The 2021 housing market has been exceptionally hot. Because of this, you may have seen many news stories mentioning individuals who are looking to purchase waiving the inspection and the appraisal in an effort to produce a more attractive offer to the seller. This can be risky for a variety of reasons – but to truly understand the risk behind waiving an inspection or an appraisal, you must first understand the difference between these two things.
After you have an accepted offer on a property, the first step of the home buying process should always be to have a home inspection. A home inspection is a thorough examination of a home to determine its present condition and uncover any red flags. During the inspection process, a home inspector will examine the structure, roof and attic, basement, electrical and plumbing just to name a few. You will receive a report of the findings once the inspection is complete that will describe any repairs that are required and you may want to negotiate with the seller to have them complete the repairs. Once both the buyer and seller agree to terms of the repairs, an appraisal can be ordered.
An appraisal is a process that is required for almost all mortgage loans that’s used to determine the estimated market value. The appraiser will look at the condition of the home, its location and the value of similar recently sold homes in the area. The appraiser will walk through the home creating a report which will provide the final determination of the home’s market value and will be used in the lenders final decision to approve the loan amount. The main purpose of a property appraisal is to confirm to a lender that the price a buyer agreed to pay for a property isn’t in excess of its fair market value. If an appraisal finds that a buyer is overpaying the buyer has three main options:
- The buyer can ask the seller to lower the sales price to be in line with the appraised value.
- The buyer can choose to make up the difference between the appraised value and contract price by increasing the amount of funds that they bring to closing.
- The buyer can terminate the contract and walk away if no agreement between them and the seller can be reached.
Difference between a home inspection and a home appraisal
In its simplest terms, a home appraisal determines the value of the home while a home inspection determines the condition of the home.
In closing, home appraisals and home inspections are similar in that they both protect the interest of the buyers and sellers. Yet they are not interchangeable. You cannot use the inspection report to determine a home’s value and you should not use the appraisal to try and determine its condition.