Frequently people confuse the terms appraisal and inspection. While they are both part of the home buying process, they are distinctly different. In the simplest of terms, an appraisal determines the “value” of your home for a lender, while the inspection determines the condition of the home for the buyer.
When borrowing money to buy a house, your lender will require you to get an appraisal on the property to receive an unbiased valuation of the home. The appraisal is the estimate of your home’s value done by an independent 3rd party using a licensed professional. The appraiser takes into account the square footage, the number of bedrooms and bathrooms, condition of the home, and recently sold comparable homes in the neighborhood to come up with the appraised value.
Your loan officer will order the appraisal from a third-party certified or licensed contractor. The cost of the appraisal depends on the location and size of the property. Other factors such as rural properties, investment properties, manufactured home, or multi-unit properties can also affect the cost. Appraisals are generally between $400-$600, but can be higher. Typically, it’s the buyer’s responsibility to pay for the appraisal, and it is paid for early in the process outside of closing. In addition to inspections and moving costs, this is another cost to consider in your budgeting. The appraisal can take anywhere from a few days to a few weeks to be completed and sent to the lender.
Once the appraisal is complete, your lender will review it. If the appraisal reveals any problems with the home, the lender may require that they be fixed before the loan can be approved, or they could cancel the loan for that property altogether. If the appraised value is less than the purchase price, the lender will have restrictions on a maximum allowable loan amount that may affect the terms of the sale. This scenario may cause a renegotiation with the seller. You may pay the difference yourself, negotiate with the seller to reduce the purchase price, come up with a compromise with the seller, or cancel the contract.
A home inspection is an option that the buyer has before purchasing their home. It is usually not required by the lender. In some cases, a termite inspection, septic inspection, or water potability test for well or private water may be required. A home inspection may provide a better idea of any of the home’s problems before you buy it. A home inspection is the buyer’s responsibility to order and pay for. You should hire a certified home inspector. Home inspections cover a wide range of areas in the home, but be aware that they do not cover inside the walls, the roof or chimney, septic tanks, or structures separate from the house such as sheds. If you want something inspected that is not covered in the inspection, you can look into another specialized inspector. Your real estate agent will be able to help you with this. Once your inspection is complete, make sure you save a copy of the inspection report. Depending on the terms of your purchase contract, you may have the option to negotiate to have the seller make repairs. Or, if your inspection shows many problems that you or the seller are unprepared to handle, you can terminate or cancel the contract. Depending on the language of the contract, you may be able to get your earnest money back.