Home inspection vs. appraisal
Quick insights
- A home inspection assesses the physical details of a property, while an appraisal evaluates the market value.
- Buyers usually order inspections for their protection; lenders require appraisals to finalize a mortgage loan.
- Both steps can lead to price negotiations but focus on different aspects of the real estate deal.
Buying a home involves several professional evaluations that protect buyers, sellers and the lender. Two of the most common steps in this process are the home inspection and the home appraisal. While they often happen around the same time, each serves a distinct purpose. To help you navigate both steps, let’s look at how they differ and why both matter.
What is a home inspection?
A home inspection is a thorough look at a property’s physical condition. A buyer typically hires an inspector after an offer is accepted. This step is often a “contingency” in the purchase contract, meaning you can walk away after getting the inspection report.
What a home inspection typically covers
A licensed home inspector looks at visible and accessible parts of the home, such as:
- The roof, siding and outside drainage systems
- Electrical wiring, plumbing and HVAC systems
- The foundation, basement or crawl space
- Windows, doors and accessible insulation
- Large appliances that stay with the home
The goal is to find safety hazards, various problems and potential repairs that are worth documenting.
Why inspections matter to homebuyers
An inspection may help you:
- Understand exactly what you’re buying
- Decide whether to proceed with the purchase as planned
- Ask the seller to fix issues or offer seller concessions
- Create a budget for future maintenance
Inspections provide facts you may need to negotiate. Depending on the findings and your contract, you can use the report to request changes to the purchase agreement.
What is a home appraisal?
A home appraisal is a professional estimate of what a home is worth. Your lender usually chooses the licensed appraiser. The goal is to confirm that the value of the home is worth the loan amount.
What an appraiser looks at
An appraisal typically reviews:
- The home’s size, layout and features
- The sale prices of similar homes (comparable sales) in the area
- Current trends in the neighborhood
- Overall quality and upgrades
- The current state of the housing market
While the appraiser may notice major problems, they don’t dive deeply into the home’s systems like an inspector would.
Why do lenders require appraisals?
Lenders use the home as collateral for the loan. This means that if you stop making payments, the lender needs to know they can sell the home to cover the debt. For that reason, an appraisal is required for most mortgage loans:
- Conventional loans typically use an appraisal to confirm market value for the lender.
- FHA loans often need an appraisal to check the value and ensure the home meets basic safety standards.
- VA loans usually require appraisals to confirm the value and verify the home meets minimum property requirements.
- Jumbo loans could have strict appraisal standards because these loans involve higher amounts of money.
If the home appraisal value comes in lower than the offer price, it could affect loan approval and require negotiation.
Inspection vs. appraisal: Key differences
While both involve a professional visiting and evaluating the property, the purposes are very different:
- Focus: Inspectors check “how it works.” Appraisers check “what it’s worth.”
- Who it protects: The inspection typically protects the buyer. An appraisal primarily protects the mortgage lender.
- Main goal: An inspection may identify potential repairs or safety concerns. An appraisal assesses the market value.
- Outcome: Inspection findings may lead to repair requests or credits, while appraisals may affect the financing terms.
- Scope: Inspections are detailed and technical, while appraisals are broader and market-based.
- Timing: Both usually happen after an offer on the home is accepted, but rarely at the exact same time.
Example scenario: When both come into play
Imagine a first-time homebuyer is buying a charming 1950s home.
- The inspection reveals aging plumbing and an older roof that may need attention sooner than expected.
- The appraisal comes in below the purchase price because similar homes nearby sold for less.
Now, the buyer and seller may need to negotiate the price based on value, not just condition. Same house. Two reports. Each helped the buyer make an informed decision.
In summary
While home inspections and appraisals may seem the same, they serve distinct roles in a home purchase. One reports on the physical condition of the home, while the other ensures the price is right for the loan. Together, they can help homebuyers move forward with more clarity, ask questions and make informed decisions.
If you want to learn more about buying a home, contact a Home Lending Advisor. They can help you understand and navigate the process.
