Appraisal Vs. Inspection: A Guide

If you’re a first-time home buyer, the differences between appraisals and inspections can be confusing. Understanding the distinctions is crucial because, in many cases, you’ll need at least an appraisal before your lender approves your mortgage.

Let’s explore the ins and outs of appraisals and inspections so you can better understand these vital steps in the home buying process.

If you’ve asked yourself, “Are appraisals and home inspections the same?” you’re not alone. That’s why it’s important to know how they differ.

An appraisal is a real estate professional’s independent estimation of a home’s fair market value. It determines how much a home should sell for after an evaluation of its physical structure and systems. On the other hand, an inspection solely assesses the physical structure and systems of a home to determine if repairs are needed. An inspector’s goal is to ensure the home is structurally sound and not make a judgment on how much the house is worth.

While most mortgage lenders require an appraisal as part of the home buying process, they usually don’t require inspections. That said, many home buyers order an inspection to protect their investment.

Home Inspections Vs. Appraisals: At A Glance

A real estate appraisal assigns a dollar value to a home. Appraisers are typically required to have no connection to the mortgage lender to discourage potential bias and help ensure fair market value.

An appraiser weighs several factors to estimate a home’s market value, including its location and condition. They also compare the prices of “comps,” recently sold similar homes in the area. However, comps are secondary to the overall condition and features of the house.

The appraiser’s report helps lenders decide whether to approve a mortgage loan.

An appraiser’s job is to produce an unbiased estimate of a home’s value. They follow a standardized format established by the Uniform Standards of Professional Appraisal Practice to help ensure a fair valuation.

Appraisers can collect information for their report by walking through a house, researching it online or conducting a drive-by appraisal. To determine the market value of a home, an appraiser will likely evaluate:

• The overall condition of the home
• The home’s square footage
• The number of bedrooms
• Available storage space
• The lot size
• Comps and the state of the market

The lender and borrower both receive a copy of the final appraisal report.

When Do You Need An Appraisal?

Mortgage lenders typically require an appraisal for conventional loans and government-backed loans from the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA) and the U.S. Department of Agriculture (USDA). Lenders require home appraisals to verify a property is worth the amount a home buyer will pay.

While appraisals are typically required for mortgages, some cash purchases and refinances don’t require an appraisal.

The Average Cost Of An Appraisal

Average home appraisal costs vary throughout the country. According to HomeAdvisor, the average price of an appraisal ranges from $313 – $422.

What If The Home Gets A Low Appraisal?

Issues with a home’s appearance, location, floor plan, appliances and environmental factors can contribute to a lower appraised value. So what happens when the appraisal comes in lower than the agreed purchase price?

Most lenders won’t approve a mortgage for more than the appraised value. When this happens, a buyer has a few options:

• Cover the appraisal gap
• Negotiate a new price with the seller
• Walk away from the purchase

A buyer can also dispute a low appraisal with a reconsideration of value (ROV). If your lender grants the ROV, you can use it to explain why you believe the appraiser undervalued the home. The appraiser will review your information and provide additional details that support their conclusion or adjust the valuation.

Why Do Lenders Require Appraisals?

An appraisal helps a lender ensure the home is worth the amount the home buyer wants to borrow. An independent appraisal helps ensure a lender isn’t issuing a loan for more than a home’s fair market value.

A home inspection is an objective, comprehensive evaluation of a house’s physical condition that can offer home buyers peace of mind. An expert inspector checks the roof, electrical systems, plumbing, foundation, HVAC system and other parts of the home’s structure and systems. Their report can point out any problems that may require a buyer’s attention.

The American Society of Home Inspectors (ASHI) guides inspectors on the observations to include in their reports.

A home inspection usually occurs after a seller accepts an offer. The home sale is often contingent on receiving a favorable inspection report.

It typically takes an inspector 2 – 4 hours to perform an inspection, and prospective buyers are typically invited to attend.

Home inspection reports may be ready in 24 – 48 hours and often include photos.

What’s Not Included In A Home Inspection?

Home inspectors generally don’t evaluate certain key items as part of their final report. Here are some to keep in mind:

• Environmental hazards: A home inspector typically can’t check for asbestos, radon or other environmental red flags.
• Renewable energy systems: Inspectors don’t evaluate renewable energy systems, like solar panels, wind turbines and geothermal devices.
• Alarm systems: The functionality of smoke detectors, carbon monoxide alarms and security systems aren’t included in home inspections.
• Pest inspection: Home inspectors aren’t going to check for You’ll need to make arrangements for a separate pest inspection.

When Is An Inspection Required?

Inspections aren’t usually required, putting the decision to pay for a home inspection in the buyer’s hands. While inspections aren’t generally mandatory, they can be a wise investment that limits a buyer’s risk of encountering unexpected and expensive issues after closing.

Average Cost Of A Home Inspection

The average cost of a home inspection in the U.S. is $342. The cost typically ranges from $281 – $403. A home’s size and age and an inspector’s travel time can affect the final price.

What Happens If A Home Inspector Finds Serious Problems?

What happens if the home inspector finds a lengthy list of red flags on your dream home? You can accept the flaws and negotiate a lower purchase price or request that the seller pay for the repairs.

Buyers can also back out of the deal. However, before walking away, they should weigh the severity of the problems against all other options, including negotiating with the seller.

We’ve compiled answers to common questions home buyers have about inspections versus appraisals.

What does an appraiser look for versus an inspector?

Both processes serve vital roles when buying a home – but their objectives differ.

Appraisals determine a property's value by considering its appearance, condition and comparable sale prices. Home inspections assess the physical condition of a property by evaluating a home’s interior and exterior condition and identifying areas in need of repair.

Do the inspection and appraisal happen at the same time?

The inspection and appraisal can overlap or even be combined. However, coordinating the schedules of the home inspector and home appraiser doesn’t provide much of a benefit.

What’s checked during an appraisal?

Appraisers determine whether a home’s asking price matches (or surpasses) its current market value. They evaluate the property’s condition and consider the selling prices of comparable homes.

What hurts an appraisal?

Poor aesthetics, outdated appliances, a bad floor plan and evidence of hazardous materials can hurt a home’s appraised value.

When buying a home, an appraisal is usually a mandatory step. On the other hand, a home inspection is often optional. Still, spending a few hundred dollars for an inspection may save you thousands more in unexpected repairs after you close on the home.

Now that you know the differences between an inspection and an appraisal, are you ready to start your home buying journey? Apply for a mortgage today!