Appraisals / Home Inspections?

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Real Estate

When you're buying a home, you'll need two types of inspections, the inspection and the appraisal. They seem similar at first glance because both entail someone coming by to assess the property. They have distinct purposes, however, and the information obtained is reported to different parties.

What is a Home Inspection?
If you're a buyer who's offer was recently accepted by a seller, one of the first things you'll do is schedule an inspection. As the buyer, you can find and hire your own inspector, or your agent may have a recommendation. Either way, make sure any inspector you use has a solid reputation and is qualified (which means, in many states, licensed).

An inspection is thorough assessment of the safety elements of a home and the overall condition. An inspector will examine major systems like plumbing, electrical, and HVAC systems, roofing, and siding.

A home inspection takes a few hours. Then, when it's done, the inspector reports to the buyer. As a buyer, you can use the inspection information to decide whether or not buying the home is a suitable investment for you.

An inspection can also be brought back to a seller for further negotiaton. Let's say your inspector discovered that the circuit breaker is a safety hazard and needs to be replaced. Citing the inspection report, your agent may be able to negotiate with the seller. The seller, who has an incentive to prevent the deal from falling through, may agree to pay for some or all of the circuit breaker replacement.

A buyer and their agent can attend an inspection, and it's worth the time and money to make sure the property you want to buy doesn't have any major, potentially expensive issues you should know about.

Some buyers will waive an inspection contingency to make their offer stronger, but it's a risky move. Discovering a major defect – like a structural issue – after the fact means repairs are the new owner's sole liability.

Most states require sellers to disclose issues in a home when they're selling it, but there's no guarantee there isn't a lurking issue that the seller simply isn't aware of.

What is an Appraisal?
An appraisal is something almost all lenders are going to require you to have to get a mortgage. The appraisal's purpose is to determine the estimated market value of a home, so the lender knows the home is worthy of the loan amount. A third-party appraiser makes this determination based on factors like the home's location, the value of properties that are similar and recently sold in the area, and the condition of the house.

The appraisal process sometimes includes a walkthrough, but it's not as in-depth as an inspection. Then, the appraiser will research the comparable homes in the area and create a report.

The report will highlight the appraiser's determination of the market value of the home. The lender will then use the appraisal report when they decide to approve a loan amount.

A lender can't finance more than 97% of the home's appraised value in most cases. If there's an appraisal that comes back lower than the price you offer, then you have to pay the difference out of pocket, renegotiate, or leave the deal.

If the appraisal comes back and it's higher than your offer price, you already have more equity in your home.

How Do the Two Compare?
The following are some specific differences between an inspection and appraisal:
A home appraisal is something required by your lender if you're buying a home, but a home inspection isn't necessarily a requirement.
Your lender orders an appraisal. If you want an inspection, you arrange this yourself.
An inspection doesn't affect your ability to get the loan amount you need, but an appraisal can.
Appraisers only look at the surface features of a home, but an inspector looks for deeper issues.
During an inspection, you're encouraged to walk with the inspector, but an appraiser usually goes through the process without anyone present.
During an inspection, if you're there, the inspector will explain things to you as you go along. With an appraisal, you don't know anything until the report is complete.
Inspections only consider the property's condition during the assessment, but an appraisal looks at local factors like crime rates in the area, lot size, and comparable home prices.
Overall, while there are differences, both an inspection and an appraisal are beneficial to a homeowner because they help you get the peace of mind of knowing that your home is worth what you're going to pay for it and that it's a safe place for you to live. Also, both are completed by a third party, so you can feel more secure in your overall decision to buy a home.