What’s the Difference Between a Home Appraisal and a Home Inspection?
I get it! Everyone is looking to save money when possible on the purchase of a home. But friends, the argument that since the lender will be appraising the house you can go ahead and skip the home inspection. NOT a good idea! Here are the major differences, as I see them, between a home appraisal and a home inspection.
The Home Appraisal
First, let’s take a look at the home appraisal. The purpose of the home appraisal is to get an independent opinion of value. It will confirm to the lender that the house they are considering loaning money against is worth at least as much as the buyer has offered to pay for it. Sometimes a misguided buyer just has to have that cute little bungalow because of that maple leaf shaped swimming pool and the granite island in the kitchen. Here’s the problem: They’ve been looking for a maple leaf shaped swimming pool and this is the only one they’ve found. So, yes, $150,000 seems a little high, but who’s counting when you find that perfect pool! The buyer can agree to buy. And the seller can agree to sell. But when the lender finds out that similar houses are actually only selling for $125,000 the lender will not make the loan based on the $150,000 purchase price. The lender will lend based on the real market value of $125,000. So, either the deal falls through or the buyer makes up the $25,000 difference with their own cash.
The licensed home appraiser will pull “comps.” Comps are homes that have sold in the past 12 months that are similar to the house being appraised (called the “subject property”). Generally the appraiser will find 3 comps that are similar in age, size, location, bedrooms and baths. They will make “adjustments” to the value if they cannot find identical homes that have sold. Based on the sales price of the comps the appraiser will determine their opinion of the subject property’s fair market value.
So, as you can see the appraisal is to protect the lender, NOT to inspect for the condition of the house. Yes, if something is grossly and obviously wrong with the house the appraiser will catch it. But the appraiser does not go to the home with the idea of checking the furnace, roof, wiring, plumbing, termites, etc.
The Home Inspection
The home inspections is wildly different from the home appraisal. First off, it has nothing to do with your mortgage. You can get a mortgage without a home inspection, but probably not without a home appraisal (unless you’re putting down a VERY large percentage of the purchase price).
The home inspection is contracted and paid for by the buyer of the home. A licensed home inspector will inspect for major defects all the major components of the home: i.e. foundation, roof, plumbing, electrical, heating, air conditioning, appliances, outlets, windows, insulation, etc.
At the completion of the home inspections, which take from 2-5 hours, and cost from $225 – $600, the buyer will receive a copy of a very detailed home inspection report. As you can guess, the home inspector does not generally offer an opinion of value as the appraiser does, but rather a report of the condition of the home. In the case where a “major defect” is discovered, the buyer may complete an “inspection response,” requesting that the seller repair the major defect. The seller may choose to correct the defect, in which case the buyer is obligated to purchase the home. Or, the seller may determine that they are not willing to correct the defect. If the seller refuses the purchaser should be able to recover their “earnest money deposit” from the seller. Occasionally the seller will disagree with the inspector’s findings, which can get pretty interesting, but that’s a different post altogether!
Hopefully you are now much clearer on the difference between a home appraisal and a home inspection.
Your next loan in Indiana
When you’re ready to get your next loan in Indiana, I would love to help you. My pledge, as always, is to treat your money as if it were my own. I will treat you as a friend, not just a file.