Home inspection vs. appraisal: what’s the big difference?

Thinking of buying a home? Or maybe you’re refinancing or taking out a new loan? There can be a lot of unknowns to those who are unfamiliar with real estate. With an investment as significant – and essential – as your home, it’s important that you feel confident in your decisions. 

We’re here to help. This blog will dive into an essential aspect of homeownership: the appraisal and inspection processes. 

Appraisals and home inspections are core to maximizing benefits and minimizing potential risks before committing. It is also vital for the lender as it helps determine the home’s value and state.  

Let’s start at the beginning - what is an appraisal? What is the difference when it comes to a home inspection vs. appraisal? And how can these processes aid in home purchase or even a favorable home valuation?
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What is the difference between a home inspection and an appraisal?

Appraisals and inspections aren’t the same despite their similarities and role in the home-buying, mortgage lending, and refinancing processes. 

Even though these services assess the property in question, they’re doing so for entirely different reasons. They also benefit the homeowner in altogether different ways. Here’s a quick breakdown to help you understand the differences between an appraisal and a home inspection:

Appraisals assess a home’s value and inspections help you understand a home’s current condition.

Let’s go a bit deeper into each.  

What is an appraisal, and why is it important?

Appraisals are required for most mortgage and home equity loans. It is an essential step in the process that determines the estimated market value of the dwelling. According to federal laws, appraisals must be executed by a licensed third party and not the lender or mortgage company.  

To determine the home’s value, the appraiser must factor in a few things known as comparables or comps. They include:

• The home’s location and condition
• The value of recently sold homes in the neighborhood

Licensed appraisers gather information by doing a walk or drive-through of the property or simply gathering information online.  

Once they’ve collected the comp data, the appraiser will analyze and create a final report of the property’s market value. The information is shared with the mortgage company. It will inform the final decision on whether or not to provide the loan. 

When purchasing a new property, lenders typically can’t offer borrowers more than 97% of the home’s appraised value. If the appraisal report comes back lower than the offer price, the homeowner is on the hook to pay the difference out of pocket. They may even want to renegotiate with the seller or walk away from the deal if the house’s value is less than the offer price.  

If you are getting an appraisal for a refinance or even for a home equity line of credit (HELOC), your home value may come back lower than you expected. This could be due to a myriad of things, including:

• Condition of your property (if it has not been maintained well enough, etc.) 
• The overall value of the homes in your area
  

On the other hand, you automatically gain more home equity when the appraisal value comes back higher than your offer price. 

Why do I need a real estate appraisal?

Appraisals are vital to determining the home’s value when selling and when homeowners are looking to tap into their home equity and apply for a home equity line of credit (HELOC). 

While you must get an appraisal, it is actually in your best interest to do so. Appraisals can benefit the current homeowner and prospective homeowner in many ways, including:

• Helping you get approved for loans like a mortgage or a HELOC
• If you’re buying, it ensures that you don’t pay more for the home than what it’s worth
• It also helps define the amount of property taxes you pay

What is the real estate appraisal process? 

A home appraisal process typically includes a walkthrough of the dwelling, researching comparable in the area, and then analyzing and producing a report. This report is then used as the basis of any lender/borrower relationship. 

When purchasing a new home, this process starts after an offer is accepted. In this scenario, lenders stand to lose the most when a piece of property is inaccurately priced. To combat this potential risk, lenders will typically be the ones who order the appraisal. Still, it is the homeowner who foots the bill. 

Your lender may also request an appraisal when applying for refinancing, appreciation mortgage, or HELOC. For a Fraction Mortgage, we require an appraisal before the commitment and one at the end of your term, as your home’s increased or decreased value will determine the amount of interest we charge. The final appraisal is paid out of pocket. 

Once ordered, typically, lenders will refer the current or prospective homeowner to a preferred appraiser. This neutral third party will examine the following: 

• The home’s interior 
• The exterior and grounds
• Curb-appeal
  

They will take this information, form a professional opinion on the home’s market value and present the information in an official report given to both the lender and borrower. 

To maintain ethics, the report follows a set format that is standardized based on specific regulations. These formats are based on The Uniform Standards of Professional Appraisal Practice. Depending on any other contingencies, if the report comes back clear of conflicts, the lender will begin to finalize loan terms and send over your closing documents. 

When do I need a real estate appraisal?

You are typically required to obtain a real estate appraisal before you can close on your loan. However, there are times when the homeowner does not need an official appraisal.

