Before your mortgage loan is approved, you usually need to go through an appraisal and a home inspection. An appraisal tells you the market value of your property — while a home inspection tells you what might need to be repaired or replaced. Both are critical for the home loan process, but they have some key differences that you should understand as a home buyer.
During an appraisal, a licensed appraiser will take a thorough look at your property and compare it to others that are similar. The appraisal will take into account a variety of factors: the condition of the property, the age of the property, the roof, the neighborhood, etc. An appraisal is an incredibly thorough look at what the property should be going for in the open market.
Appraisals aren’t set in stone and they can be unpredictable in hot markets. The value of a property is, of course, influenced by what someone is willing to pay for it. In hot markets, appraisals will be more volatile, because property values are changing very quickly. Consequently, an appraisal will take a look at how the property market has been changing over the course of the last few years.
All appraisals are done via a set of uniform guidelines. But having a thorough appraiser is important because they are the ones who need to input all the data, some of which can be subjective. As an example, the appraiser is responsible for picking the right comparable properties. If an appraiser picks the wrong properties, the house can be drastically overvalued or under-valued.
In general, over-valuing a property is fine. The buyer is the one who receives the appraisal report, not the seller. If a buyer purchases a home for $350,000 and it appraises at $400,000, the buyer has essentially gained $50,000 in equity right off the bat. More than that, the buyer has nothing holding them back from getting a loan.
But an issue can occur if a buyer purchases a home for $300,000 and it appraises at $250,000. In this scenario, a bank will usually only lend money based on a value of $250,000 rather than $300,000. Either the buyer will need to put down an additional $50,000 to purchase the property or the seller will need to come down in price.
Appraising low is a concern in hot markets as sometimes the market can outpace the appraisal. The appraiser may not be willing to change their appraisal because the market may be moving so fast that all the houses could be considered “over-valued”, e.g. the appraiser may think the market is heading toward a crash, in which case that really is the true value of the property. At the same time, there’s really no way for anyone to know what direction the market will move in.
A low appraisal can be disputed. But it’s rare for that to work. Generally, an appraisal dispute only works if the buyer can show that the wrong comps were used or if there’s an obvious mistake on the form, such as miscalculating the square footage of the property or missing a bedroom or a bathroom.
All of this highlights the need to ensure that the appraisal is handled by a well-qualified professional and that it’s ordered very early on in the mortgage process. Appraisals can take two to three weeks to come in because they are so comprehensive — and if they come in low, there may be more negotiations.
A home inspection can be scheduled at any time, but it’s usually scheduled early in the process. In some hot markets, a home inspector will do a “walk and talk” inspection before you put an offer in. But traditionally, you hire them after your offer has been accepted. A day or two after the inspection, they will give you a full report of what they noticed.
Home inspectors are not specialists, so they may not be well-versed in electrical, plumbing, or foundation issues. But they will note if they believe that you should contact a specialist. Usually, they’re looking for fairly surface-level issues; they aren’t getting into the walls. They aren’t guaranteed to find everything wrong with the property.
But they will tell you what they notice. A buyer then has the option of asking a seller to complete these repairs or to credit them for the repairs.
Under FHA and VA loans, more repairs may be needed before the loan can be cleared to close. This is because FHA loans and VA loans generally have higher requirements for habitability.
So, what do you need to know about appraisals and home inspections as a home buyer?
An appraisal is critical to understanding the value of your property. If you don’t get an appraisal in time, you may not be able to close your loan. Meanwhile, a home inspection is more about understanding your property. If you have an FHA or VA loan, a home inspection may be more rigorous. If you have a conventional loan, it’s usually mostly for bargaining and for your information.