Home Appraisal vs. Home Inspection: How They Differ

When selling your home or buying a house, the appraisal and inspection are critical steps in the process. As they both involve a professional conducting an onsite examination of the property, it’s easy to confuse the two. However, there are key differences between a home appraisal and a home inspection.

Is a Home Inspection the Same as a Home Appraisal?

The home inspection and appraisal are not the same. They each serve a different purpose, follow a different process, and are conducted by different professionals.

The main difference between the home appraisal and home inspection is that the appraisal determines the home’s value, whereas the inspection determines the home’s condition.

The appraisal is an independent analysis by a licensed appraiser of what the home is worth under the current market conditions. This is based on the home’s location, size, and the value of comparable homes. These “property comps” are a tool to compare the home you’re buying against the selling prices of similar homes in the same area.

By contrast, the inspection assesses the home’s structure and systems to determine if any issues are present that may require costly repairs.

Another key difference between the appraisal and the inspection is that mortgage lenders usually require an appraisal before issuing a home loan for the buyer to purchase the property. Lenders do not require this inspection. But many homebuyers choose to do the inspection anyway to protect themselves financially.

It is common for home purchase contracts to list the appraisal and inspection as contingencies, which are conditions that must be met before the transaction can close. If the home doesn’t meet these conditions, then the buyer can walk away from the deal and get their earnest money deposit back.

Read on to learn how the appraisal and inspection work and why each is essential in the home purchase process.

What Is an Appraisal?

Mortgage lenders require an appraisal to determine a home’s value before issuing a home loan to the buyer. The appraisal assures the lender that they are not lending more money than what the home is worth.

As the house serves as collateral for the loan, the appraisal protects the lender in case the borrower defaults on their home loan.

How do home appraisals usually work?

Once the appraisal is ordered and a real estate appraiser is assigned, the appraiser begins an unbiased assessment using public records and conducting an onsite evaluation of the home. Real estate appraisers must follow the practices and guidelines specified by the Uniform Standards of Professional Appraisal Practice

There are many factors that influence home valuations, including location, condition, square footage, number of bedrooms and bathrooms, and any special features a home may have. The appraiser also looks at property comps to compare the subject property against similar homes in the same area that have recently sold.

During the inspection part of the appraisal, the appraiser walks through the home to determine the property’s condition, features, and any improvements that could increase its value.

The appraiser compiles this information into an appraisal report. This provides the home’s appraised value and data to support its valuation. The appraiser then submits the report to the mortgage lender and borrower.

What if the appraisal comes in low?

If the appraised value is the same or higher than the borrower’s loan amount, then there are no issues. The real estate transaction can proceed as planned.

However, if the home’s appraised value comes back lower than the loan amount, that presents a problem. The buyer will have the options below:

  • The buyer can put more money toward their down payment to cover the difference between the home’s appraised value and the loan amount.
  • The buyer can negotiate with the seller to lower the purchase price.
  • The buyer can terminate the purchase contract and get their earnest money back, assuming that they have an appraisal contingency. If not, they risk losing their deposit.
  • The buyer can request a reconsideration of value (ROV). You can find more information on the ROV process in our blog here.

While low appraisals may be uncommon, they do occur. To help prevent this scenario, it’s always best for the buyer, the seller, and their real estate agents to prepare before going into the appraisal. Check out our blog on Preparing for a Home Appraisal Inspection for a checklist of things you can do to maximize a home’s appraised value. 

What Is a Home Inspection?

A home inspection is a professional, thorough examination of a home’s physical condition, including its structures and systems. A home purchase is a huge financial investment, and the purpose of the inspection is to provide the homebuyer with peace of mind.

Home sales are often contingent on receiving a favorable home inspection report. Therefore, if the home inspection finds any issues, the buyer can decide whether they want to proceed with the purchase or terminate the deal.

How do home inspections usually work?

Once the seller accepts the buyer’s offer and the home goes under contract, the buyer or the buyer’s real estate agent will hire a professional home inspector who is licensed or certified by the state. The parties will then schedule a time for the inspection to take place.

During the inspection, the inspector checks many parts of the home, including the roof, electrical systems, plumbing, foundation, HVAC (heating, ventilation, and air conditioning) system, basement, attic, visible insulation, walls, ceilings, floors, windows, doors, and more.

The buyer should be present during the home inspection if possible. That way the inspector can explain any uncovered issues, and the buyer can ask all their questions.

The inspector compiles a report that covers their findings, complete with pictures, analysis, and recommendations, and provides this report to the homebuyer. The American Society of Home Inspectors (ASHI) provides a professional home inspection checklist for what parts of the home inspectors should examine and include in their report.

Depending on size and condition, a home inspection for a single-family home can take two to four hours to perform. Inspectors typically provide their reports within 24 to 48 hours after they have completed the inspection.

What if the inspection finds issues with the home?

If the home inspection report identifies any issues with the home, the buyer can choose from the options below:

  • The buyer can negotiate with the seller to lower the purchase price.
  • The buyer can request that the seller fix the issues before the sale closes.
  • The buyer can decide if and when they will cover the cost to fix these issues after they take ownership of the home.
  • The buyer can terminate the purchase contract and get their earnest money back, assuming that they have a home inspection contingency. If not, they risk losing their deposit.

How Are Home Inspections and Appraisals Alike?

Appraisals are between the buyer and their mortgage lender, and inspections are between the buyer and seller. But both have a significant impact on the homebuying and selling sides, the final purchase price, and whether the sale actually closes.

Remember, if the home’s appraised value comes back lower than the buyer’s loan amount, then the seller may need to lower the purchase price or risk losing the deal. And if the inspection shows any major issues with the home, the seller may have to reduce the purchase price or pay out of pocket to make those repairs. In both cases, lowering the sales price results in less profit for the seller.

Therefore, home appraisals and home inspections are similar in that they impact all parties involved in the transaction, including the buyer, the seller, and the mortgage lender. They can make or break the deal.

Home Inspection and Home Appraisal FAQs

Below are some frequently asked questions about home inspections and appraisals.

Who pays for the home inspection and appraisal?

The homebuyer typically pays the fees for the appraisal and the inspection. However, in some cases, the buyer may be able to negotiate with the seller to cover these costs on the buyer’s behalf.

How much do a home appraisal and home inspection cost?

Appraisal fees vary based on the home’s size and location. According to HomeAdvisor, the average cost ranges between $313 and $422 (as of August 2023).

Like appraisal fees, inspection fees also vary according to the home’s size and location. According to HomeAdvisor, the average cost ranges from $281 to $402 (as of June 2023).

Does a home refinance require an inspection and appraisal? 

The home appraisal process, including the appraisal inspection, is usually required for a refinance. The appraisal assigns a value to your home, so it helps lenders determine how much you can borrow when refinancing your mortgage.

A refinance will not typically require a home inspection.

Can you get a mortgage without a home inspection?

Mortgage lenders do not require home inspections. However, if you want to buy a home, they are a great idea to understand the condition of the property and any potential issues it has.

The bottom line: The home inspection is a relatively small investment that protects the buyer. After all, the price of the home is significantly more than the price of the inspection. 

Have Any More Questions?

For more information about residential appraisals, click here to read our additional articles. If you have any further questions about the appraisal process, call us at 425-967-3794 or contact us here.

Alex Todak