After you put an offer on a home and sign a purchase contract with a seller, the due diligence period begins. This is your time as a buyer to verify the property's condition and confirm that the actual value is in line with your offer before you close on the sale and commit to the purchase.
During this phase, you should undertake two important processes: the appraisal and the home inspection. One will assess the home's condition to protect you as the buyer, and the other will determine the property's market value to protect the lender. Although similar, they are different processes that feature a few important distinctions, which is why both are necessary when buying a home. To help you understand the difference, here is a look at a home inspection vs. appraisal.
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What Is an Appraisal?
A home appraisal is a documented evaluation of the value of property by a licensed professional. In a real estate transaction, appraisals are used to determine if the home is worth the asking price or the offer made by the prospective buyer.
Appraisals are an important part of the home-buying process as they not only assess whether you're making a smart investment as a buyer, but they are also used by your lender to set the terms of the mortgage, such as the amount of your down payment, the interest rate, and whether or not you'll even qualify.
A licensed appraiser will consider the facts of the home, such as the square footage, lot size, number of bedrooms and bathrooms, presence of any amenities such as a deck or swimming pool, and the general condition of the home.
They will also consider market data such as the sales price of comparable homes recently sold, current supply and demand trends, the location and any other relevant metrics. Based on this information, they will provide an unbiased report of the home's worth.
Does the Buyer Pay for the Appraisal?
Yes, it's typical for the buyer to pay for the appraisal, which should be factored into your overall closing costs. However, in some cases, a seller may hire an appraiser before putting the home on the market to get a better sense of the market value, in which case it would be their responsibility to pay the fee. Appraisal fees typically range from about $300 to $500, although it can depend on the state and local market where the property is located.
Does the Bank Require a Home Inspection?
Yes, lenders will require a home inspection if you plan to finance the purchase. If you plan on paying cash, it's up to you whether you feel it necessary to confirm the value. However, a home inspection is required for a mortgage because the lender will want to confirm the value of the property is enough to cover their losses if you don't pay back the loan.
The property will be used as collateral while you pay off your mortgage to ensure you continue to make on-time payments. That way, if you stop paying and go into foreclosure, they can sell the property to recoup some of the money they gave you. However, they can't do that if the home is worth significantly less than what you offered.
So, the lender will require an appraisal before underwriting the loan. If it comes back lower than expected, they could deny the loan, even if you were approved. Some purchase contracts will have an appraisal contingency that permits you to get out of the sale if you are denied financing due to a low appraisal.
If everything comes back as expected and the value is equal to or higher than what you offer, the lender will proceed with the underwriting process and use the appraised value to calculate your down payment, interest rate, etc.
Should the Buyer Be Present at the Appraisal?
No, the buyer is typically not present for the appraisal. The process is meant to be impartial, and a buyer's presence could potentially influence the appraiser. For the same reason, a seller can not be present during a home appraisal, either.
What Is an Inspection?
A home inspection is a professional evaluation of the safety and condition of a property. An inspection aims to provide the buyer with a detailed report of the home's structural integrity and any potential problems to ensure you make an informed purchasing decision.
A home inspector's duties and responsibilities include checking the foundation, roof, plumbing, electrical system, HVAC system, and other structural components. The inspector will then provide you with a detailed report of their findings.
If the inspection reveals any red flags that the seller did not previously disclose, you can return to the negotiating table or even walk away from the sale if the issues are major.
Who Pays for the Home Inspection?
When purchasing a home, the buyer typically pays for the home inspection and appraisal. However, just like an appraisal, if the seller chooses to commission their own inspection prior to listing to spot any issues before they arise, it would be their responsibility.
Unlike an appraisal, lenders don't always require a home inspection before approval, although some will and most strongly recommend it. An inspection will ensure that you know exactly what you're buying and gives you the opportunity to voice any concerns before you close on the sale. The cost of a home inspection can vary depending on the location and size of the home but typically ranges from about $250 to $400.
Do I Need to Be Present For the Home Inspection?
No, you don't need to be present during the home inspection, but if you're available, it's not a bad idea to show up. It gives you the opportunity to learn more about the home and what to keep an eye on.
Even if it doesn't uncover anything serious, you may learn something valuable like how soon the roof might need to be replaced or areas that need better insulation to reduce your energy bill.
What Is the Difference Between an Inspection and an Appraisal?
Although they are similar processes and often get confused, a home inspection and appraisal are not the same thing. The primary difference is in what the home inspector vs. appraisal looks at and who it protects.
An appraisal will look at broader market trends as well as the condition and facts about the home to confirm its value. An inspection will focus more specifically on the condition and safety of the property and not consider any market data.
So the major distinction between a home appraisal vs. home inspection is that the former generally protects the lender while the latter protects the homeowner.
Should You Conduct the Home Inspection or Appraisal First?
It's typically wise to conduct the inspection first. You may want to adjust your offer or back out of the sale if it reveals anything significant. You might also want to give the seller some time to make the necessary repairs if you still want to buy the home. However, if you were to conduct the appraisal first without addressing the issues and it came back lower than expected, your loan may be denied, causing you to have to start the mortgage approval process all over again.
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