Buying a home involves more than just getting pre-approved for a mortgage (which can be a project on its own.) Once you’ve made an offer, negotiated terms, agreed to a price and locked in your interest rate, you’ll still have to deal with a home appraisal and a home inspection before you can close. A home appraisal is an estimate of your prospective abode’s true property value, ordered by your lender. A home inspection is a thorough evaluation of the property’s condition, designed to flag any issues that may not be readily apparent (like termite damage or mold.) Both are key parts of the homebuying process. In order to help you get through them without any major problems, here’s a primer on home appraisals and home inspections.
(A quick aside before we dive in: Lenders are known to pull an applicant’s credit after they’ve pre-approved a home loan, usually right before closing. As such, you’ll want to be careful not to do anything that will damage your credit scores, lest you lose out on the financing. It’s a good idea to monitor your credit standing along the way for any surprises. You can view your free credit report snapshot, updated every 14 days, on Credit.com.)
What Is an Appraisal on a House?
With the loan conditionally approved and a purchase offer accepted, you must make sure that an appraisal is ordered from a lender-approved provider. The appraiser’s report will evaluate the property in terms of its replacement cost, marketability and physical condition to guarantee that, in the case that it has to be foreclosed, the lender may re-sell it quickly with minimal loss.
An appraiser’s report relies on several techniques to determine value, but the most common and important means of valuation involves the assessment of comparable properties. The appraiser’s task is to examine all the data on recent, nearby sales, and to select the three, four, or five properties that most closely mirror the property being appraised. When this is done, the appraiser tries to determine a fair price for the subject property, accounting for differences in the size and features of among the comparable homes. Other factors that could impact value include age, condition, desirability of location, and amenities like swimming pools or good views. When an appraiser comes up with a comparable-based assessment, each of these things is taken into consideration.
Why Get an Appraisal?
Presuming that they’ve been shrewd in their negotiation, some homebuyers wonder why an appraisal is even necessary. The short answer is this: Unless banks have received an appraisal confirming a home’s value, they are forbidden by law to issue a loan on that property. Remember that real estate lenders are lending money to you, and they are doing so in large part because they have the ability to foreclose on you in case you default. Thus, they want to assure themselves of the value of the collateral on which the loan is based, so they can recover their money in the case of a foreclosure.
Before you jump to the conclusion that the appraisal is being done solely for the benefit of the lender, realize that it is also an important check for you, a way to ensure you don’t overpay for a property. Don’t think this can’t happen to you — it can. Appraisals also offer important information aside from a home’s estimated value. This includes a site’s dimensions, lot size, zoning, flood and earthquake zoning, easements, room count, and an accurately measured size.
How Can I Make the Most of My Appraisal?
Have your lender order the appraisal. They are the ones who ultimately need it anyway. It is likely that you will have to pay for that report up front and when you do, you are legally entitled to get a copy. When you get a copy of the appraisal, you’re entitled by law to sit down and review it with your agent. You may also want to drive by the other properties listed in the report so you can see firsthand what other buyers’ money has gotten them elsewhere. Do they confirm your feelings about the price you’ve attached to your would-be property, or does this exercise raise questions?
Here’s another warning: On the appraisal report, there is a section on values. Essentially, this is there to document the condition of the housing market in your area at the time of the appraisal. One of three options is designated: increasing, stable, and declining. While some home values may be increasing or stable these days, many markets around the U.S. have experienced periods of declines in value. In some markets, the declines were significant.
Lenders do not want to do loans in a market where values are declining because they know that the property is security for their loan. In those areas of the country where values are declining, the appraiser is going to be completely truthful and check “declining.” This means that the lenders are going to cut back on how aggressive they are going to lend. For example, if they were willing to do a 95% LTV loan before, they will only do 90%. If they were willing to do 80% LTV loans, now they will only do 75%. You can see that this could potentially have a dramatic impact on your lender. So, you will want to know how they view the market, what they expect from appraisers, and what their current policy is on how much they will lend.
You should also be prepared to make a copy of the appraisal available to your insurance agent, who is going to want to know exactly what it is that he or she will be insuring. In summary, an appraisal is a fundamental part of real estate transactions, and you should be sure that you enjoy its full benefits.
What Is an Inspection?
An inspection is a complete survey of the home’s physical condition done in order to determine the home’s real condition. Water damage, mold, and termite damage are some problems inspectors typically look for. The inspector should be licensed, and of your own choosing. Never use an inspector recommended by the seller or listing agent. That inspector might conveniently overlook certain problems with the home.
The buyer is usually expected to pay for the inspection, which varies depending on the size of the home, and what the inspection will cover. Inspections usually cost between $500 and $1000; the cost of not doing a home inspection (and not catching major structural or other problems with a home) can cost you hundreds of thousands of dollars.
Why Get an Inspection?
If done right, an inspection ensures that you aren’t “buying a lemon.” Certain problems, such as radon or mold, are often invisible to the naked eye but can cost a small fortune to fix. You need the information from an inspection to help you determine how much you’re willing to pay for a home, what repairs will be necessary, and whether or not you’d like to walk away from the deal.
As is the case with lenders and real estate agents, not all inspectors are good inspectors. Choose an independent, licensed inspector (read: not affiliated with the seller, agents, or anyone else involved in the transaction). The inspector should be specifically experienced with the type of home you are buying (old, new, flat roofed, etc.) Remember, if the inspector misses problems, you will likely be the one to pay for his or her mistakes. Contact an organization who requires inspectors to have certain qualifications and experience, and get referrals from friends, and recommendations from previous clients.
How Can I Get the Most Out of My Inspection?
To prepare for the home inspection, ask friends about their home inspections. What did they have the inspector look for? What problems were missed? Do research online on what a good home inspection should cover, and prior to the inspection, review with the inspector every item he or she is going to look at, and be sure to accompany the inspector during an inspection.
This article has been updated. It was originally published on April 8, 2013.