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

Buying a new home

From choosing a mortgage lender to closing the loan, each step in the homebuying process is important. But this process is just as confusing as it is exciting.

As people near the end of the homebuying process and get closer to becoming homeowners, they may run into a question: What exactly is the difference between a home appraisal and a home inspection?

In this article, we’ll outline the main differences and when you might need each one.

What is a home appraisal?

A home appraisal is the determination of the home’s fair market value. They are performed by a licensed appraiser and often required by mortgage lenders before they’ll approve a mortgage.

Future homeowners will generally need to pay for an appraisal of the property they plan to purchase to ensure the loan is for the appropriate amount and that the home is worth enough to secure the loan. The home appraisal fee will vary, but it is typically as low as $300.

Home appraisals also occur when someone is selling a house and wants to assign the correct listing price. This type of appraisal is also known as a pre-listing assessment. You’ll also likely get an appraisal when you’re applying for a home equity loan or refinancing, getting a divorce or filing for bankruptcy.

A home appraisal includes:

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

A home appraisal does not include:

  • Testing for radon, energy efficiency and health/safety.
  • Identification of items inside and outside of the home that will need to be repaired.

What is a home inspection?

A home inspection is a thorough inspection of a property that is used to determine the condition of the property and reveal any repairs that need to made. Unlike a home appraisal, a home inspection is usually optional.

Once a buyer has made an offer, they have the option to hire a home inspector to visit the home and perform an inspection. Since the home inspection is a tool that can protect the buyer, the results give them 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 age and size.  

A home inspection includes:

  • An evaluation of the home’s structure.
  • An evaluation of the home’s interior and exterior.
  • Testing for radon, energy efficiency and health/safety (optional).
  • Identification of items inside and outside of the home that will need to be repaired.

A home inspection does not include:

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

When home appraisals and home inspections are combined

Home appraisals and home inspections are usually two different tools, but under certain circumstances they may be combined. The prime example: when a homebuyer has applied for an FHA loan.

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 of 3.5% even without stellar credit. When a homebuyer opts for this specific type of loan, a home appraisal is required; however, it is a bit more in depth than the typical appraisal because the goal is not only to determine the value of the home a borrower wishes to purchase, but also to ensure that the home is safe for the buyer to live in, structurally sound and can actually be used to secure the loan. Ultimately, what the appraiser finds during their visit to the home will help them determine if the property satisfies HUD’s minimum property requirements.

The bottom line

Home appraisals and home inspections have a few similarities, which is why people may not fully understand how the two differ. For example, both are completed at some point during the homebuying process, both offer some sort of protection to the buyer and/or lender and both require an evaluation of the home’s condition.

Although home appraisals and home inspections are somewhat alike, there are a few key differences people should take note of if they plan to purchase a home.  

Home appraisals

  • Performed by a home appraiser.
  • Required by mortgage lenders.
  • Determines the fair market value of a property.

Home inspections

  • Performed by a home inspector.
  • Not required by mortgage lenders, depending on the mortgage product.
  • Determines the condition of a property to reveal current and potential issues.
 

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