financial investment you’re making is a good one. Getting an inspection and appraisal is widely recommended when purchasing a home.

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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.