Step 7: The Need for House Appraisals and Home Inspections

House appraisals and home inspections are an important step of the home buying process, and while they perform similar functions, they are not the same thing. Appraisals are done by a certified appraiser in order to determine the value of the home. Home inspections are done to determine if there are any issues with the home before you buy. Both can impede the home borrowing process. Lenders hesitate to fund more than 80% of the home’s appraised value. This means that if the home you want is appraised at less than the seller’s asking price, you may have trouble getting a loan. Home inspections will determine if there are any issues with the house that you or the seller were unaware of and may affect both the lender’s decision to provide a loan and your own desire to purchase.

 

What Are House Appraisals?

When you decide to purchase a home, your mortgage broker or real estate agent should be able to facilitate the appraisal process. Only certified and authorized appraisers may perform an appraisal. Occasionally, some loans (such as VA loans) will be approved without house appraisals, based on the market value of similar homes in the area. However, in general you should expect that an appraisal will be performed once you find a house you would like to purchase.

Appraisers consider a number of factors when deciding the home’s value:
  • Age of the home
  • Visual defects
  • Condition of the exterior
  • Building and electrical code compliance
  • Plumbing issues
  • Size (number of bedrooms and bathrooms)
  • Building materials (what the home is made of)
  • Energy conservation features (if any)
  • Neighborhood/area
  • Proximity to schools and other resources

They will adjust their figures based on what they observe and the overall market health of the industry. As long as the home is appraised at, above, or near the purchasing price, you should still qualify for a loan. If the appraised value is less than the sellers asking price, you may have to cover the difference yourself, or look elsewhere. Many times, however, the seller is willing to negotiate and may lower their asking price in order to secure the sale.

 

Who Needs a Home Inspection?

Inspections are not typically required before purchasing a home. If the home you want is appraised at market value or above the seller’s asking price, you can usually get a loan without a home inspection. However, we recommend that most homebuyers get one as it is a great way for you to learn about any hidden issues or problems before you buy the home. Such issues may include unseen problems with the foundation, plumbing, code infractions, etc. A detailed home inspection report can prepare you for extra costs associated with the property and give you leveraging power in the sale negotiations.

An inspector does not necessarily need to be licensed, depending on your state, and they will evaluate many of the same things the appraiser does, though in a more ‘hands-on’ fashion. Inspectors may crawl under the home or in the attic, inspect the plumbing close-up, and generally go through additional measures to ensure the safety of the house. There are a few things that a traditional home inspector may not have the expertise to check for. If you want to be completely sure about a home’s safety and value, consider hiring someone to check for the following:

  • Asbestos
  • Radon, Methane, Radiation and Formaldehyde
  • Lead
  • Chemicals or toxins from previous owners

There are at least 21 different kinds of home inspections and how they are carried out vary by state and home inspector. Your real estate agent should be able to provide you with a list of types of inspections and reputable inspectors in the area. Remember that home inspections are not always required, but they are almost always a good idea. If you find there was a problem the seller did not disclose (or may not even have been aware of) you can use the home inspection report as a means of bargaining for a lower price on the home.

Home inspection reports are not always easy to understand and you may have difficulty in discerning which reported problems are serious and which shouldn’t really affect the home’s value. A good inspector will agree to walk you through the home and point out the problems they found. Alternatively, you can ask them to go through their checklist and explain to you what everything means. The report itself does you little good if there’s a problem you don’t readily identify or understand.

Ready to continue? Step 8: Negotiations and Real Estate Closing Process