If you take out a mortgage to buy a home, you’ll likely hear the terms appraisal and inspection thrown around quite a bit. While they may sound similar, they both have different purposes. Keep reading to learn about the differences and how they pertain to your purchase.
What is a Home Appraisal?
First, you should know that the home appraisal is almost always required. It’s how the lender knows there is enough value in the collateral provided for the loan. For example, if you apply for a $200,000 loan, but the home is only worth $150,000, there isn’t enough collateral for the lender to make a loan.
You’ll need a licensed appraiser to do the home appraisal for you. The appraiser will evaluate the interior and exterior of the home. He will likely take measurements and take notes on the home’s condition. He will also ask questions about any upgrades done on the home.
The appraiser then looks for comparable sales in the area. Comparable sales are homes that sold within the last 6 months to one year. These homes should be of similar size and have similar features as the subject home. This is how the appraiser comes up with the fair market value for the home.
What the Home Appraisal Is Not
The home appraisal is not an inspection. The appraiser does look at the condition of the home, but only at the surface level. He doesn’t look to make sure the electrical wiring is safe or that the roof has at least three more years on it. He may notice small things that are wrong with the home, but typically nothing that would prevent you from buying the home.
The appraiser is not a licensed inspector. You can’t expect him to tell you about anything that’s wrong with the home that you can’t see yourself. His main job is to figure out the home’s value and that it is in basic good condition.
What is an Inspection?
An inspection is not required by most lenders, but we highly recommend it. The inspector will also walk through the home, but in a much more detailed fashion. The inspector looks for things that are wrong with the home. He will look at all of the systems in the home and test everything to determine the home’s condition.
The inspector will report on things like the foundation, roof, electrical system, appliances, and any other main functions of the home. The inspector will write a very detailed report (up to 50 pages sometimes) that will tell you everything about the home – the good and the bad.
You can then use the inspection report to re-negotiate the conditions of the home purchase if the inspector finds something wrong with the home. This can only occur if you put a home inspection contingency on the contract, though. If you did, you have until the specified date in the contract to discuss your options with the seller.
Sometimes the fixes are small enough that a seller is willing to make the changes for you. Other times it may take a little more negotiating. You may, for example, ask for a lower purchase price or you may ask the seller to give you a credit to fix major issues if the seller isn’t willing to make the repairs himself.
What the Inspection Is Not
The inspection doesn’t tell you or the lender the value of the home. The inspector is only focused on your property and its condition. You pay for the inspection yourself and the report comes to you as you pay for the service.
The lender doesn’t have anything to do with the inspection. It doesn’t have any effect on your loan status or the type of loan program you can get. The inspection is for your own good to help you make a solid decision on the purchase of the home as the inspector can find things wrong with a home that you may not see.
Both the home appraisal and inspection add value to a home purchase. The appraisal is required, but again, it can help you know that you are making a solid investment. You wouldn’t want to pay more for a home than it’s worth just as a lender wouldn’t want to give you a loan for more than a home is worth. The inspection helps you feel reassured that you are making a solid decision in your purchase.