Home Inspection vs. Appraisal: What’s the Difference?

Many homebuyers are unclear about the differences between a home inspection versus an appraisal. The main difference is that an appraisal deals with the value of a home, 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 one or both may be required by the lender before your mortgage loan can be approved. Therefore, it’s important to know what a home inspection and appraisal are and how they can aid you during closing.

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.

Homebuyers usually need an appraisal to ensure that the loan amount a lender offers them can cover the cost of the home and that the home is worth enough to secure the loan. 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. The fee for a home appraisal will vary, depending on the home location, type of mortgage, size of the loan and type of property, but you can expect to pay around $300 to $500.

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 refinancing, getting a divorce or filing for bankruptcy.

For homebuyers, an appraisal can affect the interest rates they’ll be offered — especially if it comes in low. That could increase the buyer’s loan-to-value (LTV) ratio, which could trigger extra fees or higher interest rates for conventional loan borrowers. These fees and higher interest rates apply to those borrowing more than 60% of their home’s value who also have a DTI over 40%.

A home appraisal includes:

• An evaluation of the condition of the home’s interior and exterior
• An evaluation of comparable homes in the area
• An evaluation of the home’s location/neighborhood
• An evaluation of the size of the home at the land it sits on
• An evaluation and determination of the home’s fair market value

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 to confirm it with an appraisal.
• 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 the interior and exterior of a home.
• 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 condition of the property 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. 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 to visit the home and perform an inspection. A home inspection is a tool that 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. Generally, the fee for a home inspection is between $300 and $500, and is based on a number of factors, including the home’s size and where it’s located.

A home inspection includes:

• An evaluation of the home’s structure and utility systems like plumbing, electrical, water and heat
• An evaluation of the home’s interior and exterior structures
• Identification of needed repairs

A home inspection does not include:

• An evaluation and determination of the home’s fair market value
• An evaluation of the home’s location and neighborhood
• An evaluation of the comparable homes in the area
• An evaluation of the size of the home

Home inspection vs. appraisal

Differences between an appraisal and inspection

Although home appraisals and home inspections are somewhat similar, there are a few key differences.

• Purpose. The purpose of appraisal is to determine the fair market value of the property, while an inspection determines the condition of the home and identifies any items in need of repair.
• Required versus optional. While a home appraisal is traditionally required by mortgage lenders, a home inspection generally is not required.
• Who can perform it. A home appraisal is performed by a home appraiser who evaluates the home’s value, while a home inspection is performed by a home inspector who 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 the interior and exterior condition of the home. Some of the information gathered by an appraiser and an inspector 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 for 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 loan programs like FHA and VA loans.

FHA loan appraisals

An FHA loan is a loan that is insured by the Federal Housing Administration 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 type of loan, an FHA-specific home appraisal is required, which is a bit more in-depth than the typical appraisal.

The goal of an FHA appraisal is not only to determine the value of the home 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 requirements.

 See current FHA loan rates and compare lenders today.

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 seeks to prove the home is “safe, sound and sanitary.” A VA-approved appraiser will look to see if 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 if the home has sufficient drainage, water, and electrical systems.

See current VA loan rates and compare lenders today.