Appraisal Vs. Inspection: A Guide

If you’re a first-time home buyer, you might be confused about an appraisal versus an inspection. In many cases, you’ll need at least one of them before your lender approves a mortgage loan.

Let’s explore the ins and outs of appraisals and inspections so you can better understand these important layers of the home buying process.

The main difference between an appraisal and an inspection is that an appraisal is a real estate professional’s independent analysis of the home’s value – basically how much it should sell for – under current market conditions. Strictly speaking, the appraised value can differ slightly from the market value, however.

An inspection, by contrast, assesses the home’s structure and systems. In most cases, mortgage lenders require an appraisal as part of the home buying process. They don’t usually require inspections, but many home buyers choose to get an inspection to protect themselves financially.

A real estate appraisal assigns a value to a home. An appraiser weighs a number of factors about the home, including its location and condition. They also evaluate the prices of “comps,” or similar homes that were recently sold in the area. However, with an appraisal, comps take a backseat to the overall condition and features of the house.

The appraiser’s report allows lenders to decide whether to approve a loan. In many cases, laws require that the appraiser must not have any connection to the mortgage lender. 

An appraiser’s job is to provide an unbiased opinion about a home’s value.

Appraisers can walk through the house, research it online or do a “drive-by appraisal” to collect information for their report. These are some of the factors an appraiser will likely evaluate:

• The overall condition of the home
• The home’s square footage
• The number of bedrooms
• Available storage space
• The lot size
• Comps and the state of the market

The lender and the borrower will both receive a copy of the appraisal report. Appraisers follow a format specified by the Uniform Standards of Professional Appraisal Practice.

When You Need An Appraisal

Typically, mortgage lenders require an appraisal before they’ll allow a home buyer to close on their loan. This includes conventional loans and government-backed loans from the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA) and the Department of Agriculture (USDA).

Certain home-related transactions, such as some cash purchases and refinances, don’t require an appraisal, though.

However, in most cases, a lender will usually ask for the appraisal after the seller accepts the potential buyer’s offer.

The Average Cost Of An Appraisal

Average home appraisal costs vary throughout the country. According to HomeAdvisor.com, the average range was $313 – $421 as of late February 2023.

What If The Home Gets A Low Appraisal?

A home’s appearance, location, floor plan, appliances and environmental factors can all result in a lower appraised value. So what happens when the appraisal reports that the value of the home is lower than the requested purchase price?

In many cases, lenders won’t approve a mortgage for an amount higher than the appraised value. When this happens, a buyer has a few options:

• Pay the difference of the appraisal gap
• Walk away from the purchase
• Negotiate a new price with the seller

It’s also possible to dispute the appraisal.

Lenders don’t want to loan a home buyer more than the value of the house they want to purchase. An independent appraisal ensures that they’re loaning the correct amount for the purchase.

A home inspection can offer peace of mind for home buyers by providing a neutral, comprehensive evaluation of a house’s physical condition. An expert inspector checks the roof, electrical systems, plumbing, the foundation, the HVAC system and other parts of the home’s structure and systems. Their report can point out any potential problems for the prospective buyer.

The American Society of Home Inspectors (ASHI) provides guidance on what observations inspectors should include in their report.

The home inspection usually takes place after the seller accepts the offer. The home sale is often contingent on receiving a favorable inspection report.

It typically takes an inspector 2 – 4 hours to perform an inspection to discover potential issues. In many cases, prospective buyers are invited to attend the inspection.

Home inspection reports may be ready in 24 – 28 hours and often include photos.

What’s Not Included In A Home Inspection?

Home inspectors generally don’t evaluate a few items as part of their final report. Here are some examples:

• Environmental hazards: A home inspector typically can’t check for asbestos, radon or other environmental red flags.

• Renewable energy systems: Inspectors don’t evaluate renewable energy systems such as solar panels, wind turbines and geothermal devices.

• Alarm systems: Smoke detectors, carbon monoxide alarms and security systems aren’t included in home inspections.

• Pest inspection: Home inspectors aren’t going to check a home for pests. You’ll need to make arrangements for a separate pest inspection.

The average cost of a home inspection in the United States is $341, with a typical range of $281 to $402 as of late February 2023. The home’s size and age, along with the inspector’s travel time, can affect the inspection cost.

In many cases, inspections aren’t required. This puts the decision to pay for a home inspection in the buyer’s hands. Even when inspections aren’t mandatory, they can be a smart investment that limits a buyer’s risk.

What if the home inspector finds a lengthy list of red flags on your “dream home”? You can accept the flaws and negotiate a lower purchase price. Or, you can also request that the seller pay for fixing the issues.

Buyers should also consider the severity of the problems and whether they are truly deal breakers.

Here are a few questions home buyers often ask about the difference between inspections and appraisals.

What does an appraiser look for vs. an inspector?

Appraisers evaluate the appearance and condition of the property, along with the sale prices of comparable homes. Home inspectors inspect a house’s physical structure and systems.

Do inspection and appraisal happen at the same time?

It’s possible for the inspection and appraisal processes to overlap or even be combined. There’s not much benefit to coordinating the schedules of the home inspector and home appraiser, though.

What is checked during an appraisal?

Appraisers determine whether a home’s asking price is comparable to its value. They take an in-depth look at the condition of the property and consider the selling prices of comparable homes.

What hurts an appraisal?

Poor aesthetics, outdated appliances, a bad floor plan and the presence of hazardous materials can hurt the appraised value of a home.

When you’re shopping for a new home, an appraisal is usually a mandatory step in the process. On the other hand, a home inspection is often optional. Still, spending a few hundred extra dollars for an inspection can help spot potential issues that may cause problems down the line.

Now that you know the differences between an inspection and an appraisal, are you ready to start your home buying journey? Apply for a mortgage today!