The two terms that homebuyers may encounter in the process of buying a home and getting a mortgage for it are “Home inspection” and “Home appraisal.” For buyers who are new to the terminology of housing and mortgage, these terms can be confusing as some people think it means the same thing.
Most buyers know that both home inspections and home appraisals are forms of evaluation for the home that is being bought and financed. However, as B&R Residential Management Professional says, what is not clear is why there should be two evaluations. That would not be a problem, except that buyers have to pay for both of them.
Therefore, many buyers view one of these processes as redundant and an unnecessary waste of their money and time. This belief comes from a misunderstanding of the nature and functions of home appraisals and home inspections. Although they appear similar, they are very different.
This post will help you understand all you need to know about the vital points of difference between a home inspection and a home appraisal.
What is the home inspection?
A home inspection is a comprehensive examination of the physical features of a home. It subjects its structures, crucial systems, and appliances to intense scrutiny to find anything that is not in the best shape and functioning as required. The focus of the home inspection is to discover hidden problems such as unreported damage or natural wear and tear.
A typical home inspection takes up to three hours and covers everything in the interior and exterior of the home. It is a safeguard buyers use to ensure they do not buy a home for more than it is worth. It also helps to uncover faults the buyer failed to disclose. Licensed home inspectors conduct home inspections, prepare a formal report of their findings, and deliver it to the buyer.
Based on the home inspection report, a buyer can make an informed decision on the home’s value. The buyer can use the home inspection report to negotiate a lower price, or if the inspection report has uncovered serious problems, they can decide to walk away from the deal. The lender or mortgage provider is not involved in the home inspection process.
What is the home appraisal?
The home appraisal helps lenders determine if a home is worth the loan amount. Professional home appraisers hired by lenders conduct the home appraisal. The focus of the assessment is to calculate the home’s market value based on its physical condition, quality of craftsmanship, amenities, and characteristics of the neighborhood.
The home appraiser looks at the following to determine the market value of the home;
The physical attributes of the house: The physical attributes here include the size of the home, the condition, and operability of its various features, the integrity of its main structures, the presence of health/safety hazards, and evidence of visible damage to the home.
How up-to-date the property is: This includes the style of the home, level of general upkeep, maintenance records for the house, upgrades on the property, and overall craftsmanship of the entire home.
The value of similar homes in the area: The appraiser will also look at the general characteristics of the neighborhood and what similar homes in the area sold for recently.
The home appraiser uses these factors to assess the home and includes that valuation in the report they present to the lender. The summary will explain the calculation of the home’s value and lenders can use it as a guide to determine if the house is overvalued, undervalued, or acceptably valued.
Differences between the home inspection and home appraisal
1. Who orders it?
Buyers order the home inspection, but lenders order the home appraisal on behalf of the buyer. The buyer pays for the home inspection and the home appraisal.
2. Impact on loan amount
The home inspection has no impact on the loan amount. However, it can influence the purchase price of the home. The home appraisal can alter the loan amount if it shows an overvaluing of the property. Here, the buyer may have to make up the difference in the price. That is because a lender will not lend more than 97% of the appraised value of a home.
3. Whom does it benefit?
The home inspection benefits only the buyer. But the home appraisal benefits both the buyer and the lender. It ensures that lenders do not expose themselves to more risk than is necessary. Also, it helps buyers avoid paying too much for a home.
4. How do their processes differ?
During the home inspection, the buyer is encouraged to accompany the inspector. The inspector will educate buyers on the issues they find in the home. But buyers are not allowed to escort the home appraiser. Moreover, the home appraiser does not use special instruments during the evaluation, but home inspectors do.