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Appraisals vs. Home Inspections: What's the Difference?

Jodi Keehr
Educational Opportunities: 
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Home > Education & Events > Appraisals vs. Home Inspections: What's the Difference?

What’s the difference between an appraisal and a home inspection? Do you need both?

Whether you’re a first-time homebuyer, or refinancing a property, knowing the difference between an appraisal and home inspection will help you get through the process.

For new home owners, lenders generally require an appraisal for many reasons. An appraisal gives the lender general information about the home and its condition. It also provides an opportunity for the appraiser to provide a sound opinion of the market value.

A question we often hear is “does an appraisal give me leverage for the purchase price?” The short answer is “maybe.” It generally depends on each situation. Appraisers arrive at market value using a system of comparable sales in your neighborhood and make adjustments for varying attributes. You may be surprised to hear that your appraisal came in at the exact same number as the purchase price. This is common, because you, as a buyer, and the seller are actually contributing to the market values when you make a purchase.

Typically, an appraiser will not appraise a property without a fully executed sales contract in place. They normally do not want to set market values; they would rather let the normal supply and demand happen naturally. Also good to note: in the case of a purchase transaction, a lender generally will loan either the appraisal value or purchase price, whichever is less.

So, if you find yourself in a bidding war on the home of your dreams, you may see the appraisal come in lower than what you initially agreed upon paying. However, it’s important to keep in mind that an appraiser is not a licensed home inspector.

In cases of financing a property, or a contract for deed payoff, an appraisal is necessary. Your lender needs to know the base value of the collateral for your loan request. The new appraisal will be based off of current market value and the other comparable homes for sale for in your neighborhood. If you are looking to maximize your appraisal value of a property you own, always keep your home in good condition, continuously conduct updates and never let it run down.

A bank typically does not require a home inspection, but sometimes — depending on the loan program or if there are concerns noted from the appraiser about the home’s structure — they may request one. A licensed home inspector does a complete and thorough examination of the home, inspecting every room, using a checklist and rating system to assess each aspect of the home. They will oftentimes make recommendations on whether or not certain items need to be replaced.

Many buyers choose to make their offer contingent on a home inspection. Whether or not a seller will accept the contingency, is sometimes a drawback. For a complete guide to homeownership download Compeer Financial’s Country Home Buying Experience e-Book, with sample closing costs, including appraisals and home inspections.

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