Home Inspection vs. Appraisal: What’s the Difference?
Many homebuyers are unclear about the differences between a home inspection and appraisal. The main difference is that an appraisal determines a home’s value, while an inspection addresses the integrity of the home’s physical structure.
Both processes provide valuable information regarding the home that could affect your purchase, and your lender may require one or both before approving your mortgage application.
What is an appraisal?
A home appraisal is an estimate of a home’s fair market value performed by a licensed appraiser. Mortgage lenders often require an appraisal before they’ll approve you for a loan, but home appraisals occur any time someone needs a professional opinion about how much a house is worth.
When you need an appraisal
Homebuyers usually need an appraisal to ensure that the loan amount a lender offers them can cover the home’s purchase price and that the home is worth enough to secure the loan. Sellers often use an appraisal to ensure that the listing price is correct. This type of appraisal is also known as a pre-listing assessment.
People may also seek appraisals when applying for a home equity loan or refinance, getting a divorce or filing for bankruptcy.
Who pays for an appraisal?
A potential buyer must pay for an appraisal of any property they plan to purchase, but the mortgage lender typically hires the appraiser and arranges the process.
How much an appraisal costs
Home appraisal fees will vary, depending on the home location, mortgage type, loan size and property type, but you can expect to pay around $300 to $500.
A home appraisal evaluates:
- The home’s interior and exterior condition
- Comparable homes in the area
- The home’s location and neighborhood
- The size of the home and the land it sits on
- The home’s fair market value
New home appraisal requirements for conventional loans
A home appraisal has been the standard way to evaluate a home’s value for many years, but if you’re buying a home with a conventional loan you may have other options to determine your home’s value, including:
- Value acceptance. Formerly known as an “appraisal waiver,” this is when the lender provides a home value and it is accepted without the need for an appraisal to confirm it.
- Value acceptance plus property data. This option skips the need for an appraisal and appraiser, but still depends on property data collected by a third-party professional who’s trained to assess a home’s interior and exterior.
- Hybrid appraisal. A hybrid appraisal is a valuation method that involves collaboration between an appraiser and a property data collector, but may only be allowed in special cases.
What does it mean to get a home inspection?
A home inspection is a thorough investigation into the property’s condition and reveals any repairs that need to be made. The key difference between an appraisal and inspection is that the appraisal focuses on the home’s value, while the inspection focuses on the home’s condition.
When you need an inspection
Unlike a home appraisal, a home inspection is usually optional. However, in some cases a lender or loan program may require a home inspection as part of your mortgage application.
Once a buyer has made an offer, they have the option to hire a home inspector. A home inspection can protect the buyer, and the results give a buyer the opportunity to decide if they want to walk away and find another home to purchase, buy the house “as-is” or attempt to negotiate with the seller and hold them responsible for the repairs before the home is officially sold.
Who pays for an inspection?
The homebuyer typically pays for an inspection as part of their mortgage closing costs. However, it’s not uncommon for a seller to agree to pay as an incentive to the buyer. A buyer can also negotiate to bring down the home price by subtracting the inspection costs, as a way of passing that cost on to the seller.
How much an inspection costs
Generally, home inspection fees range between $200 and $500, and are based on a number of factors, including the home’s size and where it’s located.
A home inspection evaluates:
- The home’s utility systems like plumbing, electrical, water and heat
- The home’s interior and exterior structures
- Which repairs are needed
A home inspection does not:
- Determine the home’s fair market value
- Look at the home’s location and neighborhood
- Assess comparable homes in the area
- Take into consideration the home’s size
Home inspection vs. appraisal
| Home inspection | Home appraisal | |
|---|---|---|
| Evaluates a home's value | ||
| Evaluates a home's interior and exterior condition | ||
| Identifies a home's aspects that are in need of repair | ||
| Mortgage lenders often require it | ||
| Buyers typically pay for it | ||
| Cost | $300 to $500 | $200 to $500 |
Differences between an appraisal and inspection
Although home appraisals and home inspections are somewhat similar, there are a few key differences.