Here is an example of when you do not need an appraisal of your home.

In October 2019, US federal regulators updated the threshold for appraisals from $250K to $400K. This update to the regulation only impacts privately held mortgages that aren’t federally backed. Even these lenders may still choose to require appraisals. 

This change does not mean that any home sales under $400K are exempt from an appraisal, and the regulation does not apply to mortgages backed by: 

• The Federal Housing Administration 
• The Department of Housing and Urban Development (HUD) 
• The Department of Veterans Affairs
• Fannie Mae/Freddie Mac
  

It’s more likely than not that you will require a home appraisal, even with this new regulation. 
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What is an inspection, and why do I need one?

Home inspections are examinations of a home to help determine its current condition. It also allows homeowners or lenders to understand any potential red flags and risks of damage or concern before closing.

Through the inspection process, a licensed home inspector typically examines the following: 

• The home’s structure, foundation, and exterior
• The roof, attic, basement
• All electrical and plumbing systems
• And more
  

Inspectors can walk the homeowner through the process, their checklist and even point out issues and areas of concern that could eventually be a problem in the future.

Following the inspection, the home inspector will issue a report of their findings, including what was inspected and what requires repair. 

Depending on the results, a lender may or may not choose to lend to you until necessary repairs are made. 

When do I need a real estate home inspection?

Where a home appraisal is almost always required, inspections are not.

When purchasing a new home, the buyer can pay out of pocket and request an inspection. On the other hand, if you borrow money via a HELOC or a home equity loan, the bank may ask that you get one before closing. The cost of the home inspection will come out of your pocket. 

Inspections can help protect buyers, borrowers, and lenders alike from potential financial risks.

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How does the home inspection process work? 

The home inspection process involves a thorough examination of the internal and external conditions. The process is executed by a licensed home inspector. It is typically a condition in the sale of a home or for borrowing money from a lender. 

A real estate home inspector checks the dwelling for any significant safety, structural issues, or damage, including:

• The structural integrity of the exterior of the house 
• Age and state of the roof 
• Condition of the electrical and plumbing systems 
• Water damage or water pressure levels
• Condition of any HVAC systems
  

The inspection process does not end there, though. Home inspectors will also look for longer issues that may plague a home but may need to work with other specialists to help identify the extent of the damage. These include: 

• Mold inspection
• Chimney inspections
• Pests or termites 
• Radon testing
  

The inspector will review the home in-depth, and if you are present, will walk you through the process. The home inspector will issue an official report to the homeowner or buyer after the walkthrough. From there, the lender can determine whether the home is fit to borrow against. 

What is the difference between an appraisal and a home inspection?

In the simplest terms: 

The appraisal determines the home’s value, and a home inspection determines the condition.

Each serves a different purpose, but here are the biggest differences between a home inspection and an appraisal that you should be aware of: 

• Typically, home appraisals are required by a lender. Home inspections aren’t. Sometimes both are needed by a lender. 
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• Inspections are usually set up by the purchaser during a real estate sale. Appraisals are often ordered by the lender. Again, sometimes both are required by the lender. 
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• A home appraisal could impact the amount the lender loans you. In some cases, a home inspection does not. Both may affect the house valuation when applying for a home equity loan.
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• A real estate home inspection only checks the home’s condition when assessing. In contrast, a home appraisal considers many more things. This includes the home’s condition, lot size, home features, comparable neighborhood home prices, area crime rates, school zones, walkability score, and more.

What is the cost of an appraisal and an inspection? 

These services are vital to the lending process and come at a cost – that the borrower will typically have to pay for out of pocket.  
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Appraisal cost

According to Bankrate, “atypical, single-family home appraisal will range from $300 to $450.” A larger home will cost more, and in a larger city, expect the appraisal to cost anywhere between $500 to $800+. This cost is also dependent on several factors, including:

• Home size 
• Value and condition of the property 
• Level of detail involved in the appraisal 
• If your home has multiple units
  

Inspection cost

Per the US Department of Housing and Urban Development, a typical home inspection can cost anywhere between $300 to $500.
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Both serve their own purposes

Despite the title of this article comparing the two, they are not competing, and each serves its own purpose in the purchasing and lending processes. 
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Both an appraisal and a home inspection work together to protect all relevant parties, which is vital when a large asset like a home is on the line. Make sure you check with your lender to see what is required before closing.