The mortgage settlement process, often referred to as the mortgage closing, can sometimes seem confusing and a little overwhelming. Whether you are buying a new home or refinancing an existing home, there are various fees to be paid and steps to go through. Two steps that are often confused by homebuyers are the home appraisal versus home inspection.
Remember the Difference: Home Appraisal versus Home Inspection
One easy way to remember the difference between an appraisal versus a home inspection is that a home inspection is for your protection. A home inspector will not estimate the value of your home.
Typically, home appraisals are for lenders; home inspections are for buyers.
What is a Home Appraisal?
A home appraisal is a document that provides an estimate of a property’s price, otherwise known as its market value. Your home will serve as collateral for the mortgage, so a lender will require an independent appraisal on the property prior to the approval of your mortgage loan application. This is to ensure that the mortgage loan amount is not more than the value of the home and lot you want to purchase or refinance. Most lenders will loan you no more than 95 percent of the appraised value of the home or purchase price, whichever is less.
The person who conducts the home appraisal is called an appraiser. This person will consider several factors in developing the home appraisal, including location, square footage, recent sales of similar properties, and construction quality to estimate the property’s market value.
There is a fee associated with getting a home appraisal. The appraisal fee is sometimes included in the loan application fee. Some homeowners who are refinancing a mortgage already have a current appraisal and, depending on the lender, may not be required to get another appraisal. If you are in this situation, you could save a few hundred dollars by using the existing appraisal.
FHA Loans Appraisal
Many mortgages are insured by the federal government through the Federal Housing Administration (FHA.) The FHA requires lenders to get an FHA loans appraisal on properties prior to loan approval. According to the FHA, they require appraisals for three reasons:
- To estimate the market value of the property.
- To ensure the property meets FHA health and safety requirements.
- To determine whether the property is marketable.
An FHA loan appraisal document will indicate property defects that are easily noticeable and found not in compliance with U.S. Department of Housing and Urban Development’s minimum property standards. These defects may not be the same as those items noted in the home inspection report. The estimated cost of a property appraisal is $263 to $444, with a nationwide median cost of $292.
What is a Home Inspection?
There are two types of home inspections, those required by the lender and home inspections initiated by the buyer.
A Lender’s Home Inspection
A lender, especially one that offers Veteran’s Affairs (VA) or FHA-insured mortgages, may require a home inspection and an analysis by an engineer or consultant to check for things like water damage, termite damage, and the structural condition of the home. In rural areas, lenders may want a test of septic and water systems. Water tests usually check on water quantity, not quality. The health department of the local city government may also require a water quality test, which could involve a separate payment. It’s important to remember that a lender’s inspection is to protect the lender, not you. Consider asking for a buyer’s home inspection to ensure that the property’s condition meets your standards. The cost of a lender’s home inspection will likely be between $300 and $500.
A Buyer’s Home Inspection
Often, a buyer will make the purchase offer of a home contingent on the results of a home inspection. You will have to pay for this inspection. The cost varies by region, but spending hundreds of dollars could save you thousands.
When you make a purchase offer, sometimes called a binder, contingent on the results of a home inspection, it allows you to cancel closing on the deal if an inspector finds problems with the home or property. If deficiencies are found with the home, you may want to renegotiate for a reduced price or require the seller to make repairs to the home. If you are getting a VA or FHA loan, you will need a certificate from a qualified inspector stating that the home is free from pests such as termites and rodents. In this case, you can also make your purchase offer contingent on pest inspection results.
Similar to the lender’s home inspection, things to look for during a home inspection include structural soundness, water damage, and pests. In addition to these basic home inspection criteria, you may want to have the home inspection include an examination of the condition of the roof and the plumbing and electrical systems. It is also wise to have the home tested for environmental hazards that may not be visible to the casual observer. This may include testing for radon gas emissions, water quality, asbestos, lead-based paint and other toxic materials. If you are making your purchase offer contingent on the results for environmental hazards, make sure this is stated clearly in the conditions of your offer.
Remember, the easiest way to know the difference between an appraisal versus a home inspection is that an inspection is for your protection!