- Purpose. An appraisal’s purpose is to determine the property’s fair market value, while an inspection determines the home’s condition and identifies any items in need of repair.
- Required versus optional. While mortgage lenders traditionally require a home appraisal, a home inspection generally isn’t required.
- Who can perform it? A home appraiser performs a home appraisal and evaluates the home’s value, while a home inspector performs a home inspection and evaluates the home’s condition.
Similarities between an appraisal and inspection
Home appraisals and home inspections have a few similarities, and this can explain why many people get them confused.
- Both examine a home’s interior and exterior condition. Some of the information that an appraiser and inspector gathers may overlap, but the aim of the two processes is different.
- Both offer some sort of protection to the buyer. An appraisal ensures that you get the proper loan amount and that the house is worth enough to secure the loan. An inspection, meanwhile, identifies any repairs that need to be made, giving the buyer the opportunity to walk away, buy the house as-is or negotiate with the seller to make repairs.
- The buyer typically pays. For both an appraisal and an inspection, the buyer pays because they’re the party receiving a benefit from the process.
What to know about FHA and VA appraisals and inspections
Home appraisals and home inspections are usually two different tools, but under certain circumstances they may be combined into one process. Confusing? Not really, if you understand that this usually only happens with government-backed loan programs like FHA and VA loans.
FHA loan appraisals
An FHA loan is a loan that is insured by the Federal Housing Administration (FHA) and allows homebuyers to purchase a home with a down payment as low as 3.5%, even without stellar credit. If you opt for this loan type, an FHA-specific home appraisal is required, which is a bit more in-depth than the typical appraisal.
You can’t get out of an appraisal if you choose an FHA loan, since the goal of an FHA appraisal is not only to determine the home’s value but also to ensure that the home is safe, structurally sound and otherwise meets all FHA eligibility requirements. Ultimately, what the appraiser finds during their visit to the home will help the lender determine if the property satisfies HUD’s minimum property standards.
How much it costs: $400 to $700
VA loan appraisals
A VA loan, which is backed by the U.S. Department of Veterans Affairs, also requires a special appraisal that goes a step further than a conventional home appraisal. A VA home appraisal needs to prove the home is “safe, structurally sound and sanitary.” This means a VA-approved appraiser needs to confirm that the home has adequate space for living, sleeping and cooking, as well as sanitary facilities.
If the home is located in a rural area, the appraiser will look for private road access to the home. The appraisal also will document whether the home has sufficient drainage, water and electrical systems.
How much it costs: Roughly $400 to $1,200, depending on your property and location.
Impact of appraisal and inspection results
Low appraisals and home inspections that reveal significant issues can feel like being thrown a curve ball — but for buyers they can also open up some opportunities to get a great deal.
Consequences of a low appraisal
When an appraisal comes in lower than the agreed purchase price, it’s a big deal because mortgage lenders won’t lend you more than the home’s value. However, buyers faced with this situation have several options. You can:
- Try to negotiate the price down. Most sellers understand that charging more for their home than a lender will finance isn’t a great idea. With a little preparation, you can negotiate successfully — in fact, 63% of homebuyers reduced their home’s price through negotiation, according to a recent LendingTree survey.
- Cover the gap in funds yourself. If you have your heart set on the home you’ve found and have some extra money in savings, it could make sense to go ahead and cover the difference.
- Walk away from the deal without losing your earnest money. Most mortgage contracts have what’s called an appraisal contingency clause, which allows the buyer to back out of the deal if the appraisal comes in low.
Consequences of a home inspection that finds problems
Similarly, if the home inspection uncovers major issues, the buyer can request the seller make repairs or adjust the sale price. Most sellers, motivated by their desire to close the deal, will agree to one or both of those things.
And don’t underestimate the amount of leverage a home inspection can give you. Negotiating a home price after an inspection saves homebuyers around $14,000 on average, according to a Porch.com survey.