Finding a house and making an offer are just the starting points in the home purchase process. Once your offer is accepted, you will work with your mortgage lender on a daily basis to submit paperwork and complete the various requirements to buy a home. Even if you are a cash buyer, you will have multiple steps to complete before you are ready for the closing appointment. 

Two of the most important elements of the buying process are the home inspection and home appraisal. These processes help home buyers feel more confident in the properties they are purchasing while assuring lenders that the house is in good condition. 

If you are new to real estate, learning more about these two terms should be key, as they are always on your buying checklist. In this article, we’ll share details about what a home inspection and home appraisal are and how they are similar or different from one another.

What is a Home Inspection?

A home inspection is a comprehensive evaluation of the visible and accessible systems and components of a home (e.g., plumbing, roofing, electrical, structure, heating and cooling, and more). The purpose of a home inspection is to provide a detailed report on the condition of the home at the time of inspection.

Once a seller accepts your bid on their house, you can proceed with the home inspection process. Most buyers usually have 10-14 days to schedule and hold a home inspection.

The buyer hires the inspector and tells the seller the date and time of the inspection – this way, the sellers can be out of the house. The buyer usually attends the inspection to learn more about their future home, but their real estate agent can attend instead if the buyer is unable to be present. 

During the appointment, the licensed home inspector will look at all of the house’s core elements to ensure the property is in good shape. They will look at electrical systems, plumbing, the roof, the foundation, the HVAC systems, and the appliances in a home.

Buyers can also request add-ons based on the needs of the home. For example, you could request a pest inspection to check for termites or a pool inspection if one comes with the house. 

If there are any issues – like a burner on the stove that doesn’t work or excess moisture in the attic indicating a roof leak – the inspector will document it for their final report.

They frequently take pictures throughout the appointment as proof of issues with the home’s interior or home’s structure. Inspections generally last between two to five hours depending on the size of the property. The larger the home, the longer it usually takes to inspect it.  

It’s important to note that a house does not pass or fail inspection. This is simply an overview from an objective third party on the state of the house. The buyer then decides whether the house meets their expectations after completing the inspection.   

Who pays for the inspection? 

In most cases, the buyer pays for the home inspection. They will either pay the home inspector directly or the lender will add the inspection bill to the closing costs.

In a buyer’s market, the seller might cover the inspection costs, but this is uncommon. On average, a home inspection costs between $300 and $500, but larger homes might cost more to inspect.

What is a Home Appraisal?

A home appraisal is a professional opinion on the market value of a home. For example, a seller can list a house for $500,000 but if the appraisal says the home is only worth $400,000 then they might have a hard time finding a buyer who is willing to overpay. Along with the inspection, the buyer has around 10-14 days to schedule the appraisal and take action based on the report.

The appraiser starts with in-depth research into comparable properties. They will look at similar houses that sold within the last 30 days and the prices the buyers agreed on. These comparable properties will usually have similar square footage to the appraised house and should be in the same neighborhood. Pulling a comparable property in a different part of town can over or undervalue the home.

The home appraiser will then look at specific features of the house to see if there are any factors that add value to the property (or detract value). For example, if the owners recently replaced the roof, HVAC system, and kitchen appliances, the fair market value of the home might increase. However, if the structure is in poor condition, then its estimated value will decrease. 

The appraiser will submit a written report on the value of the home and how they reached that conclusion. Buyers can push back against the appraisal and seek a new report if the information is incorrect or they suspect the appraiser is biased.  

Who pays for the appraisal? 

The buyer is required to schedule an appraisal in order to receive a mortgage loan. They will either pay cash for the appraisal directly or they will build this expense into their closing costs. There are times when sellers seek out home appraisals before they list their homes to make sure they are asking a fair price for the property. Most home appraisals cost between $300 and $500 but they can be more expensive if you are looking to buy a larger home. 

Some appraisals are less expensive if the licensed appraiser only needs to evaluate the value of land or if they are reporting the value of a small space like a condo. Plots of land are usually easier to appraise because they don’t have interior systems, rooms, and other home assets to review. Instead, the appraiser will focus on land assets like roads and development like connection to the city sewer system and electrical lines.  

Differences Between Home Inspections and Appraisals

Even though both of these elements are important, there are multiple differences between home inspections and appraisals. Knowing the terminology related to both of these concepts can help you secure the right inspections and reports to get your home loan approved. Here are a few key differences and similarities to keep in mind. 

• Home inspectors evaluate the condition of the home. They care that the roof is in good shape, not how much a good roof adds to the home’s value. 
• Home appraisers calculate the value of the home. They will look at improvements and repairs to determine a fair price for the property.  
• Both inspectors and appraisers are looking out for the best interest of the buyer. They want to make sure the buyer is fully aware of the state and value of the home. 
• Both inspections and appraisals are required by mortgage companies to secure loans. 
• Buyers usually cover the cost of both of these property evaluations.

