What Is the Difference Between Home Inspection and Appraisal?

What is the difference between the home inspection and appraisal? Both are an important part of the home buying process. Both involve an inspection of your home.  However, they are intended for   different primary users.  The primary user of the home inspection report is the home buyer.  The primary user of the appraisal report is the lender.

Home Inspection

The initial home inspection is done during the first few days after the contract is accepted.  This inspection in Illinois is not mandatory but it is very highly recommended.  This is where you hire a home inspector to inspect the home’s systems such as the heating and cooling, plumbing, and electrical systems. He is also looking for items of concern – signs of leaks, structural problems in the basement, future or immediate repair items.  Finally, he will give you tips on home maintenance and where things like the main water valve and stuff like that is located.  This is also your opportunity to ask questions.  The home inspection should be scheduled at a time where it is convenient for you to attend.  Occasionally, a client will ask me as an agent to attend the inspection for them.  This makes no sense.  As a homeowner, you will want the information first-hand from the inspector.

The inspector will create a report that you can reference later.  The information is good in three ways. First, the information is good for you to reference once you are in the home from a home maintenance standpoint.  Second, if the items that need repair or improvement are more than you want to take on, this is your opportunity to withdraw your offer.  Generally, the inspector will not provide a quote for the repairs but can let you know if costs to repair are likely to be significant.  Finally, you may want to negotiate with the seller to repair some items.  The inspection report can be your guide to determine which issues are the most problematic and identify the deal breakers if not repaired.

Expect to pay on average $300-500 for the home inspection. Some home buyers are tempted to pass on the inspection if the home looks well maintained or if it is a rehab.  However, this may end up being a mistake.  It is worth $300-500 to find out if the roof needs to be replaced or there is structural damage in the basement.

Appraisal Inspection

The appraisal inspection is ordered by your lender for the primary purpose of determining an opinion of value for the home.  The value is determined by comparing your home to other similar or comparable homes sold recently within the same neighborhood with similar square footage, room count and architectural style.

The appraiser is not an inspector.  They will check whether the furnace is working or utilities are on but won’t be able to tell you if there are functional problems.  If you are getting a FHA or VA loan, the appraiser will also check to ensure that the home meets the property condition standards required for these loans.  FHA and VA loans require that homes not have peeling paint, missing handrails for the stairs, holes in the wall, damaged roof or gutters, etc.  If the property conditions for a home do not meet FHA standards, the lender will require correction of the issues by the seller or a 203K loan which will provide the funds to fix the problems after you move in.  You do not have the option of buying “as-is” for the items flagged in the FHA appraisal report.  Note that conventional loans do have some property condition standards but they are not as extensive as FHA/VA.

In addition to the appraisal inspection flagging property condition issues, there can also be a problem with the appraised value being lower than the sold price.  The lender will not approve a mortgage on a home that has a sales price higher than the appraised value.  For this reason, your realtor should have provided you with a market valuation prior to making your offer on the home to ensure that your offer price is in line with the market value. Many deals are lost because of appraised value.  It’s often a difficult conversation to ask the seller to reduce the price because of a lower appraised value and often sellers are reluctant to do so.

The cost of the appraisal should be between $300-400.  The appraisal is ordered by the lender.  Again, the primary purpose for the appraisal inspection is to set an opinion of value for the lender. It is not to assure the home buyer regarding the condition of the home.

Village Inspection

The city of Chicago does not require an inspection prior to sale but many of the suburban communities do.  Check with the village where you are purchasing to see what additional requirements are needed.  As a note, some suburbs are stricter than others so don’t wait to take care of village inspection.  The village inspection should not be considered as a substitute for a home inspection.  Home inspectors are licensed by the state and have continuing education requirements to maintain knowledge.

Millie C. Lumpkin, Broker