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What is the Difference Between a Home Inspection and an Appraisal?

After you've found the home of your dreams, there are still quite a few steps that have to be taken before you take ownership of the property. The process doesn't complete when a seller has accepted your offer. 

While each home-buying process may differ slightly, there are some general steps that are included in all. If you are financing the cost of your home through a mortgage, two of the biggest required steps in the process are the home inspection and appraisal.

While both will assess the overall quality of the home to help confirm the purchase price, they entail very different things, have different outcomes and mean different things.

Let's take a closer look at the difference between a home inspection and an appraisal.

What is a Home Inspection?

During a home inspection, an independent third-party will conduct an in-depth examination of the home you wish to purchase. The goal of the inspection is to determine the condition of the home at the present time, bringing to light any major concerns, red flags and future repairs that may be needed.

A general home inspection will look at the overall condition of the home, including the electrical, plumbing, attic, roof, basement and structure. The inspector will look at the interior and the exterior of the home when doing the assessment.

After the inspection has been completed, the inspector will generate an official report that will be sent to you for review. The report can sometimes be overwhelming, as it will point out every little detail of the home. Don't be alarmed, though, as each item should be labeled as different priorities, and not all suggested repairs will be dire in nature.

Other Inspections That Can Be Done

In addition to the general home inspection, there are a number of specialized inspections that can be done as well -- depending on the location of the home and the components of it. These inspections are typically done in addition to the general inspection, and will either come with an additional fee or be done by a completely different company.

This includes testing for radon in the home -- typically in homes that have basements -- and inspections for pests and termites, chimneys and mold. 

Are Inspections Required?

In almost all cases, home inspections are not required by law. Some lenders may require the borrower to get certain inspections completed, though, depending on the type of mortgage they are getting. For instance, an FHA loan that's backed by the government may require a general inspection to be completed.

Keep in mind, though, that you typically aren't required to get an inspection. If you believe the home is in pristine condition, you could forego the inspection to save money and/or serve as a selling point for why the seller should choose your offer over those extended by other buyers.

The Benefits of Getting a Home Inspection

While you will be required to pay for all home inspections, there are a number of big benefits to getting them done. Inspections will uncover potential issues in your home that you most likely will not be able to see yourself.

Even if you're an experienced contractor, you may not have the same ability to spot potential issues in a home you want to buy, if only because you are emotionally connected to it. Since home inspectors are independent parties in the transaction, they provide an objective overview of the condition of the home.

What's more, some inspections such as those on wells and septic systems may need to be conducted by specialty companies.

Not all home inspections uncover major problems. If this happens, it doesn't mean you wasted your money. If anything, that should serve as a confidence booster that the home you're purchasing is a solid investment. 

What Happens Once Inspections Are Complete?

After your inspections are complete, you'll have the opportunity to potentially re-negotiate the sales price of your home. You can go back to the seller and ask them to fix certain items on the home inspection list, or ask them to give you a credit on closing costs in lieu of that.

Some states require that the seller fix certain home inspection items, such as termite damage. Other than that, though, the seller is under no obligation to make any of the repairs for items that are included in the inspection report.

What is a Home Appraisal?

A home appraisal is a review by an independent third party to determine the actual re-sale value of the home you want to purchase. The appraiser will take a look at the condition of the home, but also will compare it to similar homes in your area that sold recently. Using these comps, the appraiser will come to a final conclusion about the value of your home.

Mortgage companies will use these appraisals as a rubber stamp that the sales price you agreed upon matches up with an independent appraisal of the actual home. 

Who Conducts a Home Appraisal?

While your mortgage company will likely help you set up the appraisal on your home, they are not allowed to be connected to them in any way. The law in most states require appraisal companies to be completely independent and separate entities from the mortgage company, so as to not create a conflict of interest.

Despite this, you will be forced to pay for the cost of the appraisal, which could be upward of $500.

Are Home Appraisals Required?

Most mortgage companies will require borrowers to get an appraisal of their home before they officially underwrite a loan. This is because it ensures that the home value matches up with what you have agreed to pay for the home. 

Appraisals are not required by most state laws, though, so if you are paying for your home in cash or financing it in some way other than a traditional mortgage, you will probably not be required to get an appraisal.

What Happens Once the Appraisal is Complete?

Once the appraisal has been complete, the company will provide the final value of your home to both you and your mortgage company. If the appraisal ends up matching the agreed-upon sales price -- or is in close range -- then your mortgage company will proceed with underwriting your loan.

A problem will only arise if the independent appraisal differs significantly from the sales price. In most cases, lenders will not extend borrowers a loan for more than 97% of the value of the home as determined by the appraisal.

If the appraisal comes in much lower than what you agreed to pay for the home, then, you might be required to pay more out of your pocket to secure the mortgage. If you can't do that -- or don't want to -- you can either re-negotiate the sales price with the seller, or the deal may fall through. 


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