While the buyer will look at the appraisal report and inspection findings, they also need to submit these documents to their mortgage company for review. This is a standard best practice whether you are applying for a private loan or working with the Federal Housing Administration (FHA) as a first-time homebuyer. 

Additionally, some lenders have specific timelines and requirements for these reports. If you are working with the Department of Veterans Affairs for a VA loan, you might have a smaller window to work with home inspectors or submit your appraisal reports.

Impact of Low Appraisal or Negative Home Inspection

Once the appraisal and inspection process is complete, the buyers can review the reports and decide how they want to move forward. In a perfect world, the inspection will report on a flawless house with the appraisal is perfectly in line with the seller’s asking price. However, this isn’t always the case. There are times when the inspector finds major issues with the house and the appraisal comes in much lower than expected. In this case, the sale is potentially in jeopardy. 

What Happens When the Appraisal is Low

If there is a low appraisal, the buying process comes to a stop. Lenders will not approve mortgages for more than the appraised market value. This is because the buyer is less likely to sell the home for the current asking price in the future, which means the bank might not recoup its money in the next home sale. 

In this case, the buyer can approach the seller and try to negotiate a lower selling price that matches the appraisal. The seller can either walk away from the deal or they can accept the lower offer. If the seller walks away, they risk facing the same problem with the next buyer – unless they can find a cash buyer that agrees to complete the purchase without an appraisal. 

What Happens With a Negative Home Inspection

 If there is a negative home inspection, the buyer will decide whether the sale moves forward. They can either accept the inspection and acknowledge that they will need to make repairs when they move in or approach the seller to rectify the issues. The buyer can either renegotiate a lower selling price or ask the seller to make repairs before the house is cleared to close. 

For example, if a house needs a new roof, the buyer can either ask the seller to replace it immediately or drop their offer by $20,000 to cover the replacement cost and labor involved. 

In some cases, banks will withhold loans if the inspection highlights significant issues. These issues increase the risk of buying the home and could impact the finances of the buyer who will have to pay for repairs. The buyer might have to walk away from the deal if a seller isn’t willing to negotiate after an inspection.

A seller can always reject renegotiations and refuse to make repairs. But, once again, they risk losing the sale and the next buyer will likely have the same concerns.

Hire a Quality Real Estate Agent to Help You Buy a Home

Both the appraisal and inspection and crucial for understanding the home you want to buy. They can confirm the fair market value of the home and assure you that your future asset is in good condition. For most people, a house is one of the biggest purchases they will ever make and the property is their largest financial asset. Home inspections and appraisals can give you peace of mind knowing you are making a sound decision.

If you need help understanding the difference between a home inspection vs. appraisal and other aspects of the buying process, contact a Realtor you can trust. At FastExpert, we have some of the top real estate agents on the market who are eager to work with buyers. You can read profiles to see which agents specialize in helping first-time homeowners and can even see which Realtors speak specific languages in your area. You don’t have to be a real estate expert to buy a house. Turn to FastExpert and hire someone to help you along the way.

Frequently Asked Questions

What’s the main difference between a home inspection vs. appraisal?

A home inspection evaluates the condition of the house, while a home appraisal focuses on the value of the home. The home inspector wants to buyer to be aware of any necessary repairs or issues with the property in the name of full transparency. The appraiser wants to make sure the house is sold for a reasonable price so both parties receive a fair deal. 

Can you negotiate after a home inspection?

Yes. If the home inspection comes back with repairs and issues you weren’t aware of, you can approach the seller with a new offer on the home. The seller can either accept the offer, provide a counter price, or walk away from the deal. The success of this negotiation will depend on how eager the seller is to move and the market. If there are lots of bidders competing for a home, the seller might reject the negotiation and work with another buyer instead. 

What happens if the home appraisal value is lower than the offer?

If the home appraisal is only slightly lower than the offer, the deal might be able to move forward. However, if it is significantly lower, the mortgage lender won’t approve the loan and the buyer cannot purchase the home. Both parties will need to renegotiate the purchase price until it aligns with the appraisal. 

Can I forgo a home inspection or appraisal if I’m paying in cash?

Yes. Mortgage lenders require buyers to complete the inspection and appraisal process but cash buyers don’t need to fulfill these requirements. However, many cash buyers still want an inspection and appraisal completed before they are willing to close on the home. This gives them more confidence in the home sale so they know they are making a good financial decision. 

How can I prepare for a home inspection or appraisal?

The best way to prepare for these two events is to get the know the home-buying process before you start making offers. Look at a sample appraisal report online or ask your Realtor to walk you through what happens at a home inspection. As a buyer, there’s not much you can do. Sellers, on the other hand, often work fervently to make repairs and improvements on the home before the inspector or appraiser arrives.

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• Source: https://www.fastexpert.com/blog/home-inspection-vs-appraisal/