Whether you’re a homebuyer or seller, it’s easy to confuse a home appraisal and a home inspection. After all, both involve a professional visiting your home and evaluating the premises.
However, there are key differences between an appraisal and inspection, including the purpose of the visit itself. In short, an appraisal helps you understand how much a home is worth, while an inspection helps you understand its condition. Here, we break down some of the major differences between a home appraisal vs. a home inspection.
What is a home appraisal?
An appraisal is a process used to determine the value of a home. Usually, if the homebuyer is seeking financing for the purchase, the bank or mortgage lender will require the property be appraised. This ensures that the property is not worth less than the amount of the loan — a risk no lender would be eager to take.
During a home appraisal, an appraiser will conduct a walkthrough of the home you’re looking to buy to assess the features of the property (such as number of bedrooms and bathrooms), as well as any improvements or renovations that could have affected its value. The appraiser will also look at comparable properties in your area, or comps, to compare against what other similar homes have sold for, and may also take details on the overall neighborhood into consideration.
Using this information, the appraiser will then complete an appraisal report with their estimate of the home’s current market value. The lender then uses this sum in determining the amount of the loan they’ll approve. Generally, you won’t get a mortgage for more than 80 percent of the property’s appraised value. If the appraisal comes in low — that is, if the appraised amount is lower than the loan amount — that appraisal gap will have to be made up by the buyer, or it may even derail the deal.
The buyer usually pays the appraisal cost, which is typically somewhere between $300 and $400 and paid as part of the transaction’s closing costs.
When is an appraisal required?
If you’re financing your home purchase, an appraisal will almost certainly be mandatory: Mortgage lenders generally insist upon an independent appraisal to confirm a property’s worth before they will approve financing. Some lenders also require an appraisal for a refinance.
What is a home inspection?
A home inspection entails a professional inspector — often someone licensed or certified by the state — visiting the house and thoroughly evaluating its condition. The inspector is not looking for how much the home is worth but rather what kind of physical shape it is in. Inspectors examine the home for any damage, hazards or other problems, whether existing or potentially brewing. They usually look at the HVAC and other major home systems as well as accessing the basement, attic, crawl spaces and looking at both the roof and the foundation.
While the buyer doesn’t technically need to be present for the home inspection, being there can be useful. The inspector can address each area of the home with you and explain the severity of any issues that crop up. This is also an opportunity for you to ask questions about anything you might be concerned about.
This process can take a few hours or more to complete, depending on the size, age and condition of the house. The inspector then produces a written report, offering their opinion of the property and noting any damage. A home inspection contingency is often included in the deal’s purchase agreement, meaning that the purchase is contingent upon the inspection findings. If it uncovers major structural issues, for example, the buyer might request a reduction in the home price or ask that the seller pay for repairs — and they may have the right to back out of the purchase altogether.
When is a home inspection required?
Home inspections aren’t usually required by lenders. But they’re immensely useful for helping the homebuyer fully understand the home’s condition, as well as the likelihood of any future issues, before closing on the sale.
In most cases, the buyer or their agent will be the one to hire the inspector and schedule the visit. The buyer generally pays for the inspection, which will cost about the same as an appraisal: around $300 to $400.
Appraisal vs. inspection: Key differences
Both processes involve a skilled professional examining a home before it changes hands, and both can uncover potential issues that may affect the sale. They cost around the same amount, too. But home appraisals and home inspections have very major differences:
- Purpose: The purpose of an appraisal is to determine the monetary value of a home. This can be impacted by its condition but also hinges on factors like the local real estate market and comparable properties nearby. Whereas a home inspection focuses solely on the home’s condition, to ensure that it is in sound shape and can be safely occupied.
- What is considered: Appraisers will consider factors beyond just the home and grounds, including the neighborhood, surrounding area and what nearby houses have been selling for. An inspector, though, is looking solely at the property, its functionality and its safety.
- Who is present: A home appraisal is typically done without the presence of the buyer or seller, with the appraiser revealing their findings to both parties and the lender once their report is complete. In contrast, the buyer is often encouraged to walk through the home with the inspector so that they can ask questions and understand any issues.
- Who is impacted: Appraisals are mainly between a buyer and the buyer’s lender — their main purpose is to ease the lender’s risk in relation to the loan amount — whereas home inspections are primarily between the buyer and the seller. However, both services can have a potential effect on the home’s final sale price, so in that sense all three parties might potentially be impacted.
How sellers can prepare for both
If you’re selling your home, you can take a few proactive steps to ensure a smooth home appraisal and inspection. Both are important if you want to close relatively quickly and easily.
Ideally, you want the inspection not to reveal issues that could cause problems on your way to the closing table. To prepare, consider completing any repair work you already know needs doing. It’s also helpful to provide copies of any relevant paperwork for the inspector to reference, and to ensure that he or she has easy access to areas that will need to be evaluated, like crawl spaces and electrical boxes.
For the appraisal, while you can’t control outside factors — like your local comps and market conditions — you can make sure your home itself presents well. If you have made any upgrades during your time there, such as a kitchen remodel or an addition, have paperwork and permits available. Also be sure that the lawn and any trees on the grounds are trimmed and tidy, and the interiors clean and well maintained.
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