Home inspectors and home appraisers both evaluate homes, but they do so for different reasons and by different methods.
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A home inspection determines what parts of the property may be in need of repair. The home inspector is usually hired and paid by the buyer, separate from the process of getting a mortgage. However, if the buyer requests it, their mortgage lender may be able to arrange a home inspection and include it as a closing cost.
It is wise to have a home inspection done before finalizing the sale price.
It is wise for a buyer to have a home inspection done before finalizing the sale price with the seller. If the inspection reveals necessary repairs, the seller can either perform them or lower the sale price to compensate.
Bear in mind that a home inspection does not guarantee how long parts of the home will last before they need to be fixed or replaced. This includes appliances like refrigerators and laundry machines as well as major home systems like central air conditioning. Buyers can sometimes negotiate for their realtor to pay for home warranties, but once again, this is typically outside the mortgage process.
A home inspection also does not determine whether a building is built to code. For that, a building inspection is required.
An appraisal determines the fair market value of a home by looking at comparable sales. The lender has an appraisal done to ensure the home is worth enough to justify the amount of the mortgage, and by law, the appraiser must be an independent third party.
Like a home inspector, an appraiser evaluates the condition of a home, but this is only one part of their analysis. They must also consider the size, amenities, and location of the home, and then look at the sale prices of comparable homes in the same area.
Appraisers are required to take pictures inside every room when they inspect a home.
The appraiser must factor in anything that could make one home worth more than another, even if it’s something as simple as easier parking or a nicer view. From there, the local housing market will influence the price. Identical homes (with identical views) can still have very different prices depending on what city and state they are located in.
If the appraised value of the home is much less than expected, it means the home is overpriced from the lender’s standpoint. For a purchase, either the seller must lower the price or the buyer must increase the down payment. For refinancing, the terms of the new mortgage may change due to the higher loan-to-value ratio, or LTV.
Other information outside of the official appraisal can affect the fair market value of a home. For example, if you want to use money from a cash-out refinance to pay for home repairs that the appraiser did not realize were necessary, your lender will factor this into the LTV.