Appraisals vs. Inspections – Is there a Difference?

As you’re on your home buying journey, you will find there are a lot of new terms to learn.  And some of these terms come with a cost – one is optional for you (inspection) and the other is required by the lender (appraisal) – both seemingly doing the same thing.  Let’s take a look at the differences and similarities:

Both have a third, uninterested party going out to view or inspect the home.  Both are looking for safety concerns.  Here’s how they differ:

Inspection – This is an optional expense and your real estate agent or loan officer can typically provide you with some great recommendations.  Inspection costs are paid at the time of the inspection and are paid directly to the inspector. The costs vary by home type, square footage and if you choose additional tests.  Though we can’t tell you to have a home inspection, we can certainly share that’s it’s a very important thing to do and well worth the cost.

The inspection is done for you, not your real estate agent, seller or the lender.  It’s something you choose to do to learn the good, the bad and the ugly of the home.  An inspector will almost always find “something” of concern.  No house is perfect.  This is the best way to “check under the hood” of your valued investment.

The inspection typically takes place shortly after your offer is accepted.  The inspector will spend 2-4 hours in the home looking at everything inside and outside the home – mechanicals, roof, electrical, safety concerns, suggested and deferred maintenance, attic, functioning of appliances and much, much more.  That said, they are not looking to give value to the home or to tell you if you should or should not move forward with the purchase.  They are there to report what they observe.

Appraisal – Alternatively, this has everything to do with value.  If you’re financing, the lender will require an appraisal to be done.  The lender wants to know if the price you’re paying is an accurate representation of what the market says the home is worth.  The appraiser does most of their work prior to stepping into the home.  They need to research similar style homes and prices to help determine value.  The visual inspection will give them more information about the location and condition of the home.  You will pay for this as well. The report is the property of the lender, but you will get a copy. You are not in attendance for the appraisal, but with the inspection, you’ll attend for the last hour or so. 

There are three outcomes to the appraisal: value comes in at the contract price (most common), higher than the contract price, or lower than the contract price.  If the value comes in higher, you have added bragging rights about getting a great deal!  If it comes in lower, you will work with your real estate agent to determine next steps.  All lenders will lend on the lesser of the appraised value or purchase price.  If the appraisal comes in lower, the lender will determine your maximum loan amount off of the appraised value.  That means that you may have to come up with more money to cover the difference between the appraised value and your agreed-upon price.  You may also try to renegotiate the purchase agreement, although this is not always an option.  You and your real estate agent will work to get the best solution for this situation.

The appraisal costs can vary as well by type of home, location, rural or not, how many units, type of occupancy and more. 

We’d love the opportunity to answer any questions you have about the financing process and how home inspections and appraisals get you across the finish line of buying a home!



Article by:
Darcy McDonald
Mortgage Sales Manager
Wings Mortgage, NMLS #209020
Phone: (952) 997-8048
Apply with Darcy


 

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